Earnings Call Transcript - GRND Q1 2024

Operator, Operator

Good afternoon. My name is Clouie and I will be your conference operator today. At this time, I would like to welcome everyone to the Grindr Q1 2024 Earnings Conference Call. After the speaker's remarks, there will be a question-and-answer session. Thank you. I would now like to turn the conference over to Tolu Adeofe, Grindr's Head of Investor Relations.

Tolu Adeofe, Head of Investor Relations

Thank you, moderator. Hello, and welcome to the Grindr Earnings Call for the First 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 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. 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.

George Arison, CEO

Thanks, Tolu, and hello, everyone. We reported outstanding revenue growth and strong adjusted EBITDA in the first quarter. User metrics and engagement were all healthy. Our overall Q1 performance reinforces our confidence in our full-year outlook. I’m grateful to our team for their hard work in the significant product launches and to our users for engaging with the launches and providing us important feedback quickly to allow us to make improvements. In addition to the remarkable results, we have hit the ground running on our 2024 strategic priorities. Those priorities are focused not only on driving continued growth this year but also positioning Grindr for the long-term success of the Global Gayborhood in Your Pocket. We are pursuing that vision by focusing on: one, a robust set of products and features to serve users with intent; two, a lean and nimble team with an exceptional performance-driven culture; and three, a brand narrative that is true to the important role we play in the community. Looking at product development, we currently have 2 products in test, Right Now and Roam, both built with user intent in mind. Right Now is a multi-phased product we’re building in response to strong user demand that makes it faster and easier for users to connect. Phase 1 features our crowning tests with more expected to be launched later this year and next year. Right Now will ultimately have additional robust features facilitating better user engagement and capabilities for more seamless and easy communication if we use both one-on-one and in groups. Roam, previously referred to as Roaming, targets travel intentions. This feature enables users to transport their profile into a different location that they will be traveling to, making their profile discoverable by users in that area. We are currently planning to start rolling it out more broadly in the second half of the year. During Q1, we also rolled out our new chat system built with an entirely new architecture, which encompasses step change improvements in its critical user features. This was a complex test we’re taking, and we’re in the finish line in addressing bugs that have arisen in the initial launch period. The new storage of chat server-side eliminates lost chats as a result of device changes. Fixing this was a top request from users for years. We are very excited to offer this significant upgrade to all users. New chat architecture will be foundational to several new intention-focused features we plan to roll out in the coming quarters. Turning to our team, we continue to build out our talent base, and we increased the number of engineers on board by more than 50% in Q1. As we think about long-term growth, we are centering on a vision of creating the Global Gayborhood in Your Pocket. Physical Gayborhoods are hubs for the gay community long established in large cities where we can interact safely and comfortably with businesses, resources, bars, restaurants, and shops specifically catered to us. Over our 15-year history, Grindr has come to represent this concept in a digital way. We see this today and how the app is used for things like travel accommodation, health information, and making professional connections. We know our users want other types of actions, information, and services that will enhance their lives. Our vision of Grindr as a Global Gayborhood is about tapping into these desires. It will be a multiyear journey to achieve this vision, and we're excited about the potential of Grindr to find an even more integral part of the community and to build an even greater business in the process. I'm excited about sharing the long-term product roadmap that underlines the Gayborhood vision with you at our Investor Day in June. Thank you again for joining. And now I'll turn it over to Vanna to discuss the quarterly results.

Vandana Mehta-Krantz, CFO

Thank you, George, and hello, everyone. Grindr is firing on all cylinders as we start off the year. Q1 revenue grew 35% year-over-year to $75.3 million, and adjusted EBITDA margin came in at 42%. Q1 revenue was driven by strong sales across all products, including the XTRA Weekly subscription, which launched in mid-2023. Direct revenue increased 34% year-over-year to $64.4 million, and indirect revenue was up 43% year-over-year to $11 million as we benefit from reinstated banner advertising since Q2 of 2023. To share a few key user metrics, average monthly active users increased 7% over the prior year to $13.7 million. Average paying users in the quarter increased 17% over the prior year to 1 million, which brings payer penetration to 7.4% for the quarter. Our Average Direct Revenue per paying user increased 15% over the prior year to $21.25 this quarter. Moving to expenses and profitability, operating expenses, excluding the cost of revenue, were $36.5 million in Q1 of 2024, up 13% year-over-year. This reflects higher personnel costs driven by stock-based compensation and contractors, which were offset by lower depreciation. Adjusted EBITDA for Q1 of 2024 was $31.6 million, equating to a 42% adjusted EBITDA margin, up from $22 million a year ago or 39% of revenue. Turning to our balance sheet, we paid down $25.8 million of debt, bringing our debt position to $315 million as of March 31, 2024, and ended the quarter with $21.5 million in cash and cash equivalents. Lastly, I'll touch on how we're thinking about our 2024 outlook. We are pleased with the strong start to the year, which increases our confidence in the outlook for revenue growth of at least 23% and adjusted EBITDA margin of at least 40% for the year. We set and update our annual guidance based on our most current views of the business and what we know to be achievable. Q1 year-over-year revenue growth was largely driven by user adoption of the XTRA Weekly subscription, which was introduced in mid-2023. We are currently testing new products and are encouraged by their potential while still accumulating data that will inform the timing of global launch and revenue forecasting. With that, I'll ask the operator to open up the line for questions.

