Grindr Inc.

Q2 2023 Earnings Conference Call

8/9/2023

speaker
Operator
Hi, good morning, everyone. I'm Lauren Shanks, Morgan Stanley Small Mid-Cap Intern Analyst, and I'm excited to be joined this morning by George Harrison, Grindr's CEO, and Vanna Kranz, Grindr's CFO. One quick disclosure on my end. Before we begin, please note that all important disclosures, including personal holding disclosures and Morgan Stanley disclosures, appear on the Morgan Stanley Public website at morganslandy.com, backpacks, research disclosures, or at the registration desk. So with that out of the way, thank you both for joining us.
speaker
Lauren Shanks
Thanks for having us.
speaker
Operator
Maybe let's start high level. Talk about Grindr's evolution from one of the first mobile dating apps to where it is today.
speaker
Lauren Shanks
Yeah, so Grindr has been around since 2009. It's a very integrated product into the gay and the bi community. I became a Grindr user in 2009, so I actually lived through the beginnings of that, back when mobile was very early days. It started out as an app that the founder built for himself, frankly. And for the first, like, four, five, six years, all the income on Grindr was filed on his own personal tax return. Like, this was not a VC-backed company that he built. It was just done for himself. And it became very big. And it became very big because the virality of the product is so massive, right? So Grindr is a grid of people around you who are in the application that you can talk to. It's not a matching product. You can talk to anybody you want. that was a very viral product so it's basically a gay bar on your phone and and that works really really well and it's worked very well from the very beginning um so casual dating aka hookup was the primary use case in the early days of grinder as more and more people joined and as being gay became more acceptance it also then grew into other things which is long-term relationships and Now that's a pretty big part of the use case as well. We actually haven't really kept up with building features to support that, but it still happens a lot that people meet each other on Grindr, whether it's for a hookup purpose and that transitions to dating, or actually are out there actively looking to date and then meet people that they date on Grindr. Third category is regular relationships. One of the jokes on the app oftentimes, like, oh, do people really network on Grindr? I'm like, 100% they network on Grindr. I'm about to invest in a military... DEFENSE CONTRACTOR STARTUP OF A FOUNDER WHO I MET ON GRINDER. SO IT TOTALLY HAPPENS THAT YOU NETWORK ON GRINDER AND IT'S A MASSIVE THING BUT I'M GUESSING LIKE 20, 30% OF OUR USERS DO THAT. AND THEN LASTLY TRAVEL. WE ACTUALLY HAVE A PRETTY BIG TRAVEL USE CASE ALREADY. OUR USERS TRAVEL WAY MORE THAN AVERAGE PERSON WHICH MAKES COMPLETE SENSE BECAUSE THEY HAVE HIGH DISPOSABLE INCOME AND THEY'RE NOT USUALLY WITH CHILDREN WHICH LIMITS YOUR TRAVEL. AND SO We have an opportunity to build a ton of features for them to support that already, but kind of discovering new cities and figuring out what you should do in those cities is another thing that our users do. That's kind of the 13-year evolution of Brenda from where it was in 2009 to today. Right.
speaker
Operator
You're both relatively new to the company. Maybe just give a brief background about yourself and what attracted you to the business of the company.
speaker
Lauren Shanks
Totally. So I'm a serial entrepreneur. I've started three companies. One was a mobile company called Taxi Magic when mobile was very early. And then an AI company, a company called Shift, which I took public. I never thought I'd be running somebody else's company, but this opportunity was just too awesome. The kind of margins it kind of has, the kind of engagement with users that it has, and then how under-monetized it is and how much we can do to make it better was really appealing. And obviously, I've really benefited as an individual from all the work that many, many people have done over the decades to make it'd be okay to be a gay man and have a family and have a husband, and so Grindr affords you an awesome platform to actually continue doing that all over the world, and that was really appealing to me as well, so that's why I decided to take this job.
speaker
Grindr
And for me, it's a mission-oriented company, and connecting the LGBT community was really powerful, but coupled with that, it's extremely profitable, and the engagement, I launched Disney+, and ESPN+, I was the CFO there, And the engagement metrics were just off the charts. It's almost an hour a day of our average 12 million monthly active users. We have 85% unaided brand awareness, and we know one other company with a few other companies with something higher. And then lastly, it's already in 190 countries. And so to already be a global company and this incredible asset to just continue to monetize, I just wanted to be part of it.
