Grindr Inc

NYSE:GRND

Earnings Call Analysis

Grindr's Strong Q3 Earnings with Heightened Growth

Grindr posted a vigorous third quarter, showcasing a 39% surge in revenue to $70.3 million compared to the same period last year. The company's effective monetization strategy and product enhancements have been well-received, leading to robust financial health evidenced by a 46% adjusted EBITDA margin. With an upward revision in revenue growth expectations for 2023, Grindr now targets figures at or above 31%, a jump from the previous 28%, while maintaining an adjusted EBITDA margin of 41% or better. User engagement also saw progress; average monthly active users climbed by 8% year-over-year to $13.5 million, while average paying users grew by 18% to $962,000, pushing the average revenue per paying user up $2.25 to $21.33 this quarter.

Robust Revenue Growth and Profitability

Grindr has posted an impressive performance in the third quarter of 2023, with a robust 39% increase in revenue and a solid adjusted EBITDA margin of 46%. The company has revised its full-year outlook with expectations for revenue to grow at or above 31%, a notch up from the previously anticipated 28%, while maintaining an adjusted EBITDA margin of at least 41%. This is a testament to the strong acceptance of the company's new products and features, driving both user growth and enhanced monetization.

Detailed Financial Performance

The detailed financial metrics reveal a quarterly revenue hike to $70.3 million, up from $50.4 million in the same quarter the previous year. This was spearheaded by a 43% jump in direct revenue to $61.6 million and a 21% increase in indirect revenue to $8.7 million. User engagement has also seen a positive shift with an 8% rise in average monthly active users, reaching 13.5 million, and a notable 18% growth in average paying users, indicating a higher monetization per user.

Revenue Per User and Operating Expenses

Grindr reported an increase in average revenue per paying user by $2.25, reaching $21.33 for this quarter. Operating expenses, excluding costs of revenue, went up by 5% year-over-year due to factors such as higher salaries and other expenses related to the company's return-to-office initiative and investments in growth.

Improved Bottom Line

The bottom line showed significant improvement, with the net loss for Q3 shrinking to $400,000, an improvement over the $4.7 million loss of Q3 2022. The net loss margin for the quarter dropped to 1% from 9% in the same quarter last year, due to effective cost management in areas like sales, marketing, depreciation, and tax expenses. The Adjusted EBITDA recorded for Q3 was $32.6 million, which is 46% of the total revenue, demonstrating an efficient control over operating costs and robust growth in revenue streams.

Balance Sheet Position

The balance sheet indicates a net debt position of $343.4 million as of September 30, 2023. However, the company ended the quarter with an increased cash reserve of $29.9 million in cash and cash equivalents, suggesting it has the liquidity to pursue its operational strategies and investments effectively.

Earnings Call Transcript 2023-Q3

[Operator]

Good afternoon. My name is Lodi, and I will be your conference operator today. At this time, I would like to welcome everyone to the Grindr Third Quarter 2023 Earnings Conference Call. [Operator Instructions] I would now like to turn the conference over to Tolu Adeofe, Grindr's Head of Investor Relations. Please go ahead.

[Tolu Adeofe, executive]

Thank you, moderator. Hello, and welcome to Grindr's Q3 2023 Earnings Call. Today's call will be led by Grindr's CEO, George Arison and CFO, Vanna Krantz. They will make a few brief remarks, and then we'll open it up for questions. Please note, Grindr released its Q3 2023 shareholder letter this afternoon, and this is available on the SEC's website in Grindr's Investor page at investors.grindr.com.

Before we begin, I will 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 such statements. These statements are subject to risks and uncertainties, and our actual results could differ materially from the views expressed today. Some of these risks have been set forth in our earnings release and our periodic reports filed with the SEC. Additional disclosures regarding non-GAAP measures, including a reconciliation of GAAP to non-GAAP measures, are included in the earnings release we issued today, which has been posted on the Investor Relations page of Grindr's website and in Grindr's filings with the SEC. With that, I'll turn it over to George.