Operator, Operator

And we'll take our first question from Nick Jones with Citizens JMP.

Nicholas Jones, Analyst

Maybe first, increasing the engineer headcount by 50% sequentially. And with Right Now and Roam products rolling out, can you speak to how you think about, I guess, return on investment? When you add engineers, you guys are a very product-driven company with a lot of enhancements to come. How do you think about ratcheting up those hires and how we should be thinking about, I guess, the timeline or return on investment for those hires?

George Arison, CEO

Thanks for being here, Nick. Great to talk to you. So I'll start and then I'll hand over to Vanna. First, we had way more engineers than we have on board today at our peak in January of 2023. We were close to 225 people in total, and a big portion of nearly half of that was in the product and engineering team. As everyone knows, a lot of folks chose not to stay on Grindr. I think with the culture change and some communications that we wanted to make, which included coming back to the office, they chose to depart. We were at 129 people in total at the end of Q3, which is far from where we were at our peak. So the engineers that we're adding are bringing us close to where we were in the past. When I came to Grindr, my takeaway, and this is not just mine but a sentiment shared by a lot of the leadership, was that we had the opportunity to significantly increase productivity. We were not shipping as many products as we could have been shipping, and I think it should have been in a significant way both last year and I continue to see pretty significant productivity improvements this year. Obviously, some of that has to do with clarity on what you want to achieve because I think engineers do really well with clarity on the product vision and specifications. Some of us do with better management, which we’re implementing across the whole team; that’s something you have to do as a company matures. As far as how we tend to think about product development, we are a very product-driven company, no question. The way we believe product is built is through the user perspective. If you go to our operating principles on our website, you'll see that the first principle is 'user #1.' There’s a clear reason; we try to learn from users what they want and then try to build that for them. This does not mean you don’t come into the product with a hypothesis; you definitely do, but you start with the user in mind. We're fortunate that users have told us a lot in terms of what they want. They've been saying this for years, asking when we will build certain features. I think we've been deliberate in ensuring that we build those for them. What we normally do is gather that initial user perspective on what they want, mark things up, design prototypes, and present those to users to collect feedback, making changes based on their input as we build the product, at which point we have reasonable confidence that something will work well. We try to create the most minimum viable product possible to address the user need that's in question and get it out to the market as quickly as possible because the best test for something is having users interact with the product and start collecting feedback. For example, last year with Roam, we put the first personal room out in the fall in a couple of countries with selected users, collected feedback, refined it based on real product use, and then re-launched it in the last quarter. That's the general approach we take for product development. We definitely have more to do than resources, which is significant. That's why we said that we would expect that over a 2-year period, we would build back up to at least the levels of total hires we had at the beginning of 2020.

Vandana Mehta-Krantz, CFO

And to address your question, we are considering our investments with respect to the overall envelope we've set in terms of our guidance of 40%. Everything that we're discussing is factored into the guidance we’ve shared with you, which reflects the investments we need to continue growing in the short and medium term. Yes, it sounds like a big change with the 50% increase in engineering headcount, but we were at 104 total FTEs in Q4, and now we're at 129, so still a relatively lean company for the amount of product we have out there and our goals.

Nicholas Jones, Analyst

And maybe still staying on the theme of product rollout, there's the Unlimited Weekly rollout globally in Q1. You mentioned the XTRA that was rolled out in Q3 last year. Payer penetration as a percent of MAUs ticked up nicely in Q1. Can you speak to how the final rollout obviously helps attract more payers, but to the extent that users are having a better experience—is that also showing up in MAUs who are not quite ready to pay? Could you walk through how these rollouts impact payers and perhaps, overall usage of the platform?

