Grindr Inc. Q3 FY2024 Earnings Call

Good afternoon. My name is Rob, and I will be your conference operator today. At this time, I would like to welcome everyone to Grindr's Third Quarter 2024 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. Thank you. I would like to now turn the conference over to Tolu Adeofe, Grindr's Head of Investor Relations. Please go ahead.

Thank you, Moderator. Hello, and welcome to Grindr's earnings call for the third quarter 2024. 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 Shareholder Letter this afternoon, and this is available on the SEC's website and 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. 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 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.

Thanks, Tolu, and hello, everyone. With strength across all of our financial and user metrics we delivered an exceptional third quarter, enabling us to again increase our revenue growth guidance for the year to 29% or greater. Our outperformance reflects the success of our Weekly Unlimited subscription offering as well as effective merchandising and paywall optimizations. Advertising revenue also exceeded our expectations this quarter, fueled by increased demand from our third-party advertising partners. Vanna will cover a few highlights shortly. And as always you can find a more detailed review of the quarter in our shareholder letter. I will focus the remainder of my remarks on our team's continued focus on building and launching innovative features and products focused on the user. In Q3, we expanded testing of Right Now to the Washington, D.C. metro area. We also launched Right Now's feed feature that allows users who are in the Right Now mode to post their intent to a group of nearby users and then chat directly with each other. We will continue expanding Right Now with more features and across more geographies, with the goal of scaling the product by the end of 2025. Our focus is on user engagement but there is significant potential for monetization as well. We also launched the Interest tab, centralizing inbound interest across Viewed Me and Taps which increased payer conversion and led to an over 150% increase in user engagement with the Viewed Me feature. In the future, we will add additional inbound-related features to this tab. In addition, Roam is now live globally allowing users to move their profile to a different location before arriving, serving the one in four Grindr users who are traveling in any given week. We're making good progress in other product areas as well including early testing of our AI-powered Wingman which we highlighted in the shareholder letter. Additionally, I'm very proud of our team's work in resolving legacy bugs and improvements to app stability that took place in Q3, an important part of our user experience focus. This indirectly also supports conversion as over time we expect users to recognize the improved quality and increased value we are delivering. Overall, we remain on track or ahead on all items on the product roadmap we shared at Investor Day and we're bullish about our portfolio approach to product development, which is key to our plan for long-term success. Our product work starts with users, their needs, their behaviors, their preferences. We build features that drive their engagement before implementing steps that drive revenue. This allows us to make sure that our unique connection with our community remains strong. Worth noting however that inherent to this approach is also the likelihood that some products and features will be bigger than others. With strong execution this year, we are setting Grindr up for another great year of growth in 2025, as we continue to execute on effective monetization strategies. In the near-term our bigger performance drivers will likely be our existing products as well as paywall optimization and merchandising. I expect that next year our team will not only continue to deliver strong financial results, but also achieve good progress in both launching new initiatives as well as scaling products that are already launched or in test all targeted at creating an exceptional user experience. As a result, we have potential upside in our results from these new products as adoption grows. Thank you all for your support and a big thanks to our team for their great work in Q3. Now here's Vanna, to discuss the results.

Thank you, George, and hello everyone. Grindr delivered an exceptional third quarter marked by solid performance across all of our financial and user metrics. Total revenue for Q3 increased by 27% year-over-year to $89 million with an adjusted EBITDA margin of 45%. Direct revenue increased 25% year-over-year to $77 million driven by the continued adoption of the Unlimited Weekly tier as well as better merchandising and paywall optimizations, which resulted in higher conversion of free to paid users. To share a few key user metrics, our average monthly active users increased 8% over the prior year to 14.6 million. Average paying users in the quarter increased 15% over the prior year to 1.11 million, bringing payer penetration to 7.6% for the quarter and our average direct revenue per paying user increased 8% over the prior year to $23.07 this quarter. Indirect revenue for Q3 grew 43% year-over-year to $12 million with outperformance in our advertising business being driven by strong demand growth. Moving to expenses and profitability, operating expenses, excluding cost of revenue, were $38 million in Q3 of 2024, up 7% year-over-year. Adjusted EBITDA for Q3 2024 was $40 million, equating to a 45% adjusted EBITDA margin versus $33 million a year ago or 46% of revenue. Turning to our balance sheet, we ended the quarter with $39.1 million in cash and cash equivalents. Our gross leverage ratio was 2.1x based on the last 12 months of adjusted EBITDA. In the third quarter, we generated positive free cash flow of $27.9 million, a conversion rate of 69% from our adjusted EBITDA. As a reminder, our quarterly free cash flow conversion is subject to timing of changes in working capital. Lastly, I'll recap our revised 2024 outlook that we shared in our letter. Based on our outperformance year-to-date, we've raised our revenue guidance for the year. We now anticipate revenue growth of 29% or greater and we continue to expect adjusted EBITDA margin of 42% or greater. Our updated outlook implies relatively consistent revenue on an absolute basis quarter-over-quarter and the timing of planned Q4 investments. Overall, we are pleased with the continued strong growth in our business as we set the stage for 2025. With that, I'll ask the operator to open up the line for questions.