[George Arison, executive]

Thank you, Tolu. Before we get started, I would just like to tell how glad I'm to have you on board. We have added so many strong new leaders across departments who will help us attract even more [ excellent ] talent. In Q3, Zac Katz joined us as General Counsel and Head of Global Affairs; Tristan Pineiro, as Vice President of Brand Communication; and Solmaz Torbaghan as Director of Artificial Intelligence and Machine Learning, with more to come. Now for our results. Grindr delivered a strong quarter with revenue growth of 39% and adjusted EBITDA margin of 46%. It is clear from the results that our work this year on new products and features is being well received by users, and we're excited by the progress we're making on our monetization strategy.

Our team is executing on these initiatives while concurrently driving positive cultural change within the company, change that is ongoing and will continue for much of 2024. Over the last year, the focus for the executive team has been to [indiscernible] transition to an environment where our employees can continually learn, execute successfully and unleash their full potential. Returning to the office on a hybrid basis was crucial to this change. In Q2, our leadership team decided Grindr would move to a hybrid work model, involving a return to an office work environment. And in August, we announced the adoption of a multiphase return-to-office plan. This plan is designed to capture the benefits of an office work of preserving the flexibility that so many of us have come to value. Being back together in the office will enable us to deliver better results for our users and for our shareholders, and I'm excited about the pipeline of projects we're working to prioritize right now.

These projects include innovation focused on building improved functionality to allow users to better find what they need within our app and new features that better enable [indiscernible] already taking place within the app. This is all in addition to the AI capabilities we're building to help us provide users with unique insights about each other and to better connect with each other. I'm excited about the work that we're doing, and I look forward to telling you more about it in the coming quarters.

With that, I'll hand it over to Vanna to discuss our financial performance.

[Vandana Mehta-Krantz, executive]

Thank you, George, and hello, everyone. As you just heard, Grindr achieved 39% year-over-year revenue growth to $70.3 million for the quarter with an operating margin of 24% and an adjusted EBITDA margin of 46%. Our continued financial performance in the first 3 quarters has led us to update our full year outlook. We now expect revenue growth in 2023 to be at or above 31%, up from 28% and our expected adjusted EBITDA margin to remain at 41% or better. The adjusted EBITDA margin outlook reflects comparatively higher GAAP operating expenses in Q4 compared with Q3. Q3 revenue of $70.3 million for the quarter was up 39% year-over-year from $50.4 million, driven by strong sales of our subscription and a la carte products. Direct revenue increased by 43% year-over-year to $61.6 million, indirect revenue was up 21% year-over-year to $8.7 million.

In the third quarter, average monthly active users increased 8% over the prior year and 3% sequentially to $13.5 million. Average paying users in the quarter increased 18% over the prior year to $962,000 due to the increases in both average MAU and average paying users, our average payer penetration rate was 7.1% for the third quarter. On to our more detailed results. Our average revenue per paying user increased $2.25 sequentially to $21.33 this quarter. Operating expenses, excluding cost of revenue, were $35.4 million in Q3 2023, up 5% year-over-year. This reflects higher people costs, comprising lower salary and benefit expenses in the latter weeks of the quarter following our implementation of our return-to-office initiative, offset by severance costs and higher legal and other professional services.

Net loss for Q3 was $400,000 versus a loss of $4.7 million in Q3 2022. Net loss margin for Q3 was 1% compared to 9% in Q3 2022 with the improvement due to lower sales and marketing, depreciation and tax expenses. Adjusted EBITDA for Q3 was $32.6 million or 46% of total revenue, primarily reflecting our strong revenue growth as more Grindr users adopt our expanded subscription and a la carte offerings. Adjusted EBITDA results relative to GAAP operating expenses benefited from the add-back of generally nonrecurring severance expenses related to implementation of our return-to-office initiative.

Turning to our balance sheet. Our net debt position was $343.4 million at September 30, 2023. We ended the quarter with $29.9 million in cash and cash equivalents, up from $27.2 million in the prior year and $22.1 million in the second quarter of 2023. Finally, I'll recap our revised 2023 outlook, as shared in our letter. Based on our performance year-to-date, we have increased our revenue growth guidance for the year to be at or above 31%, and our adjusted EBITDA margin remains at at least 41% for the year. This outlook reflects our strong performance year-to-date. With that, I will pass it back to George to begin our Q&A.