Vandana Mehta-Krantz, CFO

To start, we actually did not roll out the Unlimited Weekly; it is still in test. It only went out in April, and so this was the Q1 result you are looking at, and the cash part was still in March. We are pleased with our growth rate in average paying users, which was 17%, and we are pleased with the ARPU changes, which are an output of attracting more paying users. Right Now continues to grow; we’re up by 7% on a year-over-year basis. We are steadily bringing more monthly active users globally into the platform while increasing our average paying users through our product roadmap development, both domestically and internationally. It's a continuous effort of tweaking our products and getting more users engaged.

George Arison, CEO

Through the products we’re building and where they’re going, we have an Investor Day coming up in June. I’m excited to share more with everyone, and we’ll provide a detailed look into what the product roadmap is and discuss how it interrelates to the growth we’re planning from a revenue perspective. Please stay tuned for that. We’re thinking about product development overall as creating products that will drive monetization while also building features for our entire user base, even if those users are not paying customers, as they are very valuable. For example, the last quarter, we released a significant update to our chat system, a completely new architecture representing a major launch—the most challenging endeavor the company has faced in nearly a decade. This update is for everyone. We believe that with this architectural change we will be able to launch new features specific to paying customers and improve our capability to convert existing users into paying customers.

Nicholas Jones, Analyst

If I could sneak in one last question here, and then I'll hop back on the queue. In a slide deck you guys put out earlier in the year, I think it was about 25% of MAUs are in the U.S. roughly, but your revenue in the U.S. is quite a bit higher than next. Could you speak to your ability to monetize so well in the U.S. and what it takes to get similar monetization in some of the international markets or clarify what the differences are?

Vandana Mehta-Krantz, CFO

Yes, you're right, Nick. We have about a quarter or a third of our monthly active users globally in North America compared to other regions. From a revenue perspective, about 40% of our revenue comes from outside North America, indicating we are further along in terms of payer penetration and conversion in the U.S. versus other regions. We put new products out globally and do a global launch with minimal localization. We continue testing how our products perform in specific international markets and will keep investing in localization efforts to increase conversion rates internationally. It's still early in that journey, but what’s reassuring is that even with a global rollout, products like the XTRA Weeklies have performed very well.

George Arison, CEO

We know all that points to a huge opportunity. The fact that we are penetrating well in the U.S. but are still below our peers in the dating space represents a great opportunity to continuously increase our penetration in the U.S. The rest of the world, including Europe, Latin America, and Asia, is below North America in penetration levels. We are just starting to think about localization from a regional perspective, which will be very beneficial. The cultural changes in places like the U.S. and Europe, for instance, are further along in acceptance of gay rights, making it easier for people to engage with a product like ours. That change is happening actively in Latin America, where we recently received incredibly positive responses during our visits to Argentina and Brazil. There’s vast potential in Latin America from this perspective, and while the pace of change is slower in Asia, we are seeing significant shifts like the recent moves in Thailand to pass gender equality laws which are positive signs. We see a wealth of opportunity to increase penetration worldwide; it will certainly be a long journey, but we plan to leverage that.

Operator, Operator

And moving next to Andrew Marok with Raymond James.

Andrew Marok, Analyst

I wanted to talk about the Right Now launch. It seems like a pretty interesting product and fairly differentiated in the marketplace. You talked about user feedback or signals on intent that went into the development of that product. Can you maybe go a second level deeper and explain what prompted the user base to signal that this is a product needed to fulfill an unmet desire?

George Arison, CEO

Absolutely. I’m happy to discuss that, Andrew. I would frame this as follows: When Grindr started out, users primarily thought of it as a Right Now product. That was its core appeal—being able to connect right away. As the user base grew quickly, many different use cases emerged—from dating to friendships to professional connections. Users no longer had the same singular intent always; they were expressing a desire to know who was available 'Right Now' when seeking connections. We have heard this from users consistently, prompting us to build a feature that allows them to indicate this intent. The Right Now feature we’ve launched so far is not the complete product; what we released is the first test phase in one country. We are collecting feedback and refining the features before the eventual broader rollout. The functionality now includes a toggle on profiles to indicate being in the Right Now mode, allowing other users to filter based on that status. Over time, we see many more features that can be tied to that mode, such as the ability to create multi-person chats or rooms for interaction among those in Right Now mode. There are many different aspects we consider adding to this product over time. We also hope to extend the product to dating, driven by user requests for better features that enable long-term relationship connections. While our core offering remains, we see both Right Now and dating functionalities as significant extensions of our product line, responding directly to user feedback.

Andrew Marok, Analyst

I appreciate the detailed insight and look forward to the future evolution of that product. Perhaps one quick one for Vanna, if I may. You mentioned reinstating banner ads significantly impacting indirect revenue growth. Should we expect the Q1 results as the run rate going forward? Any other details regarding the scale of the moves you've made would be appreciated.