speaker
Operator
Great. So let's maybe turn to the fundamentals. If you think about monetizing online dating, there's this payer penetration rate, there's revenue per payer, and advertising. Maybe we start on the payer's piece. Your payer penetration rate is in the mid-single digits, which is slightly below peers. Where do you think that can ultimately go to, and what are the steps you're taking to get there?
speaker
Grindr
So you're right. We're at about 7%, almost at 7%, and lots of folks are at 16 or so. So we think there's plenty of room here. to go up I'd say that like I mentioned it is an online community that was really born from connecting folks and so that's how we generate and have such a great now but there wasn't really a monetization focus and so now as we look at that monetization we've noticed that our pricing and I think even when I talked to George as we were just starting to talk about the opportunity before I had joined the pricing I think we can bring in folks at a lower price point and That should be very helpful to meeting people where they are on the curve. Additionally, we really are going to think about a premium tier and really figure out in a scientific manner what people want to pay for and what that higher tier is going to be. So we're going to be really doubling down on payer penetration and bringing it up.
speaker
Operator
Great. So maybe in addition to subscription tiers, are there any individual product features that you think could really unlock Do you want to go on that?
speaker
Lauren Shanks
Yeah, so we just launched Boost last year. It was the first a la carte offering that we really had. It was used 1.4 million times in the six months I was out, which I think is pretty good. But that, again, was not a focus to build features like that. It will be moving forward for two reasons. One is because we know our users really want those kinds of features. Secondly, we can bundle them up into a kind of bundle and then charge more for that at a higher tier, which we want to do as well. Boost allows a person to be visible a lot more on the grid, even if it's further away from where they are. That's a great feature for somebody who wants to get a lot of messages. That's not a great feature for someone who wants to send out a lot of messages. So the inverse of Boost of, hey, show me people who are more like the ones I really like and let me send messages to them is also, I think, very appealing for that kind of I want to send messages out versus receive a lot of messages. Another huge opportunity for us in terms of, you know, kind of a la carte is telling you a lot more about the user. I think our peers do a really good job with that. We've not launched anything like that, but educating people on, okay, this person is more like what you normally like because he tends to respond to people in your age group a lot more versus younger people, or he tends to want to date versus do a hookup, et cetera, I think is really appealing as well. So there's a lot of machine learning that you can bring into the equation here. and expose a lot more information about people to each other. Grindr is really unique because it has incredible chat engagement. So the chat is a huge part of our product, I think way more so than our peers. Last year, on average, people sent 300 million messages a day, which is like a totally different set of numbers than I think anybody else in the dating world. That A, shows how engaged people are, but then B, it gives you incredible data to use for AI. And we've not done that so far, but that's a huge opportunity for us to do something in the future.
speaker
Operator
Great. Maybe on the revenue prepare side, you mentioned Boost and some others. Where do you think ARPU can ultimately go over time?
speaker
Grindr
We definitely think ARPU could be a little bumpy as we kind of focus and think about really how we get the payer penetration up. That's what we're really focused on, payer penetration. That will drive our revenue growth. I think as we go international, and obviously we're already in 190 countries, but we're going to be thoughtful about let's call it the next tier that we go into in a much more scientific and robust fashion. That ARPU is also going to have to move around a little bit to get that penetration up. So I think you can expect it to be a little bumpy. We also will see the benefit of what we're going to call the whales, and I think that's a general term, as folks really do buy our Alucard products. And we have seen that the vast majority of our Alucard products are purchased by subscribers already.
speaker
Operator
Great. As you mentioned, your engagement is materially higher than other dating apps. How do you use that from an advertising perspective? Is that a key part of the growth story? And how else can you monetize engagement from not paying users?
