Match Group (MTCH) Q2 2022 Earnings Call Transcript

Match Group (MTCH -0.68%)
Q2 2022 Earnings Call
Aug 03, 2022, 8:30 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good morning, and welcome to the Match Group's second quarter 2022 earnings conference call. [Operator instructions] Please note, this event is being recorded. I would now like to turn the conference over to Tanny Shelburne, SVP of investor relations. Please go ahead.

Tanny Shelburne -- Senior Vice President, Investor Relations

Thank you, operator, and good morning, everyone. Today's call will be led by CEO Bernard Kim, and CFO and COO Gary Swidler. They'll make a few brief remarks, and then we'll open it up for questions. Before we start, I need to 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. With that, I'd like to turn the call over to BK.

Bernard Kim -- Chief Executive Officer

Thanks, Tanny. Good morning, everyone, and thank you for joining today's call. This is my first earnings call as Match Group's CEO, and I want to start off by thanking everyone at the company for such a warm welcome. I truly believe that love, connections, and relationships are the pillars to a happy and fulfilling life.

I'm elated to work with the team that's responsible for creating joy through connecting millions of people around the world. I've been on the job for two months, and I've been fortunate enough to travel to many of our global offices with Gary and the rest of the management team. At each stop, I've conducted all hands, ask-me-anything meetings, to convey what I will bring to the table and what I expect from the team in return. As I told my colleagues, I'm passionate about people, culture, and product.

I promised the teams that I will always be authentic, honest and act with integrity. And I expect our employees to bring those same values to work every day. I've been learning as much as possible about our business, assessing what's working and what's not and beginning to build our strategy. I'm very impressed by the team's experience and their growth mindset, as well as strong financial discipline.

This balance will serve us well as we forge ahead. I also want to thank Gary, who's been a great partner during my onboarding. As COO and CFO, he's made key strategic recommendations that we see eye to eye on, and we've been able to move quickly and decisively to unlock value across the portfolio and set up the next phase of growth. There's no doubt that there are challenging macroeconomic factors at play.

Over the past two-and-a-half years, people have been forced to isolate, then adjust to society reopening and I don't believe the behavioral impacts of COVID are fully understood yet. But what I do know is that human, real-world connections are imperative. And our apps are the best way to create those connections. It's our responsibility to innovate and provide the best experiences, and that creates the real opportunity for our business.

In our shareholder letter, I was able to share my initial observations about the business, market opportunity and our portfolio of products. I also touched upon my management style, noting that we have to be decisive and set up the right teams with long-term growth in mind. In two months, we've made immediate steps to unlock and maximize Tinder's true long-term potential. Tinder is the go-to app in the industry, available in 190 countries in over 40 languages.

It is a global phenomenon that has transformed dating culture in Western markets over the past 10 years, and it's still early in its journey in non-Western markets. I believe that innovating Tinder will only enhance its ability to continue to transform the dating experience for the next generation of singles around the world. With the current Tinder CEO stepping down, I've put a new leadership team in place who will report directly to me, while I lead the recruiting efforts for a new CEO. This team has a great working dynamic that's already apparent and brings proven expertise to Tinder's next phase of growth.

They're passionate, strategic leaders who are also able to get into the trenches, experiment, lead by example and get things done. I'm confident that this new team will work well together to build product and enhancements and innovation. But I do want to acknowledge that there have been some misfires and turnover on the team that have led to delays in product and execution in the first half of the year. I believe that our new team can right that ship, but it will take some time to execute and build momentum.

I've been impressed by the diversified dating experiences throughout the portfolio. As part of Match Group, Hinge has been a breakout star. The team has executed on building a strong brand, including their Designed to be Deleted campaign that resonates with our user base. They have elegant, differentiated product that I believe will be just as successful in international markets as they have been in English speaking ones.

While our other brands continue to face their own challenges, I'm working closely with the teams to ensure that we're organized to tackle them and set up the brands for long-term success. While the Hyperconnect acquisition has not gone to plan in our first year, we finalized the acquisition during lockdowns. My trip to Korea last month was the first time the teams were able to sit down together since we completed the deal. Their core products have struggled with increased competition and adjusting to the elimination of IDFA.

But the team is strong, and I've been impressed by the entrepreneurial spirit and innovation. The Hyperconnect team has built technologies that have been introduced in our products around the world. This collaboration is something that I expect to see more of across our teams. We continue to increase adoption and acceptance of our products in markets like Japan.

We have a team on the ground ensuring our two products, Tinder and Pairs, have marketing messages that are resonating with our users. In our other established brands, we are ensuring rightsizing marketing spend to ensure long-term profitability. And when we think about new opportunities and demographics to serve, we found a great business in The League. Their founder and CEO, Amanda Bradford, has built a brand that people love and continue to return to.

We've been impressed by The League's user base as they are willing to pay significant premiums for this service. From my experience, product innovation always drives user adoption and engagement. We have great products. But I want to speed up product delivery, bring new dynamic features to life and set big audacious goals.

