Grindr Inc. Q4 FY2022 Earnings Call

Good afternoon. My name is JP, and I will be your conference operator today. I would like to welcome everyone to the Grindr Fourth Quarter and Full Year 2022 Earnings Conference Call. Thank you. I would now like to turn the conference over to Patrick Lenihan, VP of Communications.

Thank you, operator, and good afternoon, everyone. Today's call will be led by Grindr's CEO, George Arison; and CFO, Vanna Krantz. They'll make a few brief remarks, and then we'll open it up for questions. I'll also note that we released our shareholder letter this afternoon, and that is available on our website 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 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. During today's call, we will also present both GAAP and non-GAAP financial measures. Additional disclosures regarding non-GAAP measures, including a reconciliation of GAAP and non-GAAP measures, are included in the earnings release we issued today, which has been posted on our Investor Relations page of our website and in our filings with the SEC. With that, I'll turn the call over to George.

Hello, everyone, and welcome to our earnings call. I'm pleased to share that Grindr had a great 2022. We closed the year near the top of our range, growing full-year revenue 34% year-over-year to $195 million, and hitting an adjusted EBITDA margin of 44%. Vanna will talk more about our financial results shortly. First, I want to take a few minutes to share with you my initial insight about the company and some key business and product highlights from the past year. When evaluating the Grindr opportunity last year, I quickly saw that the fundamentals of our business are outstanding. We have a differentiated product with our niche right in the marketplace, incredible user engagement with a young and growing user base, attractive market penetration opportunity, very strong global brand recognition, and outstanding margins. Our passionate team has done a fantastic job delivering strong financial results while working over the past 2.5 years to address historical underinvestment in technology, product development, and monetization. What excites me most about this business is Grindr's immense opportunity to grow and deliver shareholder value. I'm highly confident in the plans we're developing to generate sustainable double-digit revenue growth and continued high profitability as we enhance our user experience, better monetize our core business, execute over time to build out our international business and add new adjacent business opportunities as part of a community-focused super app. We intend to deliver strong results in our first full year as a public company. We anticipate 2023 full-year revenue growth of 25% or greater, with a 38% or greater 2023 full-year adjusted EBITDA margin. We see our growth opportunities in three overlapping time horizons. Near term, we will better monetize the users we have and drive conversion of free to paying users through new, impactful features and services in the Grindr app. Because we are early in our monetization journey, we will work to find the right balance between free and paid features. We will also invest in our advertising and brand partnerships to benefit both users and the businesses who want to connect with them. Medium term, currently, we operate in nearly every country across the globe, but there is more we can do to monetize and grow. We can better serve our international users by further localizing the product, bringing Grindr to more and different form factors, and effectively marketing the brand. In addition to internationalization, we will work on using machine learning and artificial intelligence for better matching and generative conversation purposes. Long term, Grindr not only has the largest user base of gay, bi, and trans men in the fold, we also have a deep connection to the broader LGBT community. By tapping into our community's unique needs, we can develop distribution partnerships, products, and services that deliver new revenue lines that have a hyper-focus on this highly valuable demographic. Having previously founded three