Vandana Mehta-Krantz, CFO

Yes, Andrew, we are off to a strong start this quarter across all our business lines, and we reintroduced that banner in the middle of 2023. What I suggest is that our advertising revenue comprises about 14% of our total revenue, and the composition of total revenue should stay around that same level. I think you should think of it in that manner.

Operator, Operator

And we'll move next to John Blackledge with TD Cowen.

Logan, Analyst

Thanks for taking my question. I had a couple of inquiries. Firstly, revenue growth was strong once again in Q1. How should we expect revenue growth to trend through the rest of the year as you factor in the launch of the weekly products in '23 along with new products like the Unlimited Weekly tier?

Vandana Mehta-Krantz, CFO

Yes, thanks. We’ve had a strong year so far and anticipate a full year of great revenue growth. We’ve guided for at least 23%. Our philosophy on guidance is to inform the market based on our visibility. We're running tests across our subscription products, our a la carte offerings, and advertising formats. All those tests are going well, and their results might influence our forecast. As we receive more feedback, we will update the market. Last year, we began providing market updates after understanding the impact of our testing concerning cannibalization and sign-up growth.

Logan, Analyst

On marketing, your spend has remained minimal. Could you update us on your philosophy regarding marketing expenditures and the outcome of your podcast and other brand marketing efforts?

George Arison, CEO

Historically, Grindr hasn’t spent significantly on marketing. In the early days, there was hardly any marketing when we entered. We achieved success more by chance rather than direct marketing efforts. We weren’t effectively communicating our brand narrative. Now, with a new leader for our marketing and communication efforts in place, we’re significantly improving our marketing capabilities. We’ve seen excellent results from our recent initiatives, particularly in the community, which yielded high engagement levels and became popular. Our planned campaign, a bus tour across the U.S. to celebrate our 15th anniversary, will target major Pride Month events and is expected to have a strong impact. We believe the investment in this campaign will yield significant engagement. Our experience in Rio last year, where we tested this concept, brought in huge crowds—far beyond our expectations. We’re eager to continue telling Grindr's story in a positive manner.

Operator, Operator

And we'll move next to Rohit Kulkarni with ROTH MKM.

Rohit Kulkarni, Analyst

Great insights, George. A couple of quick queries—how do you view AI and AI-driven use cases? You mentioned chats and that you've rebuilt the infrastructure. What use cases do you think you can unlock, and what investments might be necessary to bring those to life?

George Arison, CEO

That’s a fantastic question. When we think about the user perspective and how we run the company and build products, the changes happening in software development are incredible. For instance, the capabilities of AI in code generation are impressive. AI can enhance productivity in various ways. We believe both software development and the products themselves are at an early stage, somewhat reminiscent of the transition from landlines to cell phones. We need to decide whether to invest in conventional methods or explore innovative approaches, such as AI-driven options early. We envision three major applications of AI in our products: First, in communication, providing companionship or support through coaching and mental health features. Secondly, in enhancing matching, using data from the considerable volume of user-generated chats to understand user preferences for better connections. Finally, improving application health, trust, and safety using AI to proactively detect and address inappropriate behavior, making the app a safer space. We're already leveraging AI effectively, and it has helped us reduce user reports of illegal activities by 50% over the last three years through proactive measures.

Rohit Kulkarni, Analyst

Regarding weeklies versus monthly subscriptions, how do you interpret the lifetime value of first-time customers opting for a weekly plan? Can you discuss the conversion trends—what proportion of users, over steady state, do you think will remain as free users versus those who prefer weekly or monthly plans?

Vandana Mehta-Krantz, CFO

We’ve spent considerable time analyzing our weekly and monthly user behaviors now that we have sufficient data. We’ve seen increases in our paying users and payer penetration, as well as ARPU. It's now time to review lifetime value (LTV). Our app provides immediacy to our community, and therefore, the weekly proposition aligns well with that intent. We've not encountered the levels of cannibalization expected between weekly and monthly subscriptions. The reactivation rate is robust, and our ecosystem remains healthy and accessible to more users. While we don't disclose specific LTV numbers, we do see that users who enjoy the weekly product tend to be those who dip in and out, while other longer-term users maintain stability. Given the pricing, the LTVs are generally close enough, so we're pleased with our overall ecosystem. To clarify, we began rolling out Unlimited in February, and it was fully rolled out in the current quarter. Thank you, and I’ll pass the line back to the operator now.

Operator, Operator

Thank you. This does conclude today's program. Thank you for your participation. You may disconnect at any time, and have a wonderful evening.