At Tinder, we need some time to regain product momentum. I'm committed to product innovation that will give our users more reasons to come back more often and for new singles to sign up and start dating. This is only my 63rd day on the job. But over the next few months, I'll be building out more plans as Gary and I continue to work with the teams.

And on future calls, I will share more details about our developing strategy. The team's understanding and execution on building subscription models is unparalleled. I bring expertise on the a la carte side of the business, which will be a great complement to our products. We will push our teams to innovate, collaborate and drive more growth on our platforms in the future.

I bet on people and feel great about the team's ability to transform the way people connect with others around the world. Together, I expect we will drive long-term shareholder value, be decisive and always strive to win. And with that, I'll turn it over to Gary.

Gary Swidler -- Chief Financial Officer and Chief Operating Officer

Thanks, BK, and hello, everyone. I'm excited for my and BK's first call together. There is a lot to cover this quarter, so I'm going to get right into it. We had a solid Q2 with total revenue of $795 million, up 12% year over year.

The Q2 FX headwinds were severe, as our revenue would have been $842 million, up 19% year over year on an FX-neutral basis. The FX impact in Q2 was $13 million worse than what we expected when we provided our Q2 outlook on our May earnings call. Our direct revenue grew 12% year over year. It grew 9% year over year in the Americas, with strength at Tinder, Hinge, BLK and Chispa, coupled with declines at the established brands.

It grew 6% year over year in Europe but 19% on an FX-neutral basis. Europe continues to be impacted by the war in Ukraine as well. Direct revenue grew 32% in APAC and other, 49% on an FX-neutral basis, driven by Hyperconnect. Total payers were 16.4 million, an increase of 10% from the prior-year quarter.

Payers were up 4% year over year in the Americas, 5% in Europe and 32% in APAC and other, which was aided by the acquisition of Hyperconnect. Tinder payer additions came in stronger than we had expected, while our established brands, including Match and Match Affinity brands, Meetic, OkCupid, and Plenty of Fish saw year-over-year payer declines of over 10% in aggregate. RPP was up 3% year over year to $15.86 in Q2. RPP was up 5% in the Americas, reflecting higher average rates per subscriptions increased average a la carte purchases at Tinder and Hinge.

RPP was up 1% in Europe, where contributions from Tinder and Hyperconnect were partially offset by the strength of the dollar compared to the euro and the British pound. RPP was flat in APAC and other, where contributions from Hyperconnect were offset by the strength of the dollar relative to the yen and lira. On an FX-neutral basis, RPP was up 9% companywide and 13% in both Europe and APAC and other. Tinder performed well in the quarter, delivering direct revenue of $449 million, up 13% year over year, 20% on an FX-neutral basis.

Tinder had payers growth of 14% year over year, adding 1.3 million payers to 10.9 million, and a 1% RPP decline year over year in the quarter, which again shows the impact of FX. Tinder RPP was up 5% on an FX-neutral basis. All other brands grew direct revenue 12% year over year in Q2, driven by 10% RPP growth and 2% payers growth. Hinge, BLK, and Chispa continued to drive the growth.

Some of the pressure on our established brands, payers and direct revenue in the quarter was attributable to difficulties finding marketing opportunities that met our ROI thresholds. There were a couple of other specific trends as well. At Plenty of Fish, which tends to serve a lower income demographic, users had benefited from COVID-related government stimulus in Q2 '21, but we saw weaker payer in RPP trends in Q2 2022 as the benefits of the stimulus abated. The Match brands has some lingering impacts from its new business model, and Meetic saw some conversion softness.

In Asia, Hyperconnect contributed as we expected in Q2, but its revenue was heavily impacted by FX, especially against the Turkish lira and the Japanese yen, as well as by typical Ramadan-related seasonality. Pairs in Japan saw a burst of new user strength after COVID restrictions were lifted, but only a modest sustained improvement in revenue and other trends in Q2. Indirect revenue was $14 million in the quarter, up 7% year over year, as we continue to see strong demand for ads in our products and rates increased year over year. We had a $10 million operating loss in Q2 as the intangibles primarily related to the Azar and Hakuna trade names were impaired by $217 million or roughly half the intangibles that were attributed to them at the time of the acquisition.

The impairment stems from a lower financial outlook for the two apps, including FX impacts in certain of Hyperconnect's key markets, as well as the use of higher discount rates in the DCF calculations, given rising interest rates generally. Adjusted operating income grew 9% year over year to $286 million, representing a margin of 36%. Overall expenses, including SBC expense, grew 62% year over year in Q2, but were only up 9%, excluding Hyperconnect. Excluding the impact of Hyperconnect, cost of revenue grew 14% year over year, primarily due to higher app store fees, including the initial $5 million amount placed into escrow related to the Google litigation.

Cost of revenue represented 29% of total revenue. Sales and marketing spend, excluding Hyperconnect, decreased $13 million or 10% year over year, the second straight quarter where we saw a year-over-year reduction, as we continue to reduce marketing spend in our more established brands and to show ROI discipline overall. Sales and marketing spend was down 3 points year over year as a percentage of total revenue to 15%. For the first half of the year, sales and marketing spend, ex Hyperconnect, declined $21 million year over year.