companies, I bring to Grindr a founder mindset and decades of experience in building and scaling successful technology platforms. I'm excited to share more about our accomplishments and results from last year and how they set us up to further scale in 2023. Starting with 2022. The team had a productive year continuing to tackle technology and product debt while building new features and setting ourselves up for further growth in the years to come, all while maintaining adjusted EBITDA margins that compare very favorably with our peer group. Our Albums feature is a perfect example of our user-focused and private experience design. Initially deployed in Q1 2022, Albums gives Grindr users the ability to share multiple photos instantaneously with their connections while blocking screenshots and enabling the instant relocation of Album access at the user's discretion. In 2022, our users globally added more than 70 million photos and 20 million albums, sharing them over 999 million times. Our product and engineering team launched Boost, a paid a la carte feature, in Q2 of 2022. While it currently is a relatively small new revenue stream for us, we're confident that as we optimize it over time, it will continue to scale. The successful launch of Boost, which users purchased more than 1.4 million times in just around six months, indicates a strong opportunity for us to grow a la carte offerings this year and in the years to come. Chat is the foundation of Grindr's unique engagement experience. Last year alone, our users spent a total of over 111 billion chats on our platform. That's over 300 million a day. In 2022, our engineering team improved platform and chat functions to support faster future development in coming quarters, including modernizing the UI and the UX of our inbox. Using industry-leading encryption, we continue to ensure our users enjoy the best available technology for privacy and security. Turning to our 2023 strategic priorities. We made significant technology and product investments over the past two years that helped establish a foundation for long-term growth. Our first priority is to improve the user experience. Specifically, we will help our users make more and better connections by updating features such as the cascade, search and discovery, profile and tags, and we will create an improved chat interactions experience by improving the inbox and chat interface to make messaging more reliable, organized, relevant, and actionable. Our second priority is to drive monetization through conversions and new offerings. The core way in which we will drive monetization in 2023 will be through pricing optimization and increased monetization of features and services that we have already built, such as Boost, Albums, and filters. Vanna will discuss the features as she discusses monetization in her remarks. Priority number three is planning for future growth. As we move further ahead, the obvious opportunities for growth are demographic and geographic and exist in our ads and brand partnerships business where we have underinvested. We also have an incredible opportunity to expand our products and services beyond our core, given we have one of the largest communities of gay, bisexual, trans, and queer in the world, and we are imagining how we can better serve them holistically. Last but not least, our fourth priority is to continue to commit to our community. Grindr is not a typical business. We have a deep and vital mission of service to our users and to the broader LGBTQ community. Nothing we accomplish would be sustainable without the support of the users we serve. Therefore, we see our commitment to every segment of the LGBTQ community as the foundational strategic priority for the company. In addition to providing financial support where our resources can do the most good, namely in the developing world where the LGBTQ community can often be forgotten, we will also continue to serve as a vital source of information about health for our users, like we did with monkeypox in 2022. With that, I'd like to turn it over to our CFO, Vanna Krantz, to talk through our Q4 and full year 2022 financial results.