Thank you. We will now begin the question-and-answer session. Your first question comes from the line of Nick Jones from Citizens JMP. Your line is open.

Great. Thank you for taking the questions. As we think about the roadmap you laid out at the Analyst Day, and we consider the performance over the last couple of quarters and in this quarter, are there opportunities to potentially accelerate investment and maybe accelerate those timelines? How should we think about kind of philosophically as kind of ARPPU performs, average subscribers kind of increase or paying users accelerated this quarter? I mean, as you deliver these maybe better-than-expected results, are there opportunities to potentially accelerate timelines?

Thanks for the question, Nick, and good to talk to you. So obviously, we always want everyone to deliver as much as possible on our team, right? We don't just accept the minimum or the target that we might set. We want to always exceed. That's generally my management philosophy. We have a plan, and then we have a stretch plan, and the stretch plan is a lot more aggressive than the plan. We are really happy with where the product map is today as far as the things we've laid out and by which we're working on those. As we discussed in the shareholder letter, Right Now is now in two markets. Roam is now live globally. We also have a bunch of features that are there kind of under add-ons in the works, and we would expect one or two of them to launch next year. And then we're also working on a bunch of things that are not on the public roadmap that we'll be releasing in the future, which I'm quite excited about. The Interest tab is an example of that where we didn't talk about it prior to it being launched. But the impact of it has been really positive, both in terms of how the users are perceiving the feature as well as its impact on actual conversion to paying customers. So, I think what you will see from us is that we'll be either on track or ahead of schedule on everything we publicly said, and we'll be launching more things beyond that, which we think are important to have. In general, my kind of learning about our space is that once people have product-market fit on the product, they tend to monetize it really aggressively and underinvest in building new products. And that is one of the reasons why those products have trouble with users because users get frustrated with the amount of maximization of profitability and not new product development. And so I want to make sure that we do things differently and invest in the product, try to scale the product to a lot of users, make sure users are happy with their experience, and then start thinking about how to monetize it. I think that's setting Grindr up for success not just for a year or two, but over the longer term.

Great. And then maybe just two kind of quick follow-ups. One, I guess, George, as you roll out Right Now, what are kind of the most exciting things you're learning about the product as users start using it that gets you excited about the opportunity there? And then, Vanna, could you maybe speak to some of the new ad formats and monetization within indirect revenue and any progress updates there? Thank you.