G&A expense, excluding Hyperconnect, rose $3 million or 3% year over year. G&A comprised 14% of revenue, unchanged from the prior year. The increase in G&A expense reflects lower legal fees and an increase in travel expenses as we continue to return to a more normal cadence of business travel. Product development costs, excluding Hyperconnect, grew 51% year over year and were 10% of revenue, as we increased headcount, particularly at Tinder and Hinge, in a highly competitive labor market.

Our gross leverage declined to 3.5 times trailing adjusted operating income, and our net leverage was three times at the end of Q2. These leverage levels reflect the payment of $441 million related to the settlement of the former Tinder employee lawsuits and arbitrations. Those matters are now resolved. We ended the quarter with $473 million of cash, cash equivalents and short-term investments on hand.

We deployed approximately $216 million in Q2 to buy back approximately 3 million of our shares at a VWAP of just over $73 per share on a trade date basis. We currently have approximately 9.3 million shares remaining under our buyback authorization. As we stated in the letter, there are a number of key factors affecting our performance and outlook. The first is FX, which significantly affected the first half of the year and we expect will impact the second half of the year as well.

We used the forward curve to provide our outlook. And the curve has consistently underestimated the dollar strength this year, which is largely why we have been behind our outlooks for Q1 and Q2. Leaving aside FX impacts, it's become clearer that COVID created some unusual trends in our business. The established brands benefited from a less competitive marketing environment in the early days of COVID, which drove incremental growth.

And their users also benefited from savings and government stimulus payments, which buttressed monetization. As these factors have abated, these businesses once again face growth challenges. Tinder experienced a very strong second half of 2021 as people began to socialize more after being vaccinated. Additionally, Tinder made several beneficial paywall and other optimizations in Q3 '21, which drove record sequential payer additions and strong revenue in that quarter.

We're now lapping these challenging comps. Moreover, some of the Tinder product initiatives and optimizations that we've been counting on for revenue growth in the second half of 2022 are not delivering as we'd expected and were delaying some launches. Our Plenty of Fish live stream business is showing a slowdown in revenue growth after a period of strength, in part driven by stimulus-induced spending. And we haven't seen a sustained rebound in performance in Japan, where gamers remain reluctant and COVID cases continue to rise.

Taken together, these factors lead us to expect relatively muted revenue growth for the second half of 2022. On the cost side, we're feeling the financial impacts of the tight labor market, which caused us to raise compensation levels, as well as a marketing environment, which is not yet fully adjusted to the economic realities. As such, we've significantly slowed our hiring and are sticking to our ROI discipline in our marketing spend, even at the expense of some revenue growth. The App Store fees also continue to be a headwind.

App Store fees, including the escrow amount related to the Google Play Store, were 19.5% of our revenues in Q2 '22, up over 2 points from Q1 2020. We remain optimistic that the app stores will be required to adjust their policies as the DMA in Europe goes into effect in 2023, and we prevail in our lawsuit against Google in the U.S., which should create a much fairer app ecosystem for all. For Q3, we expect total revenue for Match Group of $790 million to $800 million, essentially flat year over year. We anticipate over $60 million of year-over-year FX headwinds in Q3, meaning that total revenue growth would be over 8 points higher on an FX-neutral basis.

We expect Tinder's direct revenue to be up mid-single digits, low teens on an FX-neutral basis in Q3, while all other brands' direct revenue is expected to be down mid-single digits, but up low single digits on an FX-neutral basis. We expect Hinge, BLK and Chispa will continue to drive the growth, helping offset declines at the established brands. We expect adjusted operating income of $255 million to $260 million in Q3, representing margins of about 32% at the midpoint of the ranges. We expect lower year-over-year sales and marketing spend, a much lower year-over-year growth rate in product and development than in Q2 2022 and a continued increase in App Store fees.

The lower-than-expected revenue contribution from Tinder, which is our highest margin business, has a meaningful negative effect on our overall company margins. For the full year, we're now estimating $195 million of year-over-year FX impacts, which is $72 million more than at our last earnings call and $163 million more than when we first gave our thoughts about 2022 back in November of '21. We estimate FX is causing a 6-point reduction in year-over-year revenue growth for full year 2022, 2 points worse than at the time of our last earnings call. For Q4, we expect limited improvement in our year-over-year top-line growth rate and modest improvement in AOI margins compared to Q3.

While we expect the second half of the year to be below our growth targets, we believe the company remains positioned to deliver accelerating revenue growth as we move through 2023, driven by improved product execution at Tinder. The biggest unknown we face relates to the macroeconomic environment and its impact on our business. The consumer is facing significant pressure from rising gas and food prices, constraining purchasing power. Our product is a small purchase and one that leads to happiness.

So consumers are low to stop or reduce it. If the economy continues to worsen, we expect our business to remain resilient, but we may see modest effects at some of our brands, particularly those that cater to lowering consumers. We believe subscriptions, which constitute the vast majority of our revenue, will remain sticky, but it's possible consumers will pull back modestly on a la carte purchases, which tend to be more discretionary. We expect our Hinge business to remain largely immune from overall consumer spending pullbacks given its more affluent user base and have seen no impact to date.