speaker
Lauren Shanks
Totally. So we have an advertising business already. It's both direct, where we have partnerships with brands and they advertise, and then indirect, which is much larger, where it's third-party ads. Frankly, as I was asked on the earnings call on Monday, third-party ads are not very popular. They're probably the single biggest kind of negative set of feedback that you get from users. So what we want to do is grow our direct advertising business by partnering directly with brands, partnering directly with agencies that have relationships with those brands to build a really unique way for them to reach our user base because our user base actually is what advertisers really want to reach because, again, high disposable income, more propensity to spend that income. But we've not really been focused on that direct business so far. We will be moving forward because it's a huge opportunity. As we do that, hopefully depreciate the third-party ads. So the total ad business might not grow as much because we want to kind of reduce the dependency on the third-party ads. Then beyond that, I think as we... enable more functionality and more services in adjacent businesses to what we already are doing. There is more opportunity for partnerships with advertisers to do stuff even cooler. So I spoke about travel earlier. It would be logical that hotels would be advertising with us, that restaurants would be advertising with us. We need to build capacity for people to do that. We don't have that yet, and that's something that we'll do in the years to come. I think it's a really big opportunity. I think one of the things we're seeing is advertisers wanting to reach the LGBTQ community a lot more. Auto OEMs, for example, have said they want to spend 1% of their ad dollars on the community. If you add up all the community resources and publishers out there, that's like less than 1% of automotive OEMs spend, so they actually need more places to spend money, and I think the fact that Glenda's here and can give them that space makes a ton of sense. Okay.
speaker
Operator
You both mentioned it in your backgrounds, and I think the number one thing that investors have said to me as you came public was just, how profitable the business is, right? 44%, 2022 EBITDA margin. It's obviously come down slightly as you've added public company costs and invested in product development. How do you think about the right long-term margin profile of the business? And are there any key areas of investment that you need to make over the next couple of years?
speaker
Grindr
No, definitely. So we're pretty happy with the margins that we walked into. But what we really think we also need to do is invest a little bit more in terms of our technology, our product, as well as data sciences. So I think the way we think about that, I think George already talked about AI, how important we believe that's gonna be. We also wanna be a lot more scientific about our pricing and what parts of the value curve kind of make the most sense to them within the app. So those would be the three key areas of focus. I think that we also have a structural advantage in our EBITDA margin, and the reason we do is because we don't have really hardly any spend in sales and marketing. And that's because this app has been around for 13 years, is completely part of the DNA and the fabric of the LGBT community. And because of that, as we continue to sort of put in new products to enhance the core offerings, so last year we put in albums that was 70 million photos that were uploaded, 20 million albums, and they were shared 999 million times. And so when you have that kind of engagement, you're filling the top of the funnel in a very efficient manner. So we believe our EBITDA margins will continue to be structurally quite high and maybe even get back to some of the numbers that you've seen as we generate operating leverage. And so really, if you think about operating leverage at 7% penetration versus the peers, you're not really at leverage yet.
speaker
Operator
I think for 23 specifically, you guided to 38% or higher on earnings this week. Maybe the bridge between the 44 and the 38. How do you get there?
speaker
Grindr
Yeah, sure. No problem. So for 2022, in the first half of the year, it was, I would call it the post-COVID vaccine rollout buoyancy. And so we really generated some very, very nice revenue growth in the first half of the year. Then in Q3, it was a little dampened with monkeypox, so a little bit of a hit. And then in Q4, we really had a year-over-year comp that was very hard to really compare to because we put out more profiles in 2021. So you sort of see your revenue growth kind of come down to a more normalized level, so we're going to expect to see that in 2023. And then, like I talked about, the investment in those three areas of product tech and data science.
speaker
Lauren Shanks
But Monkeypox actually is a really interesting situation for us because I was on the board already. I hadn't yet started, but we were talking about how dangerous it could be for us. Obviously, it was dangerous for the community as well. But it also speaks to the incredible power that the Grindr has with the community. Because we started to message out on Monkeypox very early. two million people looked up where to get a vaccine through information that Grindr provided them and literally like you can align when Grindr started to do messages and then followed within like weeks vaccine rollout took off and then monkeypox collapsed and so I mean I don't think we were the only ones a lot of people played a role but Grindr was massive in driving this epidemic to like disappear because of the work that it did and that kind of I think, speaks to the connection to the user and why advertising direct to kind of users actually can be really powerful because there is that active engagement there. Great.