[George Arison, executive]

Thank you, Vanna. At this time, I'll ask the operator to open up the line for questions.

[Operator]

And your first question comes from the line of Rohit Kulkarni from ROTH MKM.

[Rohit Kulkarni, analyst]

Great quarter, guys. I'm new to the story, just perhaps, on just high level, perhaps talk about how do you feel about the algorithm for growth over the next 18 to 24 months with regards to the top of funnel users, bottom of funnel paying users and monetization. Like in an ideal world, how do you feel these 3 drivers would trend in contribution of growth? Then I have a couple of follow-ups on next year's investments.

[George Arison, executive]

So I'm happy to start and then I'll Vanna to add as well. So when we got here about a year ago or so, we're coming up on our 1-year public [indiscernible]. We've said that the biggest opportunity in terms of revenue growth at Grindr is from driving great monetization of our current users. We are significantly under-monetized compared to our peers. That's due primarily there's a lot of features that you users not to pay for, we don't currently offer. And so we've been very focused on launching features that people will want to pay for. Boost, obviously, is an example of that, and it has done really well, and we have many more à la carte and/or features inside of subscriptions that we will be building and launching in the coming quarters that will help with monetization. The Grindr has been very much on the free side [indiscernible] free and paid. We also add more features for free versus our peers in the dating ecosystem.

And So the best way to drive people to become more paying customers would be to have more features people can pay for. On the top funnel side, obviously, we have great top-of-funnel growth. And that's all organic because we launch features that the people are excited about or because people know that they should come to Grindr to meet members of the community and the community are important, but we are not dependent on the top-of-funnel growth in order to have significant growth in our revenue and in payer penetration. Anything you want to add to that, Vanna.

[Vandana Mehta-Krantz, executive]

I think that really George summed it up properly. We are really thinking about converting the users that we already have at [ 7.1% penetration ], there's plenty of room to go until we get to what I would say, match [ Bumble's ] numbers. And we are going to continue to do that through developing products and features and frankly, product pricing that enables more of our users to convert and compel them to want to convert to a paying user because there's just so much value in what we're here to offer. I know you're a bit new to the the story and so in the past, we said that will be really focus on a global strategy, but frankly, thinking about domestic first and then rolling that out. So you could sort of see a little bit of wave of coming into the future just to start to address your investment areas for the following years.

[George Arison, executive]

No, go ahead with your follow-up question.

[Rohit Kulkarni, analyst]

And I guess the other question was just around incremental investments as you look ahead next year. You already have very healthy EBITDA margin. And I can think of how quickly the EBITDA margin can go much higher based on your core business model itself. So perhaps talk about how are you thinking philosophically around investments for growth versus managing profitability in the next 12, maybe 18 months. Are there specific new chunky new investments that you wish to do or that are there on the horizon that we need as investors to keep an eye on?

[George Arison, executive]

I think the most kind of important thing on this is that right now, our team is smaller than it had been historically. As it is on publicly and as is in our financials that have been filed today, our team has shrunk in size, [indiscernible] returned to office. So our focus from investment perspective is to rebuild our team back at least to the levels that we're at in the first half of the year. Obviously, we're going to be very deliberate in how we do that and how we ensure that we [indiscernible] talent that wants to go after [indiscernible] goals and achieve impossible things on behave of users and the shareholders.

But from that perspective, investment we're going to make to kind of rebuild the team. We believe there is a lot of opportunity in the product to build new features and new things that our users really want us to build around how they use the product. And obviously, for that, you need engineers and product managers to invest in technology. But we generally confident that we can do that with a fairly lean team and to start with getting back to the size that we were earlier in the year in a January February time line.

[Vandana Mehta-Krantz, executive]

And Mohit, just to add, really what these people are going to do is to continue to develop our product pipeline, which we have nicely filled for 2024. But of course, that's a never-ending project given that the company has just started to think about the monetization levers and is evolving from just connection to connection and monetization. So that's what these folks will predominantly be working on.