We'll continue to monitor these trends and provide an update on our next earnings call. Our category provides ample runway for growth, which we can achieve by growing users and by increasing payer penetration and RPP. It is up to us to execute on the opportunities. The recent changes we've made at Tinder should better position us to perform the way we have historically.

While the business is facing some temporary challenges, we will remain disciplined on costs, especially in marketing and hiring. Our longer term prospects remain bright. And our goal remains to deliver strong, consistent growth and profitability for our shareholders. We believe our combination of growth and profitability, as well as our free cash flow generation, is one that few other companies can achieve.

With that, I'll ask the operator to open the line for questions.

Questions & Answers:

Operator

Thank you. [Operator instructions] Our first question comes from Shweta Khajuria with Evercore ISI. Please go ahead.

Shweta Khajuria -- Evercore ISI -- Analyst

OK. Thank you. BK, let me try a question on Tinder, please. So what are you looking for in the new Tinder CEO? And why has there been this much turnover in CEOs? Thanks.

Bernard Kim -- Chief Executive Officer

Thanks, Shweta, for the question. First of all, I wasn't expecting to have to manage a CEO transition so early in my tenure, and I know it's not ideal to have two Tinder CEOs in two years. But with Renate's departure, I wanted to act quickly and be decisive and put in a team that I felt confident in. We've assembled a team of all stars from Tinder and Match Group, and we also brought in Mark as CPO, who I've known for over 15 years.

Faye is moving into a newly formed position as COO of Tinder and will improve execution across the entire organization. Tom has done a great job leading engineering for the last five years at Tinder. And we're delighted that he's going to continue to lead our engineering teams. Melissa is an award-winning CMO, who's done great things at OkCupid, and we're really happy that she is bringing her expertise to our biggest business.

And Mark joined Tinder one week after I joined Match Group, and he's my top choice to lead product as I've worked with him at Electronic Arts and have admired his accomplishments leading product teams. This team in place is already working really well together and driving the business forward. And we think the new CEO, once in place, is going to really enjoy working with this strong team. When it comes to finding the new CEO, first and foremost, I want to break the cycle of short-tenured leaders at Tinder.

I want someone who's experienced, creative leader that inspires and motivates team, but is also aligned with our growth vision for the business. I will be personally leading this search. But in the meantime, I'm really excited to immerse myself in Los Angeles with the Tinder team. With leadership change comes tremendous opportunity, and I really look forward to taking this team and Tinder to the next level of growth.

Shweta Khajuria -- Evercore ISI -- Analyst

OK. Thanks, BK.

Operator

Our next question comes from Cory Carpenter with J.P. Morgan. Please go ahead.

Cory Carpenter -- J.P. Morgan -- Analyst

Hey, thanks for the questions. Sticking with Tinder, in the shareholder letter and the prepared remarks, you talked a lot about disappointing execution. So our question is, could you just talk about what went wrong at Tinder? And how quickly you think it can be turned around? Thank you.

Bernard Kim -- Chief Executive Officer

Thanks so much, Cory, for the question. Tinder did not deliver on its product road map for the first half of the year. And execution on a number of initiatives have been delayed that we were counting on for growth in Q3 and Q4. Typically, Tinder works on big initiatives on the first half of the year that materialize in payer and revenue growth in the second half of the year.

But that didn't happen this time around. So we don't expect the same revenue bump that we typically see. As an example, a lot of time was building -- was spent building Explore. It's a strong gateway with high engagement, but we haven't succeeded yet on innovating the user experience and then also building monetization features to maximize its potential.

I do believe that there is a lot of market opportunity and great product ideas at Tinder, but it's all about execution. I think now, with the new team in place, I feel confident that we will deliver on the product road map, and it gives me a lot of optimism that this is all fixable and a short-term problem for Tinder.

Operator

Our next question comes from John Blackledge with Cowen. Please go ahead.

John Blackledge -- Cowen and Company -- Analyst

Great. Thanks. On the 3Q revenue guide, maybe this one for Gary, can you provide kind of more color on the puts and takes of the 3Q revenue guide and also thoughts on 4Q revenue growth and your confidence in the expected revenue reacceleration in 2023? Thank you.

Gary Swidler -- Chief Financial Officer and Chief Operating Officer

Sure, John. I'm happy to take it. Thanks for the question. Here's the way that I kind of think about the back half of the year generally, Q3 and Q4, which is between what we expect to deliver now for the back half of the year and versus what would have resulted in our hitting our recent guidance, which was low end of the 15% to 20% range for 2022.

There's a gap there, and it really results from three areas. The first, which is about a third of the gap, is from additional FX headwinds. We talked a lot in the prepared remarks about how much that has gotten more severe. And so about a third of the gap comes from that.

Of the rest, about half of the rest or a third of the total comes from what BK just talked about, which is Tinder missed execution and the lack of delivery of initiatives, not having hit product road map and delivered as we expected in the first half of the year. And the other piece comes from a variety of other factors across the business: weakness in APAC, especially Japan; weakness in live streaming and to the established brands; and generally, some effects of macro weakness, we think, might be in that bucket as well. So those are the three buckets which, of the total gap, I think each account for about a third. And now while we're not expecting much improvement in Q4 compared to Q3, we do expect momentum to build after that and to carry over and improve as we move through 2023.