Sure. I'll take the Right Now, and then Vanna will take the ads question. So, Right Now, again, is for people who are in the Right Now mode and want to try to meet up Right Now as the name implies. It is a pretty broad suite of features that we need to offer. Not all of them are yet built, right? So some of them are already built, but not all of them are built. What people can do today is, number one, say that they're in the Right Now mode. They can then sort the grid for just people who are in the Right Now mode. And then, there's a chat feature, where people can post chat messages that are available openly to everybody and from there initiate one-on-one discussions. One of the things we'll be adding to the Right Now experience is being able to send photos in the group chat. That's something that's going to come in the future, and we think it's going to be quite popular with users from everything we can gather. Right Now with chat being available and photos not being available, we get a lot of feedback saying we want photos to be added to that as well. So, that should be on the come. The things we've seen are as kind of we expected. Right Now is not for everybody. There's a percentage of our users, and I don't think I'm in a position to give a number publicly right now but not 100% that are using it are using it often. And that's exactly what we want to see right? We want to see active engagement from a portion of the user base that we think will benefit from a user experience like this, by speaking to their intent and then enabling them to have features that address that intent. And that's been really positive. The other thing we're tracking is reengagement, meaning it's one thing for people to try the product once or an experience once. And then do they come back to it again? And we're seeing really good reengagement on Right Now both in Australia and in the DC metro area, where we're running tests. So I think overall, the learnings so far are pretty good. We do need to add more features to the suite of Right Now, as we had planned on doing and that's in the works. And then, we probably will slowly launch it in a few more markets to kind of parallel test and get user feedback in those, as we work on scaling this product through the end of next year. And next year is not going to be focused on monetization with Right Now. It's going to be very much focused on scaling engagement and getting as good of a product experience as possible set up for the user. And then I'll turn it over to Vanna for the last question.

Hi Nick, just to follow up on the ads. So yes, we've had a strong quarter across really all of our business lines, including indirect revenue, which grew at 43% year-over-year. As you know ads are a differentiator for us because of our robust freemium offering and our ability to really monetize here. We also have fairly nice margins on this because there's really no third-party payments to the App Store or Google. And so when we joined, I'd say the ad business had been a little underinvested both from a tech perspective and from a sales talent perspective. Both of those have been addressed and are in the process of being addressed. We've opened up more third-party ad partners. That demand has been able to be filled by us. And we've also enhanced our ad formats. What I mean by that is really native ads. We're starting to think about rewarded video. And we're also having more interstitials. Those interstitials, are slightly more complicated and therefore drive a little bit higher CPM. So we're still really early in our journey, I'd say for ads, but we feel pretty confident that we'll be able to continue to show some real returns here.

I mean even little things like the ordering of what would appear in the ad. So, our order had been set up where a house ad would appear first, and then an external ad would appear second, which obviously does not make sense from the perspective of making money on the ad. And so we switched that, which is obviously not a major thing, but actually had a very positive impact. So it's just an area where there's huge opportunity and not a lot of attention has been paid. We did a lot of work last year to set up the business well for this year, and a lot more work is being done this year to move us into a successful growth year for ads into 2025.

Thanks, George. Thanks, Vanna.

Your next question comes from the line of Andrew Marok from Raymond James. Your line is open.

Thanks for taking my question. You mentioned pricing and merchandising being key contributors to direct revenue growth this quarter. And I think you touched a little bit on it in your last response, but I just want to be maybe a bit more explicit, I guess. How are you kind of balancing that moving forward in pricing and merchandising versus I think you've mentioned in the past that historically given an undermonetized service your user base might be a little bit more sensitive to monetization changes in the early stages as they start to take hold? So, I guess how are you philosophically balancing that? And how much room do you think there still is to run on pricing and merchandising optimizations and improvements? Thanks.

Thank you for the question. We have a strong free offering that sets Grindr apart from others in the market. Users can fully utilize Grindr with minimal limitations without ever paying. This advantage allows us to attract new users as they reach adulthood, which is essential for our growth. It's also important to recognize that free users are just as valuable as paid users since paid users seek to engage with free ones. We're continually evaluating the experience for free versus paid users. This year, we made adjustments to how many messages a free user can send through the Explore feature. Previously, free users could send three messages daily; we've now reduced that to one because we believe this feature provides significant value that should belong to paid users. This change has led to increased conversions. While we work to enhance the paid experience, we're also committed to improving the free user experience. For example, we developed the Interest tab for all users, and updates have led to higher engagement with existing features. We are proactively addressing product bugs to enhance the overall experience for everyone. We're exploring additional ways to delineate between free and paid features, but we will do so thoughtfully and gradually. We previously tested changing how Taps functioned for non-paying customers but ultimately decided against implementing that change. Changes to the balance of free and paid features will occur based on careful testing and user feedback.

Just one last thing to add, Andrew, and that is a simple merchandising change suggesting that if you saw an ad and wanted to get a no ads upsell. We saw nice conversion into XTRA weekly just with that simple pop-up message.