[Operator]

[Operator Instructions]

[Tolu Adeofe, executive]

We'll also be taking questions from the Say platform, which is a platform that enables us to take questions from retail investors. So one of the questions was from Jean T, Jean asked what is the team doing to add value to the entry version of the app. It seems too restricted at the moment, the premium versions are too expensive for a younger user base.

[Operator]

Tolu, do you have any more questions?

[Tolu Adeofe, executive]

Look, I think, the team is redialing in, apologies. Just give us a moment.

[Operator]

[Operator Instructions]

[George Arison, executive]

We somehow got dropped off the line. Can everyone hear us now?

[Operator]

Yes, George.

[George Arison, executive]

Great. To the first question, I think what we'd say is ever since Grindr was sold from Chinese ownership to the current large shareholders, we've been laser-focused on ensuring that our product is world class and obviously have been investing heavily in the product to make that happen. This year, we launched the new home screen and a new profile page with large photos and quicker navigation. That has really improved the speed of the app, which we're really excited about. The year prior, we launched albums. And since launch, Albums has been used over 1 billion times, over 1 billion Albums have been shared, which is great. And this year, we also added video to Albums. So I think all of those things are making the entry product or the free product better. Even though historically, we've actually had the most features you can find in any dating app in the free product. One of the biggest complaints historically has been that users lose all their chats when they switch phones and have to re-download the app. That's because we used to store chats natively on the app. We've moved away from that and now are [indiscernible] chats on the web, which obviously has to remove [indiscernible] a lot of users used so why they didn't get back to somebody.

So I think that's a lot of great examples of improvements that we've made to the product over the last 18 to 24 months, and we'll continue to do that in the coming quarters. We also introduced extra weekly subscription price at $12.99 earlier this year, and that was in response to our users asking for a lower entry price point tier.

[Tolu Adeofe, executive]

Thanks, George. Our next question will be from Aiden K., who ask, will there be any perks for Grindr shareholders?

[Vandana Mehta-Krantz, executive]

Thanks, Aiden. Well, actually, we have had discussions on this topic, but we really have nothing to say on it at this time.

[Tolu Adeofe, executive]

Davian. M asked, what are the plans for expansion of the extra subscription?

[George Arison, executive]

Thanks for the question. As you know, this year, we added our web product, which is only available to extra and unlimited subscribers. So obviously, that was a very significant addition to the main offering in the app. Generally speaking, historically, Grindr's approach has been to [ err ] on the side of a free product when compared to dating applications. The functional that we offer far more significant than our peers. And now we are focused on expanding the product feature set and opportunities where people can actually pay for the product. And so you should expect more features to be launched on the paying side, but that will be a mix between things that we might launch in paying subscriptions or a la carte.

[Tolu Adeofe, executive]

I know users who tried Grindr and were unhappy with ads that basically froze the app and then it takes [indiscernible] before they can [Audio Gap] option can something be done to make these ads less intrusive.

[Vandana Mehta-Krantz, executive]

Thanks, Mark, for the question. Well, actually, Grindr offers an incredible amount of value for free, more than all of our peers and users spent about 60 minutes a day on the app. So it's good engagement. Advertising allows us to offer a robust free product and it provides the investment dollars to improve the app. And it's really important to note that we offer very few ads in the app compared to other products that we have. That have a heavy users, usage like Grindr.

Also, we actually did introduce a lower priced subscription tier called Extra Weeklys for folks that want to enjoy the app without any advertising at all. And finally, we really are starting to embark on an effort to make the ads you see more relevant to you. It's the early days but we hope that in the next year or 2, we can make meaningful improvements in this area since we know that we have a highly desirable demographic that advertisers want to reach.

[Tolu Adeofe, executive]

Thank you, Vanna. From Sean H, when will Grindr fix the issue where a user blocks someone and that blocked person is able to unblock themselves. I brought this issue up to IT, but nobody seems to know the answer. How can the blocking feature be such an issue that is taking so long to address?