speaker
Operator
Vanna, you mentioned that you've historically not spent much on marketing, right, which is pretty amazing for a business with 10 million monthly active users. On the marketing side, do you see more of an opportunity to spend on marketing in new markets or more to strengthen your advantage in existing regions?
speaker
Lauren Shanks
So for... The near term, what we want to do with marketing is just build basic functionality inside the company of what a marketing team should be able to do, right? We need product marketing because that is not something we've historically done. That is a huge opportunity for us. Because a lot of users will jump up, they launched the feature and they never told me. They didn't launch the feature, I didn't like to discover it. So telling users, hey, this feature is doing X and this is how it works and you should use it, I think would be really valuable, both from a monetization point of view and user engagement point of view. Life cycle marketing, where we bring back paying customers who might have gone away or get them to not go away, is really important as well. I think we should do more on SEO, which we've never done and has not been a focus. Paying user acquisition is not really the primary focus for us right now. Grindr has 85% unaided brand recognition in the community, so there's not a lot we can do on that beyond what we already have. But certainly in the few countries where we're the number one app, when it gets to those countries, and it'll be a while probably before we start focusing on that, there'll be some benefits to using marketing dollars to try to become the number one app. But that's probably two, three, four years down the road rather than now because in most countries we are already number one. We have a huge user base abroad. We've got to focus on who we're going to monetize among those before we focus on kind of new users in those countries. And then last point is, I mean, we are seeing a massive shift both in the U.S., but especially abroad, in how being gay is being perceived, right? So a lot more people are becoming comfortable being open about themselves than they were before. In India, it was illegal to be gay or to have gay sex three years ago. Now, probably within 24 months, they're going to legalize gay marriage. Not guaranteed, but it's kind of likely to happen. So in a very short amount of time, you're going from, like, illegal to gay marriage is legal, well, the inevitable outcome of that's going to be that the number of people who will self-identify themselves as gay is going to grow dramatically. That's a huge tailwind for Grindr because we can get a lot more users through that. We are already the number one app in India as it is, but the number of people that can use it, it increases dramatically. We're seeing that happen in so many other countries around the world. Things that took 20 years in the U.S. are taking three, four, five years abroad, probably because we accomplished them here a lot faster and the world didn't collapse and it's okay to have gay marriage, et cetera. So that's a huge advantage for Grindr over the long term. Great.
speaker
Operator
How do you think about Grindr's brand perception within the LGBTQ community relative to what the app offers? So you touched a little bit on the travel piece and what opportunities are there behind data?
speaker
Lauren Shanks
I think right now we are perceived as a necessary utility. We want to be perceived as an app that people really love. And there is that love disconnect almost where you use it for an hour a day, but you don't really love it. And I think we need to bridge that gap. And that's something we will do, I think, a lot more of. Obviously, changing brand perception takes a while, but that is something we will start to work on in the quarters to come because it's something that I think is really good for the business and also a lot of us feel very passionate about.
speaker
Operator
Oh, perfect. What about use cases beyond dating?
speaker
Lauren Shanks
Oh, so travel is one of them. I think health care is another one. Again, Mark's data suggests we actually can impact your health care pretty dramatically. For gay and bi men, there is actually unique health care needs that are important. Generally, you want to go to a doctor and you try to tell them, I want to have PrEP. You want them to know what PrEP is, as an example. So I think there's a huge opportunity in that bucket for us to do things, for sure. And there are other use cases like that. That said, in the next year two years I think we need to be closer to home like let's focus on monetizing the business that we have it is a really great product that's dramatically under penetrated from the paid penetration perspective we want to drive more users to become paying customers I think frankly that's good for us but it's also really good for them because we can then take those dollars and invest into making the product be a lot better and I think that'll benefit the community over time
speaker
Operator
Fanny, you said you expect most of the growth to come from payer penetration. As you think about the guide for 23 of at least 25% growth, maybe a finer point on the breakdown between payer growth versus revenue per payer.