John Blackledge -- Cowen and Company -- Analyst

Thank you.

Gary Swidler -- Chief Financial Officer and Chief Operating Officer

Yup. You're welcome.

Operator

Our next question comes from Alexandra Steiger with Goldman Sachs. Please go ahead.

Alexandra Steiger -- Goldman Sachs -- Analyst

Great. Thank you for taking my questions. Two on Hinge, if I can. So despite the accelerated launch time line, you reiterated $300 million in revenue contribution for this year.

Could you maybe help us understand how you think about the monetization ramp into the second half of this year and also in terms of revenue growth next year given the faster rollout? And then second, could you maybe give us a sense of like where we sit in terms of Hinge margin trajectory and the cadence of investments going forward? Thank you so much.

Bernard Kim -- Chief Executive Officer

Hinge has been very successful in many markets already, and we've created great user experience that intentions singles love. We've seen it excel in marketing and product development, driven by Hinge's awesome team and culture, coupled with Match's expertise. Hinge has great momentum, and I see two vectors for accelerating Hinge's growth. One, there's still ample runway on monetization and user growth in core markets as we continue to roll out features and marketing campaigns to drive this growth.

For example, we're really excited about the next monetization feature, which is a premium subscription tier. Second is capitalizing on product market fit that Hinge has created and translating that into as many markets as fast as we can. This will help accelerated international expansion, which will drive stronger revenue growth in 2023 and beyond. I think the combination of these two growth opportunities set up Hinge for multiple years of strong revenue growth.

Gary Swidler -- Chief Financial Officer and Chief Operating Officer

And let me jump in on the margin question. I want to point out a couple of things as it relates to Hinge and margins. The first thing is, while we are being very judicious and cautious about marketing spend across the company, as well as on hiring, now and going forward, we recognize that Hinge is the brightest spot in the portfolio. And it is our strongest growth business.

It's a very important business to us. And we are going to continue to invest at the right levels in that business, both on the marketing side as well as in product and development and people. So we're being judicious, but we're being thoughtful. And we want to make sure Hinge has the resources it needs to continue on a growth trajectory.

And I don't see issues there in terms of the way we are treating expenses as it relates to marketing or headcount. I think Hinge has the resources to continue to grow exactly as we're planning for it to grow. So I want to make sure people understand the nuances there and the distinctions between businesses that are struggling more to grow, where we're going to be more judicious on marketing and hiring versus a business like Hinge, which is growing strongly and we're investing in. As far as what kind of margins we can achieve, I think that we are still very smart and efficient with our marketing spend.

We are spending where we see traction in the business. Like now in a market like Germany, we see the organic traction. We're investing into it with marketing spend. That has been our playbook and continues to be our playbook at Hinge.

And we think that Hinge is already in position to achieve margins that are close to the company levels of margin. And we think that that's what Hinge can achieve over time. And so we don't think Hinge will be a drag on our margins. We think that Hinge will contribute nicely to the overall company margins and still grow at the levels that we've been talking about as we've been providing our outlook, which, as we say, is 50% for this year, and we think will be very strong into 2023 as well.

So hopefully, that answers your questions. Can we go to the next one, please, operator?

Operator

Our next question comes from Benjamin Black with Deutsche Bank. Please go ahead.

Benjamin Black -- Deutsche Bank -- Analyst

Good morning. Thank you for the question. So in the past, you've been a mid-teens sort of high teens revenue growth company. I understood that there's some volatility in '22, given the leadership changes and the challenges around sort of the product rollout.

But when we look to '23, how should we be thinking about the growth algorithm? And what gives you the confidence in returning to more meaningful growth? Thank you.

Gary Swidler -- Chief Financial Officer and Chief Operating Officer

Sure. Let me jump in and take that, and thanks for the question. And as I talked about a little bit with the answer to John's question as well about 2023, so I'll try to weave that together. First of all, I want to say off the bat, we remain confident that this business can return to mid- to high-teens revenue growth.

There's a lot of opportunity for us, and it really comes down to execution. And right now, we didn't execute as we needed to and as we expected to in the first part of the year. So we need a few quarters to rebuild the momentum in the business. And as BK has talked about extensively, in particular, we need a few quarters to get the Tinder team to improve their overall execution and deliver on their product road map.

And so as you know, as that takes place, we need to build back into stronger and stronger growth. And I think that will happen as we move into and then through 2023 at a measured pace in terms of improving the growth. Obviously, our goal is to deliver more than that, but our goal is to at least deliver strong and improving growth as we move through the quarter, starting in 2023. We will provide more details and specifics on what I think we can deliver for 2023 in the upcoming calls, as is our custom.

So we'll give you a better sense of what exactly the cadence is going to be like and what levels we think we can get to. But our goal is to get back to where we have been. We think there's opportunity to do that. And as long as we execute, and in particular, the Tinder team executes on that, we do think we will get there.