[George Arison, executive]

Thanks for the question. So privacy and trust and safety are really important priorities for us at the company. And we've said this many times, privacy is paramount for our users. There's many reasons for that, including the fact that we operate in many countries where we engage legal. And we are really focused on ensuring that people can protect the privacy to the fullest extent possible. Precisely for the reason of privacy, and most of the management is completely removed from customer service issues related to specific users. We have a team of professional managing that, and we [ taught ] them to be able to focus on protecting our users' needs, and we don't ever find out what might be happening with specific users. Without knowing the details of the account or a constant question, it's a little bit difficult to know exactly what that users experience might be.

But users are not able to unblock themselves in the app. So if you block somebody and they can't unblock and become visible to you again. What is most likely happening is that somebody is deleting their old account and it is recreating a new account with similar photos. Many of our users choose to purchase their old accounts and then create new ones. This is not against guidelines and there are a lot of reasons why users, including for privacy reasons, might choose to do that. For example, somebody might have made somebody favorite in their account, but the other user does not want to be the favorite and this might be one way in which they kind of eliminate their relationships that they might have built on the app and then build new ones. If someone is harassing others or breaking guidelines, obviously, please reach out to customer support and that can be addressed. But I do want to emphasize one more time that privacy and safety are a top concern for our team. and we'll continue to be very focused on that as we build the product for the future.

We recently published a blog post in this topic, and I encourage everyone to take a look at that for more details.

[Tolu Adeofe, executive]

Thanks, George. From Lewis B, when will Grindr add a Grindr Shop option. This will enable users to buy potential Grindr merchandise or gifts and send to users.

I think those [ features ] increase the value of the shares.

[George Arison, executive]

Great question. And we are definitely very proud of the Grindr brand and recognize that it can be leverage in different ways. We have incredible brand awareness in the community and we recently brought on board a new leader for our brand and communications team who joined us just 3 months ago to make our brands be utilized in many different ways. We have in the past offered seasonally collection of Grindr merchandise. We really have done that about twice a year, and we tend to rotate that a couple of times a year. So it's just a matter of prioritization about whether we're going to do more with that, but we do offer our merchandise every once in a while. And so please stay tuned next time is launched.

[Tolu Adeofe, executive]

And our last question will come from Francisco. What are some of the features or offerings being explored to compete with other chat or dating apps.

[George Arison, executive]

Great question. I've said this on an earnings call before is that we know that users use Grindr in ways more than just dating. Obviously, dating is at the core of it, but there's a lot more that's happening here. This is a core part of the fabric of gay community and people use it in many different ways socially as well. So we're both a dating and social app. We also know that in the dating there, users will use more than one application at the same time. For us, what's important is that users have the best possible experience in the app and spend time on the app and use it as the first app that they come to when they think about using a dating app for a variety of reasons, whatever reason, they might want to use it for, whether it's casual dating, long-term relationships, social engagement or chatting. To that end, we are working on a robust pipeline of features that serve our community in ways that are meaningful to them. Some of the examples of things that are in the pipeline for the future. We said this in our earnings release today and have said this in the past as well that we are really excited about Teleport. It's a way for user to be able to show themselves in a different location from where they might be at any given time as they are planning travel, which allows them to then make connections prior to their trip or ahead of the trip and then be able to engage with our users in that new location.

We've also done a lot of user research to understand that [indiscernible] intent. As the app has grown and attracted more users, intent has become a little bit confusing. Different users have different intent for what they're looking for in the app, and they will be looking for us to help them express their intent more clearly. So that's something that we're working on for the future. And then lastly, you talked a lot about how AI can be very helpful in helping us make better connections between people, whether it's by what they're looking for or their interest as well as from the generative perspective in terms of making conversations better.

So it's another area that we're focused on to make the app better.

[Tolu Adeofe, executive]

Thank you, George. Thank you, Vanna and thank you, everybody, for joining our call today. Operator, you can go ahead and close it out.

[Operator]

Thank you, presenters. And ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.