3 Things Match Group's Management Wants You to Know

By Markets Fool.com

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Image Source: Tinder Twitter account.

Match Group, Inc.(NASDAQ: MTCH) stock took a pounding after releasing its third-quarter earnings report Tuesday night, falling more than 12% on Wednesday. Though earnings per share beat estimates, revenue fell short, and investors seemed dubious about upcoming investments that could weigh on profit growth.

Despite the stock slide, it wasn't all bad new for the online-dating leader. Let's take a look at three key takeaways from the report.

1. Tinder is skyrocketing

On the earnings call, CEO Greg Blatt said, "Tinder is a rocket ship."That is not an exaggeration.

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The swipe-based dating mobile app favored by millennials has seen its paid member count nearly triple in the last year, going from 583,000 paid users a year to 1.52 million. Tinder Plus, the paid version of the app, has added about 250,000 members in each quarter since it was introduced in March 2015. That growth seemed to accelerate in the most-recent period as the app gained 284,000 new users, its strongest growth in the past year.

Management said that growth picked up with the help of an update to Tinder launched in June, and its growth has been strong in all geographies as it's the top-grossing "Lifestyle" app in 99 countries.

Increasingly, Tinder has become the company's growth engine and key profit center. Management is focusing on expanding the user base, enhancing the technology, and finding new ways to generate revenue from the app like advertising and Tinder Boost -- which allows users to pay to go to "the top of the line" to get up to 10 times as many matches for a 30-minute period.

2. Operating leverage remains strong

Match Group grew revenues 18% in the quarter, but operating income jumped 57%, which equated to an operating margin of 29%, up from 22% in the year-ago quarter. That strong profit growth is a testament to the company's business model as additional subscribers drive disproportionate growth on the bottom line since there's little additional cost to adding subscribers.

CFO GarySwidler also said the company had lower-than-expected marketing expenses in the quarter, notingthat a larger percentage of revenue is coming from brands with lower marketing expense, such as Tinder and PlentyOfFish.

Selling and marketing are the company's largest category of expenses, so controlling them does a lot to determine profit. Within its dating segment, operating margins were even stronger, growing from 25% to 32%.

While investors shouldn't expect a 57% increase in operating income each quarter, Match Group's model should mean that the bottom line continues to grow faster than the top.

3. The future looks promising

The stock's sell-off seemed to be a negative reaction to investments the company is making next year and ambiguity in its 2017 forecast. Overall, however, the company looks primed to deliver solid earnings growth next year and beyond.

Management projected revenue growth of 15%-20% next year, better than analyst expectations of a 15% increase. Considering that the company will be lapping its acquisition of PlentyOfFish in the fourth quarter and will no longer benefit from its add-on growth, that's a solid growth clip.

Further down the income statement, the company was vague about profits, saying that adjusted EBITDA would depend on discretionary areas like headcount and marketing spending at Tinder, increase in marketing expense outside of Tinder, and the level of investment in new businesses.

Management hinted that margins could come under pressure as it plans to increase marketing spending to drive growth at non-Tinder brands, and invest in new ideas. While that could weigh on profit growth in the near term, investing in its brands, especially in Tinder, is the right move. The online dating industry has moved quickly. In order to remain at the forefront, Match Group needs to continue to develop new products and attract customers to its current brands.

In four quarters as a publicly traded company, Match has beaten earnings estimates every time, and its valuation seems to underestimate its growth prospects. The international market is still ripe for growth, and advances like Tinder Boost should allow the company to grow income domestically over the long term. As the industry continues to expand, Match Group should ride that wave.

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Jeremy Bowman owns shares of Match Group. The Motley Fool recommends Match Group. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.