Benjamin Black -- Deutsche Bank -- Analyst

Great. Thank you.

Gary Swidler -- Chief Financial Officer and Chief Operating Officer

Sure.

Operator

Our next question comes from Lauren Schenk with Morgan Stanley. Please go ahead.

Lauren Schenk -- Morgan Stanley -- Analyst

Great. I wanted to ask about Tinder coins. What aspects of that product testing were disappointing relative to your expectations? And then curious as to why that sounds like it's the primary driver of the weaker second-half outlook at Tinder. I think previously, you said there wasn't much of any benefit from those new products in the back half.

So kind of bridge the gap there. And then just lastly, on the shorter term subscription packages, the day pass, weekly pass, any other commentary there. Thanks so much.

Bernard Kim -- Chief Executive Officer

Thanks. I can take that one. Lauren, thanks for the great questions. I feel confident that coins and virtual goods are a compelling offering in Tinder and can lead to significant monetization of powered users, who I believe are currently under monetized.

Mark and I have spent most of our career in gaming, focusing on building such ecosystems, and we bring this expertise to the table. I love the idea of virtual goods and currency in Tinder, but I believe it hasn't been approached in a completely logical way. For instance, my experience in gaming, demand for virtual goods and collectibles are rolled out first, and then you launch the currency to get these items later. While it's frustrating to pause the efforts, I think it's super important that Mark and I deliver the right value proposition, so this can be a long-term revenue stream.

In terms of your question around shorter term subscription packages, historically, Match Group has not offered these. But we are going to start testing a variety of short-term subscriptions at different price points to see what works. We plan our initial rollout of these programs this upcoming fall.

Gary Swidler -- Chief Financial Officer and Chief Operating Officer

And then maybe I can just jump in on the second-half outlook. I want to clarify something that you said, which is that implies we are counting on coins or even virtual goods for the second-half delivery of our revenue targets. And that isn't the case. There wasn't much, if anything, baked into the second-half outlook around coins and virtual goods.

So the fact that we're delaying that is not the driver of the shortfall versus our expectations for the second half. But there were a series of other less keynote kind of initiatives and optimizations that were expected in the first half of 2022 to help us deliver the second-half revenue and also more initiatives in the back half of the year to help deliver the second-half revenue. And it's on that series of initiatives, kind of less sexy, less notable initiatives but still very important initiatives, that really has not taken place. And it explains why changes in the team at Tinder have been made to try to make sure that we deliver more fully on the initiatives and optimizations that we have in our plans.

And so it's that kind of shortfall and delay that's really causing the issue. I think if you look back where we were in May, we still believe that we were going to deliver those initiatives. And right now, I think our confidence in that happening in the back half of the year has come down. We've made the changes, and we think we'll be positioned to have more momentum as we get out of 2022 and into 2023.

And if you look back into last year, you'll note that we had a very strong performance in Q3 and Q4, as I called out. And the reason for that is we did deliver on significant initiatives, not particularly massive initiatives, but a series of important initiatives and optimizations in the early part of the year, as well as in Q3, and I talked about it in the remarks. And that really propelled strong payer additions in Q3 and into Q4 and strong revenue growth. That materialized in 2021, and it hasn't materialized in 2022.

And we need to deliver on those kinds of initiatives and product improvements to drive the revenue growth. And the team at Tinder needs to do that, and we think we'll now be positioned to do that again.

Lauren Schenk -- Morgan Stanley -- Analyst

Very helpful. Thank you.

Operator

Our next question comes from Jason Helfstein with Oppenheimer. Please go ahead.

Jason Helfstein -- Oppenheimer and Company -- Analyst

Hey, maybe kind of a bigger-picture question. So, so far, this earnings season, we're seeing companies that have more affluent customer bases perform better in the quarter and with their third quarter outlooks. I think historically, online dating has been perceived as recession-resistant, kind of like alcohol and tobacco. I guess, BK, kind of what's your perspective on this? And I guess, as you're thinking about, are the headwinds that you're facing more self-inflicted? Or do you think that there's aspects of the vertical that are now mature enough, perhaps younger users who have less discretionary income might cut back in spending during a recession or some of the inflationary pressure we're seeing.

Thanks.

Gary Swidler -- Chief Financial Officer and Chief Operating Officer

Hey, Jason. Why don't I jump in and try to take this one? As I said in my remarks, I think as a category, we believe that dating is relatively resilient to economic downturns. And we expect our business would be minimally impacted in a downturn as well. I think as you rightly point out, if there were any impact, it would be at the brands that serve lower income consumers with less discretionary income.

We wouldn't expect to see, for example, effect at our business like Hinge, which tends to have a much more affluent customer. And so far, at Hinge, we definitely have not seen any impact from the overall macroeconomic environment. We also think that the subscription nature of our business does -- is more sticky and does provide us with some insulation from an economic downturn. But on the other hand, there is some a la carte revenue, and that's more discretionary and probably would be at more risk in a downturn.