Thank you, George. Hello, everyone. The search for companionship is arguably the most important search in our lives, and our goal is to help our users be more successful in their search. One of the key things that attracted me to Grindr's business was the deep relationship we have with our users. We are fortunate to have over 12 million monthly active users who spend on average 58 minutes a day on our app. My particular focus will be on monetizing more of those users and working with our Chief Product Officer, AJ Balance, to translate our high engagement into higher paid user penetration, which we expect to enhance shareholder value. Let me share a little more detail on our three-pronged approach that George mentioned earlier. First, we will increase the range of subscription options with differentiated features and price points, ranging from the more accessible to the ultra-premium experiences for our avid users. Second, we will improve on what we have already built and introduce new a la carte features to enhance the product experience and help our global users find what they're looking for faster and more efficiently. Finally, we will broaden our relationship with our users by serving as a conduit between them and relevant brands and experiences. We will leverage user research to evolve our existing core product and inform how we build new products to delight our users. As we move forward, we will utilize operational rigor in assessing the success of our products. More immediately, I am pleased to report that our Q4 and 2022 results continued Grindr's track record of quarter-over-quarter and year-over-year growth. We closed 2022 near the top of our guidance range, growing full year revenue by 34% and achieving an outstanding adjusted EBITDA margin of 44%. Looking quickly at our key metrics, we saw solid improvement, but we do remain early in our monetization journey. We ended the year with about 873,000 paying users, up 22% from 2021. At year-end, our paying user penetration rose to 6.9% from 6.1% in 2021. Our average revenue per paying user was $17.28 in 2022 compared with $16.08 in 2021. We believe these results represent just the beginning of what our talented organization can achieve through prioritizing data-driven product development, price optimization, and operational rigor. We intend to maintain double-digit revenue growth and best-in-class EBITDA margins in 2023, while continuing to invest in our core business, predominantly through increased headcount in technology, product, and data science. Turning to a more detailed results. For the full year 2022, revenue grew to $195 million, up 34% on a year-over-year basis from $146 million. We are especially proud of achieving 41% revenue growth in our direct revenue, which is the subscription and a la carte business. This is the key driver of our near- and long-term growth. Direct revenue totaled $163 million for the year. Grindr's Q4 2022 revenue was $55 million, up 21% year-over-year from $45 million. Direct revenue was $45 million, up 27% year-over-year. This performance was achieved despite exceptionally strong subscriber growth in the year-ago quarter, due in large part to a highly successful launch of the new profile feature as well as higher subscription activations traceable to the vaccine rollout. Additionally, in the fourth quarter of 2022, we aggressively tested subscription price optimization, which led to uneven subscriber growth. Advertising or indirect revenue was relatively flat in Q4 on a year-over-year basis at approximately $10 million as growth in brand partnerships was partially offset by a decline in programmatic advertising revenue. This was primarily due to intentional choices made by previous management to focus less on advertising and more on the user experience. We are just beginning to transition our advertising from predominantly programmatic, which typically serves less relevant advertising to our users, in favor of direct advertising, which is relevant. Total operating costs and expenses in Q4 2022 were $52 million, up from $35 million in the prior year, due to hiring and one-time costs associated with becoming a public company. Selling, general and administrative expenses in Q4 were $21 million compared to $9 million in the prior year period. The increase was primarily driven by equity compensation expense for the exiting management team, increased insurance expenses, and outside services, which were driven by legal and consultancy costs as we scaled for public company-related operations. Headcount in the fourth quarter increased by 58 people as we scaled the business for public company-related operations, and we ended the year with just over 200 full-time employees. For the full year 2022, total operating expenses were $182 million, up from $122 million in the prior year. The most significant portion of the uptick was an incremental equity compensation expense of $24 million for the exiting management team. The final $3 million of which was recognized in Q4, and also a distribution fee increase of $14 million from the prior year, consistent with direct revenue growth. We also saw an increase of the previously mentioned incremental people costs and outside service costs as we incurred one-time transaction expenses related to becoming public. Adjusted EBITDA for the fourth quarter of 2022 was $19 million or 36% of total quarterly revenue. The decrease in adjusted EBITDA was primarily driven by increased expenses as we scale to manage public company requirements and enhance our infrastructure to execute on our strategic priorities as well as challenging year-over-year revenue comparisons. Full year 2022 adjusted EBITDA was $85 million or 44% of full year revenue and up 11% from $77 million in the prior year. Some of the expense drivers that lowered the EBITDA margin in Q4 2022 will continue into 2023. However, as George stated earlier, our EBITDA margin guidance for 2023 is 38% or higher. Turning quickly to our balance sheet and liquidity. Grindr generates cash from its operating activities, given its strong EBITDA margins. 2022 was an unusual year, given the transaction, which impacted Q4. We expect to return to a more normal cadence of cash generation, which enables us to easily service our debt and fund our investments in the business. Additionally, we will be looking at our capital structure optimization over the coming quarters as our debt agreement and the market conditions allow. Lastly, I want to thank everyone on the call for their support and the interest we've seen to date from the investment community. I look forward to engaging with our investors and future analysts as we embark on this exciting journey as a public company. Grindr is an inspiring company with a goal we all believe in: connecting a global community and helping them find companionship. We look forward to translating that goal into shareholder value. With that, I'll pass it back to George.

