Match Group, Inc. — Q2 2020 Form 10-Q
Reporting period: Three and six months ended June 30, 2020; filed August 10, 2020. Match Group operates a global portfolio of dating brands, including Tinder, Match, Hinge, OkCupid, Meetic and PlentyOfFish. On June 30, the company separated from IAC and became a standalone public company. Former IAC businesses other than Match Group are presented as discontinued operations, so reported balance-sheet and cash-flow comparisons with December 2019 include significant separation effects.
Financial performance and liquidity
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Revenue | $555.5 million | $498.0 million | $1,100.1 million | $962.6 million |
| Operating income | $195.6 million | $171.3 million | $333.0 million | $288.9 million |
| Operating margin | 35% | 34% | 30% | 30% |
| Adjusted EBITDA | $227.8 million | $202.5 million | $402.1 million | $356.7 million |
| Adjusted EBITDA margin | 41% | 41% | 37% | 37% |
| Net earnings from continuing operations | $132.9 million | $119.2 million | $282.2 million | $236.9 million |
| Net earnings (loss) attributable to Match Group shareholders, including discontinued operations | $66.4 million | $113.5 million | $(144.6) million | $202.2 million |
| Diluted EPS attributable to shareholders, including discontinued operations | $0.32 | $0.55 | $(0.80) | $0.97 |
Q2 revenue increased 12%; average subscribers rose 11% to 10.063 million. North America direct revenue grew 13%, supported by subscriber growth and higher ARPU; international direct revenue rose 11%, driven by 17% subscriber growth, partly offset by lower reported ARPU from foreign-exchange effects. Q2 reported ARPU was $0.58, flat year over year; international ARPU was $0.53, down 5%. Advertising revenue fell 18% to $8.7 million.
Cost of revenue increased 18% in Q2, to 27% of revenue from 25%, reflecting higher hosting, SMS authentication, app-store fees, customer-care costs and video-streaming partner costs. Selling and marketing fell 4% and declined to 16% of revenue from 19%, helping operating income and Adjusted EBITDA grow faster than revenue. General and administrative expense rose 8% in Q2 and 25% year to date; year-to-date increases included higher compensation, legal fees and non-income taxes. Adjusted EBITDA is a non-GAAP measure; management defines it as operating income excluding stock compensation, depreciation and specified acquisition-related items.
Continuing-operations operating cash flow was $275.9 million for the first half, compared with $205.2 million a year earlier; capital expenditures were $18.1 million. Investing cash flow included a $2.449 billion net distribution to IAC at separation. Cash and cash equivalents at June 30 were $129.3 million. Total debt principal was $3.913 billion ($3.528 billion net carrying value), versus $3.293 billion principal at year-end 2019. The company had $730 million available under its $750 million revolving facility. Current assets of $451.7 million were below current liabilities of $459.0 million; year-end comparisons are heavily affected by the separation. Shareholders’ equity was negative $1.708 billion after separation-related transactions; this should not be read as a standalone operating-period loss.
Material changes and unusual items
- Revenue, operating income and Adjusted EBITDA grew 12%, 14% and 13%, respectively, in Q2; first-half growth was 14%, 15% and 13%. First-half operating income and Adjusted EBITDA were affected by higher legal costs.
- Foreign exchange reduced reported revenue by $11.1 million in Q2 and $19.5 million in the first half. Revenue growth excluding FX was 14% in Q2 and 16% year to date, versus reported growth of 12% and 14%.
- Other income included a $35.0 million legal settlement, partly offset by bond-redemption losses of $15.7 million in Q2 ($16.5 million for the first half). The company also recorded a $4.6 million impairment of the Match brand in the UK and Meetic brand in Europe, citing COVID-19 pressure on projected revenue.
- The first-half discontinued-operations loss was $366.6 million, contributing to the reported net loss attributable to Match Group shareholders. These results relate to Former IAC businesses presented as discontinued operations following the separation.
- Debt activity included issuing $500 million of 4.125% notes and $500 million of 4.625% notes, and redeeming $400 million of 6.375% notes. The revolving facility was expanded from $500 million to $750 million; the term loan was repriced and its maturity extended to 2027.
- In July, Former IAC sold 17.3 million newly issued Match Group shares for $1.4 billion net, with proceeds transferred directly to IAC—not Match Group.
Outlook, risks and contingencies
Management expected 2020 capital expenditures of approximately $55–$60 million, mainly for Tinder office expansion and capitalized software. The filing gives no clear full-year revenue, earnings or subscriber guidance. Management noted that interim results are not necessarily indicative of full-year results.
COVID-19 weighed on advertising impressions and created uncertainty around consumer demand, payment ability, operations and international expansion. Management said it intended to continue strategic and operating initiatives, but cautioned that plans could be delayed or modified. Other stated risks include competition and user retention, app-store distribution and fees, foreign-exchange exposure, privacy and data regulation, cybersecurity, and the company’s substantial debt and covenant restrictions.
Material legal matters include Tinder optionholder litigation seeking at least $2 billion plus punitive damages; an FTC action concerning Match.com marketing, cancellation and chargeback practices, for which the FTC had previously proposed a $60 million payment as part of an unresolved settlement; and a DOJ grand-jury subpoena. The filing also describes securities, derivative, consumer-protection and regulatory inquiries. Management disputes the principal claims and says it will defend them; unfavorable outcomes remain uncertain.
Other contingencies include tax matters related to the separation and audits. The company reported $40.6 million of unrecognized tax benefits at June 30 and said a further $4.1 million decrease by June 2021 was reasonably possible. A $22.6 million obligation to remit expected pre-separation tax refunds to IAC was recorded as a current liability. Separation tax treatment, indemnification obligations and tax-attribute allocations remain subject to specified conditions and potential adjustment.
Important facts for investors to verify
- Separate continuing-operations performance from discontinued operations when evaluating earnings and cash flows; confirm the effects and accounting of the June 30 separation.
- Track subscriber growth, regional ARPU and FX-adjusted revenue, particularly international monetization and app-store fees.
- Reconcile debt principal, cash, facility availability and covenant headroom; assess the consequences of exchangeable notes and warrants for dilution.
- Monitor the Tinder optionholder case, FTC litigation and related investigations, as well as potential separation-related tax liabilities.
- Compare actual capital expenditures with the $55–$60 million estimate and assess ongoing COVID-19 effects on advertising, operations and user demand.