So while right now, we don't see any real impacts to our business for macroeconomic factors, we are watching for them closely. It's something we want to monitor as we get out of the year because we do think there are a lot of crosswinds going on globally. But I would say that I don't see much downside to our 2022, even if things did continue to deteriorate. I think we've kind of assumed the right level of potential risk there as well in our 2022 outlook.

So we'll see what materializes in the next six months. But I think that your view of kind of the resiliency of our business, the way that affluent consumers, in particular, are more insulated, the risk more on the people with lower income, more discretionary spending, I think, is the right way to think about our business.

Operator

Our next question comes from Youssef Squali with Truist. Please go ahead.

Youssef Squali -- Truist Securities -- Analyst

Great. Thank you very much. This is actually a follow-up question to the one that was just asked. But -- so BK, I think you said in the letter that people's willingness to try online dating for the first time hasn't yet returned to pre-pandemic level.

And this is really at a time when our experiences are taken budgets over from things like retail, etc. So what -- again, what kind of gives you the confidence that this is not structural in nature, particularly when it comes to Tinder, maybe maturing? And if it's not, just what products are you most excited about that you think can really start moving the needle and cause growth to reaccelerate in 2023, as you guys were talking about? Thanks.

Bernard Kim -- Chief Executive Officer

Thanks, Youssef, for the great question. Let me hit this like right on. I do not believe that the category is saturated. I wouldn't have taken this job if I thought it was.

As we shared in the letter, more than half of singles in developed markets, such as U.S. and Western Europe, have not even tried dating apps. So -- and there's even a greater opportunity in APAC and the rest of the world. We have demonstrated that product innovation leads to product adoption, which drives overall category growth.

It's important to continue to innovate on our products in order to introduce online dating to new users. A great example is at Hinge. It has great user momentum and a strong top-of-funnel growth, directly driven by exciting new features such as voice props. Tinder has not seen that same level of product innovation recently.

But we feel like we have the right marketing and product teams in place now to innovate and drive its next level of growth.

Youssef Squali -- Truist Securities -- Analyst

OK. Thank you. Best of luck.

Operator

Our next question comes from Mario Lu with Barclays. Please go ahead.

Mario Lu -- Barclays -- Analyst

Great. Thanks for taking the questions. So I have one on the third quarter margins guidance. It looks like you're guiding to a 4-point year-on-year decline for EBITDA margins at the midpoint.

So Gary, you touched upon this earlier, but can you help break down further how much of that year-on-year compression is from the higher App Store fees versus product development spends? And then secondly, when should we expect product development to deleverage again? Thank you.

Gary Swidler -- Chief Financial Officer and Chief Operating Officer

Sure. I'm happy to take it. Let me just make sure that everyone understands kind of our outlook, and there's clarity around that. So we're basically saying, at the midpoint of the ranges in Q3, there'll be about 32% AOI margins.

And then we're expecting some modest improvement from there, which I think you could read as 100 to 150 basis points of sequential improvement in Q4. In terms of the overall year-over-year change in the margin drivers, let me see if I can kind of do this off the top of my head. And so I would say App Store fees are probably 1.5 points of headwinds. So there's still a meaningful headwind on year-over-year margins in Q3, and probably headcount is maybe 2.5 points of headwind.

So you have 4 points of headwind from the app stores and the headcount moves that we've made. You probably get about 1 point of benefit from sales and marketing on the other hand. And I would say there's probably some small other effects from other items, and that's probably a little bit of a headwind. So I probably am around 3.5% or so of year-over-year decline.

So that probably rounds to your 4%. But I think it's primarily the headcount and the App Store fees with some offset from the lower marketing spend. In terms of your second question, I don't expect there to be significant leverage on the product development line in the upcoming quarters. But I do think that as we turn the corner into 2023, we'll start to see the effects of the pullbacks in hiring that we're making.

And also, we'll start to see stronger revenue growth, stronger revenue generation from Tinder, in particular, as the new team really starts to accelerate and build momentum. And that will help drive momentum on the product development side, as well as should help overall company margins because, as I mentioned in my remarks, the fact that Tinder, which is a very high-margin business, is not contributing as it has been does have a significant effect on the overall company margin. So getting Tinder going is important not only from a revenue growth perspective, but also from a margin improvement, margin acceleration perspective. So it is the key.

It's the reason we've made the changes we are driving to. And I think we have optimism as we turn the corner into 2023 on all those aspects of the business.

Mario Lu -- Barclays -- Analyst

Great. Thanks, Gary.

Gary Swidler -- Chief Financial Officer and Chief Operating Officer

Sure.

Operator

Our next question comes from Brent Thill with Jefferies. Please go ahead.

Brent Thill -- Jefferies -- Analyst

Good morning, Gary. You bought back 3 million shares in the quarter. You said you're expecting the increase in share repurchases. Can you just say what that implies relative to, are you going to take a breather on M&A? And secondarily, can you just follow up on Japan? It feels like as your second largest market, you're not seeing that open to the magnitude you'd like.

What -- if you have the crystal ball, what do you think needs to happen? And ultimately, kind of when do you feel like that gets back to more normal?