Thank you, Vanna. I'm glad to have your experience and partnership to lead our company into its next year. We have an amazing opportunity to continue our profitable growth and build on our strong foundation as a community-minded product, and I'm excited to update you regularly on progress in developments. At this time, I'll ask the operator to open up the line for questions.

Your first question comes from the line of Shyam Patil from Susquehanna.

This is Margaret on for Shyam. First, historically, Grindr has had low marketing spend. Could you help walk us through the thinking around why the company has an increased marketing spend much in the past few years? And what would drive the company to increase marketing spend from here? Also, I wanted to ask about the range of subscription offerings you plan to release in the next two years, as you mentioned in the shareholder letter. Could you dig in a little more on that? For example, what additional premium features would you include in these higher-priced tiers?

Great questions. Thank you very much. Maybe I'll start, and then I'll hand it over to Vanna. So I've known about Grindr, to start with just kind of the anecdote, as a word of mouth product back in 2009. I was in a bar in Washington, D.C., with a friend, and he said, 'Let me show you something really cool.' He pulled out the phone and showed me Grindr, and you could see all these guys who were in the same bar on Grindr. I thought, 'Oh my God, this is the most amazing thing.' At that point, I was building a company in mobile as well, but our primary product was on Blackberry, so I didn't use an iPhone. I remember about a week later going to get an iPhone because of Grindr. The word of mouth for this product has been extremely powerful. My experience back in 2009 demonstrates that, and that has continued to be the case ever since. My sense is we'll be able to maintain that with 85% brand penetration. It is effective to work through word of mouth. Unlike many other social applications, we've been able to bring young people back into our app rather than have them go somewhere else. Now that's not to say we can't improve things in marketing. We absolutely can. We need to do a much better job in lifecycle marketing. We need to improve our product marketing. Those are huge opportunities for us, and we'll continue to do that, but that requires expertise in-house and is not just about dollar spend. I'll hand it over to Vanna for the second question.

Sure. Just to kind of put a finer point on the sales and marketing expense. I think as George said, we really have a tremendous benefit by already having 85% global brand awareness, which helps fill the top of our funnel from an awareness perspective. We also fill the top of our funnel with amazing user features that we develop every year. That is a more efficient way of generating MAU and top of funnel. As for the overall sales and marketing, what might happen to it and what would really drive an increase, I think as George said, we would probably start to think more seriously about performance marketing over time when we feel ready to handle that. In terms of the subscription tiers, right now, we offer two tiers: one is called XTRA at $19.99 for the month, and the other is called Unlimited, which is $39.99. Both remove ads, and the Unlimited tier essentially provides unlimited profiles and premium features like incognito. While the XTRA feature allows about 600, free users get about 100 free profiles. I'd say transitioning to a more premium tier higher than $39.99 will require a bit of work on our part in terms of user research to understand what they would pay for, and then we would develop that premium tier over time. Don’t look for it until the very end of 2023 or possibly think about 2024 for that premium tier.

Great. We are very excited to have a number of questions off of the Say platform from our retail investors. We're going to read a few of those now and answer them for everybody here. The first question from Say Technologies, what is Grindr doing to keep up with the pace of all the other dating apps? Being one of the original gay dating apps, how are you keeping it fresh and up to date?

Great question. Thank you, Patrick, and thank you to the users and our investors who submitted that. First, it's important to talk about what Grindr does and how differentiated it is. We are very different from almost every other dating app out there. We allow users to see people around them and speak to anyone they'd like on the grid that they can see. We don't force a one-on-one matching and don't limit who you can talk to. This makes the product very different, and it also makes the product really engaging. Our engagement metrics are fantastic. Last year, there were 111 billion messages sent—over 300 million messages a day in the app, which I find truly incredible. There were nearly 1 billion albums shared even though we launched the Album feature in Q1 of last year. Our engagement is really strong, and we're driving growth in our monthly active users, which we're very happy with. On these metrics, the company is doing exceptionally well, and I am confident we'll continue to succeed in the future. For competitors, I spoke about that earlier. Grindr is a very differentiated product that offers users a unique experience and has strong word of mouth and connection to the community. We need to nurture that. We need to ensure we provide users with the features they want. There are many features we haven't yet launched that users expect, and enabling those features, whether a la carte offerings or within a subscription product, is something we are working on actively.

Thank you very much, George. This next question is from Drew H. What are you doing to ensure Grindr is safe in countries or areas where LGBTQ+ identities are not welcome or safe, e.g., preventing undercover police, government accounts for the purposes of targeted discrimination, ensuring user identity and privacy safeguards, etc.? George?