Thank you for all the color there. They are really thorough. And then just maybe a very, very quick one. There was a competitor out today who had noticed some changes or potential disruptions in App Store rankings around what they believe to be the iOS 18 launch. Is that anything that you had seen? Or any evidence that the new iOS may have thrown a wrench into things?

I don't have anything to add to that yet. Obviously, we do track our ratings quite closely, but with the new iOS launching we've not noticed anything.

Yes, we saw that in a transcript as well, and it didn't bubble up to us but we'll definitely take another look.

Got you. Appreciate it. Thank you.

Your next question comes from the line of John Blackledge from TD Cowen. Your line is open.

Okay. Thanks. A couple of questions. First on the Weekly Unlimited tier, do you see that driving higher payer conversion? Or is it more so driving existing payers to switch to the tier? Or is it a mix of both? And then I have two follow-ups.

Sure. Thanks for the question. We have seen conversion rates continuing to increase, and we do track cannibalization very closely. What I think you're asking is how was the cannibalization as you brought out this new duration for Unlimited weekly. I would suggest that we were pleasantly surprised that the cannibalization was very low. And so it is helping drive conversion rates.

Okay, that's helpful. George briefly touched on this, but user growth at the top of the funnel has remained strong, increasing by 8%. Could you provide some insights into the main factors driving this sustained monthly active user growth and whether any specific regions stood out in that growth? Lastly, you mentioned in the release the need to address technical debt. Can you discuss Grindr's progress in tackling the technical debt accumulated from previous management teams and how much the current team has accomplished in improving the technical infrastructure?

I'll start with MAU. And so from a MAU perspective, as you noted, yes, we are at 8% growth and that we're happy with that number. A couple of things that are working in our favor. One of them is from the macro level we continue to see more and more countries being more open. At a micro level, we see more and more people identifying as fluid. That’s helpful as well. We're actually happy with a couple of things with respect to focusing on a great user experience. Focusing on a great user experience helps keep people in the app and bring people in the app. I would suggest that the bug fixes for instance are a great user experience and therefore helping our MAU. Secondly, I'd like to just mention that all the features on our product roadmap also help bring people in and keep our MAU at good numbers. All those things are working in our favor for MAU growth.

Yes. One thing I would add about monthly active users is that we are aware that some users in their mid-life stages or later, who may have had or currently have a Grindr account, aren't using it as frequently as before. This shift often occurs as they move towards wanting to settle down and find a long-term partner. Our current offerings lack features that cater to long-term relationships, which makes those users less enthusiastic about using Grindr for that purpose. Despite this, we recognize that Grindr remains a key platform for finding long-term partners within the global gay community. We believe there are ways to better engage these users by developing features that focus on relationships, which is a priority in our product roadmap. While we are not specifically building those features to boost our monthly active users, we anticipate that they will have a positive effect on re-engaging that demographic. When I refer to "older" users, I'm talking about those slightly older than what you might typically expect for our product. Regarding technical debt, Grindr has been around for nearly 16 years. While that doesn’t seem long in mobile technology, it is significant. The original technology Grindr was built on made sense at the time but isn't the best practice today. Over the past four years, we have worked to address this inherited technical debt. The backend technology is now fundamentally different from what it was when it changed ownership from Chinese investors. We've made substantial progress. Transitioning to a new architecture was crucial. However, the mobile codebase still has elements that one would approach differently if building the app from scratch today. This creates challenges, as improvements in one area of the code can unintentionally affect other areas, leading to bugs—something less common in modern apps. We are addressing this issue. The choice made four years ago to simultaneously make changes and add features, along with rewriting parts of the mobile codebase, is a lengthy process. We've had a lot of accumulated bugs. Recently, we conducted a two-week bug-fixing event that was very successful, eliminating over 75% of identified bugs. This effort demonstrates our commitment to maintaining product quality. It's essential to ensure the product functions effectively, avoiding potentially problematic features that create more bugs. That event was very beneficial, and we will continue investing in high-quality product development.

Thank you.

And we have reached the end of our question-and-answer session. This concludes today's conference call. We thank you for your participation. You may now disconnect.