Gary Swidler -- Chief Financial Officer and Chief Operating Officer

OK. So let me -- I'll take both of them. Let me take the second one first because I have a tendency to forget them if I don't do it that way. In Japan, I think the thing that's important to understand is that they really put a lot of restrictions into place in that market, five states of emergency over a period of a year or so.

And you have a conservative culture, I think, still kind of a reluctant dating culture, still getting used to dating apps. And I think that has frozen their behavior to a large extent. And so while we did see some initial improvement once the restrictions were lifted, that was probably people who had pent-up demand, who were kind of eager and wanted to get out there and were waiting for the restrictions to lift. So you saw a little bit of a bump, a little bit of improvement out of the gate, but then there was no follow-on from that.

And that is kind of the case today. And unfortunately, in that market, you also have COVID rising again, which has only made people, again, more conservative in their behavior. So I think it's going to take a few quarters more to normalize in Japan. I think all the macro trends that have always made that a good market for us, a low marriage rate, hard to find your partner in that market, I think, are all still there.

But some of this needs to normalize. And I think, as BK said in his remarks, we haven't quite seen a full return to normal behavior. And I don't think we have a full understanding in every market of kind of the impact of COVID on people's behavior. So Japan, I think, is a really important case study.

And given how severely they took their response to COVID, it's going to take some time for it to bounce back. And I think that's what we're expecting in our outlook. And I think that's the right way to look at it based on everything we see now. Obviously, we're hoping it bounce back faster.

We will do everything we can to try to make that happen. But I think that that is what we're dealing with in the Japan market. In terms of kind of buybacks and M&A, I want to point out, in dating, in particular, we think we've done a lot of good acquisitions. If you look at Hinge in particular, it's a home-run acquisition, just a phenomenal acquisition, and there's much more we can do with that business.

And if you go prior to Hinge, you look at the Plenty of Fish acquisition, you look at the Pairs acquisition in Japan, despite the recent trends in that market, those have been very, very strong acquisitions for us as well. And we're very optimistic about The League, which is the most recent acquisition we've made in the dating space. So if we're able to find more compelling targets in the dating space, we absolutely would like to continue to act on them, and we won't hesitate to do so. We have the financial flexibility to do them.

So there's no issues there. By contrast, when you look at the acquisition that we made outside of dating, it hasn't gone the way we would have hoped. We are working on it. We think the team is still fantastic.

There's more we can do with that business. But there's no denying that that acquisition of Hyperconnect has not worked out the way we had hoped, at least in the first year. And so the bar has been raised around non-dating acquisitions. That's not to say that we wouldn't do them.

But we need to be more convinced in both the growth that can be derived from those kinds of acquisitions, as well as the profitability levels. And we need to see a clear path to profitability, if not immediate profitability. So I think the standards will be higher for an acquisition outside of dating. So that's kind of how we think about our overall acquisition strategy, and it's something that BK and I have spent time chatting about.

And we will continue to refine our thinking around kind of M&A, because it is a core element of our toolbox and something that we have been good at. All that being said, right now, the way we look at it, we generate a lot of excess capital, probably $1 billion or so a year, maybe a little bit more, maybe a little bit less, but that's a good number to think about. And so we need to figure out what to do with that capital and use it in the most effective way. And right now, given the market dislocation and where our stock price is, betting on ourselves is our best bet.

It's our highest returning bet that we can make, and we're going to continue to do that aggressively with our excess capital. And we'll always be dynamic in this. This is a fluid set of decisions, M&A, buy back shares, whatever makes sense. We constantly discuss this internally with our board, and we want to maintain that flexibility.

But in the environment that we're operating in at the moment, we think that betting on ourselves is absolutely the right thing to do. We did it in the second quarter, and we expect to continue to do that in the third quarter as well. So hopefully, that answers your two questions. I know we're getting a little bit close to time.

So why don't I turn it over to BK for a couple of closing remarks?

Bernard Kim -- Chief Executive Officer

Thanks, Gary. Before we close the call, I want to thank the employees, the board, and our investors for trusting me with this opportunity. There's so much potential and runway ahead. I will work tirelessly to push the business forward.

And as a vote of confidence, I plan on buying $1 million worth of Match Group shares in the open market tomorrow. I'm committed to building long-term shareholder value, and I'm really looking forward to speaking with you again in November. Thank you, all.

Operator

[Operator signoff]

Duration: 0 minutes

Call participants:

Tanny Shelburne -- Senior Vice President, Investor Relations

Bernard Kim -- Chief Executive Officer

Gary Swidler -- Chief Financial Officer and Chief Operating Officer

Shweta Khajuria -- Evercore ISI -- Analyst

Cory Carpenter -- J.P. Morgan -- Analyst

John Blackledge -- Cowen and Company -- Analyst

Alexandra Steiger -- Goldman Sachs -- Analyst

Benjamin Black -- Deutsche Bank -- Analyst

Lauren Schenk -- Morgan Stanley -- Analyst

Jason Helfstein -- Oppenheimer and Company -- Analyst

Youssef Squali -- Truist Securities -- Analyst

Mario Lu -- Barclays -- Analyst

Brent Thill -- Jefferies -- Analyst

More MTCH analysis

All earnings call transcripts