speaker
Grindr
Right. So I think, as I said, I think the ARPU we're going to kind of let be the outcome or the derivative of payer growth. And so, like George said, a few key ways of really thinking about that. the lower price points, the higher price points, what's really premium, where that paywall fits. Those are the real three biggest drivers on how we're going to get the payer growth up.
speaker
Operator
Okay. Maybe just in connection with strong EBITDA margins comes strong free cash flow generation. How are you thinking about capital allocation? What are the primary uses of cash?
speaker
Grindr
Yeah. So we really want to be very prudent with our cash and how we're going to invest it. First and foremost in the three areas that we talked about, really it's going to be headcount and just getting our company to really be able to execute on these initiatives that we know are out there and that they feel like right at arm's length. So we've been kind of fortunate that the market in general has a lot better talent available to it now than it might have had six or nine months ago, and we definitely are seeing the benefits of that. Also being a public company has just been very helpful in terms of what we can offer top-caliber talent. I would say, first and foremost, into the talent bucket, and then after that, I think I'll let George talk a little bit about what else he's got in mind, because I think you have some ideas.
speaker
Lauren Shanks
Well, look, first of all, we're not going to be in the business of, like, let's double our team every year. That is not the approach that we want to take. This team is very nimble. We're like less than 200 people right now. So it's actually pretty incredible how much the team accomplishes with so few people. We're going to focus on getting our productivity to be higher and then adding people as we need to, but not like, hey, let's double as a business. I think being a very profitable business is very much the goal. We want to be best in class across the board, and we'll continue to do. Are there areas, like Vanna said, where we can invest? Totally. AI is one of the big ones. We have very good data analytics and BI. We don't actually have data science. What really data science is, which is algorithmic kind of work, that's something we need to build up. And I think it will be very valuable to us. And obviously, we talked about there are some additional use cases outside of what Grindr does at its core. Investing money into that also makes sense. I don't think it's a big dollar amount. but there's a lot that we can do on that front, which are very good adjacencies for our business, but not directly related. I'm not going to say what those are yet, because sometime later this year we'll kind of share with the world what our longer-term plan is, and I think we'll do a more detailed discussion of that.
speaker
Grindr
Yeah, and we'll just take a final look at, again, at the balance sheet that we've also inherited. There's some debt on that balance sheet, and I think in Q4 we're going to have an ability to take down the, just re-look at the interest rates that we're paying and really make it a little bit more optimized. So we'll be looking at the balance sheet as well. Excellent.
speaker
Operator
We have a few minutes left. Maybe let's wrap up with each of you on what you're most excited about in 2023 for the business.
speaker
Lauren Shanks
I think this is the first year we're a public company. I'm really looking forward to having the company function at public cadence. Like we are trying to achieve certain things in a certain order, promise the world we're going to do those and actually deliver. I think that's really, really good. I think it's going to help the team be much more effective and productive. We put in OKRs as a business as of January, and I think having that is a really great thing to have. And then secondly, I spent nine years in a business where we were burning money, and every 12 months you had to plan a fundraise. Not having to think about that is super exciting because you actually then spend your resources or your mental energy on it. Things that are a lot more fun, like building a really awesome team that really cares about things. I'll add just one more thing. I've been shocked by how much Grindr employees love Grindr. I've built three companies from scratch, literally in my living room to start, and an average Grindr employee loves Grindr more than I love the companies I've built on my own. And that kind of mission connectivity of Grindr employees is really important. What I'm really excited about is challenging that mission connectivity to being really productive and creating a really great product.
speaker
Grindr
Yeah and so for me I think I'm just so enthusiastic about the asset that we have walked into here and the potential of it and so I'm really an operator and executor and this one is set up perfectly to just get it humming and really firing on all cylinders and so the potential of Doing that domestically first and then rolling it out globally without having to fight for any brand awareness is pretty darn exciting for me. Great. Great place to wrap up. Thank you so much for your time and thank you everyone for joining us.
Disclaimer

This conference call transcript was computer generated and almost certianly contains errors. This transcript is provided for information purposes only.EarningsCall, LLC makes no representation about the accuracy of the aforementioned transcript, and you are cautioned not to place undue reliance on the information provided by the transcript.

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