It's a really important question, and it's something that we talk about a lot at Grindr, probably much more so than almost any other company out there. We really care about the safety of our users, and it's something we focus on constantly. Let me start with my background and how that relates. I was born in Georgia, the country, where being gay is still very challenging. It's not illegal; however, being out is not well accepted. I understand how difficult it can be to live in a place where being gay can be unsafe. We do a lot to help our users stay safe, and it's always top of mind when we build our product. We designate certain neighborhoods and provide information to our users in terms of how they should behave to stay safe. We've also launched features designed to help users in such countries. For instance, in our Album feature, you cannot take a screenshot, which helps prevent people from capturing images of our users in the Album. Privacy is really important for Grindr and for our users, and we are constantly ensuring it is maintained. We've had to consider our operations in various parts of the world and how to handle different environments where being gay can be difficult. Local activist and gay rights organizations have expressed that they want us to be there because Grindr is a powerful way for people to connect with each other, especially in places where it's hard to find members of the community. This is a vital aspect of our company. Grindr for Equality is a crucial division for us, and we will continue to invest in that in the years to come.

While we're awaiting any additional questions from analysts, we'll take another inquiry from Say Technologies. This question comes from Drew H. Many users are frustrated with ads for games that seem geared towards their grandparents on an iPad. Are there plans for more targeted advertisements? I completely understand Drew's concern, and I appreciate the reason behind his question. We have discussed this in detail in our shareholder letter. Our focus is on establishing direct advertising partnerships and building relationships with advertisers and the agencies they work with to bring more relevant ads to our platform. This process takes considerable time. We already have some direct ads integrated into our product, which have been better received by our users, so we aim for more of those types of ads. Our user base is highly sought after by advertisers, and we believe we can provide ads that are both relevant to users and beneficial for Grindr and the advertisers; that is our primary goal. However, achieving this will require time and cannot be completed within a single year. This is a multiyear effort.

Great. Thank you. Next question from Say Technologies is from Robert V. How does Grindr plan to encourage growth? With the cost for paid memberships being one of the most expensive of all dating apps, wouldn’t it be better to lower subscription prices and encourage more users to pay for these services? Vanna?

That actually is a great question because it's exactly what we are doing. We are testing our monetization opportunities right now. In 2023, we are experimenting with new price points as well as new subscription plans, and we seek to meet users where they are while maximizing conversion from free to paid. To do this, we are conducting user research to understand what our users want and what they're willing to pay for. We're looking to get our domestic business firing on all cylinders first, then roll it out in the medium term internationally. We know our Tier 1 international markets well in terms of both MAU and paid users, along with an understanding of acceptance levels in each of those countries. So expect that in the medium term.

Thank you very much. Next question from Brian D. Why doesn't Grindr have a verification option? This would eliminate excessive fake profiles and bots on the platform, which deceive real numbers.

Thank you, Brian. It's a good question. We've already added some features like this. For example, you can link your profile to Instagram and Twitter. Many users take advantage of that. It's essential to remember, though, that a large portion of our users are discreet, which is beneficial for various reasons. They may live in countries where being gay is difficult and want to remain discreet for their safety. It could also be personal reasons or social acceptance in their communities. We aim to encourage all users to utilize our products, including those who wish to stay private. Therefore, any developments in user verification need to work for both discreet and non-discreet users. Balancing these aspects is essential for us.

We will take one more question from Say Technologies, and then we're going to close the call. This question is from Adam S. As an active user, I have noticed a significant drop-off in engagement with other users. It may be anecdotal, but as an investor, I am concerned about losing market share to competitors. George?

Yes. I mean we have really amazing engagement, and I think it's outlined in the shareholder letter. Over 111 billion chats last year, that’s 300 million messages per day, which is really incredible. People stay in the app for nearly an hour a day. We had nearly 1 billion albums shared last year, even though Albums was launched in Q1. Engagement is strong, and we are driving growth in our monthly active users. On all these metrics, the company is doing exceptionally well, and we are confident that we will continue to do so in the future. As for competitors, I think we spoke about this a bit earlier. Grindr is a differentiated product that offers users a different experience and has strong word of mouth and community connection, and we need to maintain that. We need to ensure we provide users with the features they want. There are many features we haven’t yet launched that people expect from a platform like ours, and enabling those is a focus for us.

With that, we'll close the call. Thank you all for participating today. We look forward to keeping you up to speed on everything happening at Grindr in the quarters to come.

Thank you very much.

Thank you.

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.