NerdWallet, Inc. — Q3 2022 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2022. NerdWallet operates a consumer finance advice and comparison platform in the U.S., U.K. and Canada, connecting consumers and small and mid-sized businesses with financial product providers. Amounts below are in U.S. dollars.
Financial performance
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Revenue | $142.6 million | $98.5 million | $396.9 million | $280.1 million |
| Operating income (loss) | $(8.8) million | $6.3 million | $(26.9) million | $(29.6) million |
| Net income (loss) | $0.7 million | $(7.8) million | $(19.1) million | $(34.6) million |
| Adjusted EBITDA | $14.5 million | $21.2 million | $36.1 million | $13.6 million |
| Adjusted EBITDA margin | 10% | 21% | 9% | 5% |
- Q3 revenue rose 45%; nine-month revenue rose 42%. Credit cards and other verticals led growth, while loans revenue declined.
- Q3 operating margin was approximately negative 6% versus positive 6% a year earlier; nine-month operating margin improved to approximately negative 7% from negative 11%.
- Q3 net income included a $9.9 million income tax benefit, including a $12.1 million benefit from reducing the deferred-tax-asset valuation allowance after the OTB acquisition. The company remained loss-making for the nine-month period.
- Q3 Adjusted EBITDA fell $6.7 million year over year, despite higher revenue; management attributed the quarter’s change primarily to operating results and changes in tax-related reconciliation items. Adjusted EBITDA is a non-GAAP measure and excludes, among other items, stock-based compensation and acquisition costs.
Revenue mix and operating trends
- Q3 credit card revenue increased 59% to $57.4 million; loans revenue decreased 12% to $28.4 million; other verticals increased 87% to $56.8 million.
- Mortgage revenue fell 50% in Q3, which management attributed to higher interest rates and macroeconomic headwinds. Personal loan revenue rose 74%, partly reflecting OTB. SMB products and banking revenue grew strongly; banking benefited from higher interest rates. Insurance revenue declined 18% over the nine-month period amid inflation-related pressure on carriers.
- Average monthly unique users were 19 million in Q3, up 11% year over year. Management noted strength in banking, travel and SMB products, partly offset by mortgage and investing weakness.
- Q3 sales and marketing expense rose 82% to $103.2 million, led by performance, brand, and organic and other marketing. Research and development increased 24% to $20.7 million; general and administrative increased 70% to $15.4 million.
Cash flow, liquidity and debt
- Cash and cash equivalents were $138.4 million at September 30, 2022, down from $167.8 million at December 31, 2021. Current assets were $246.6 million and current liabilities $84.7 million.
- For the first nine months, operating cash flow was $4.9 million, investing cash flow was $(94.3) million and financing cash flow was $60.3 million; cash declined $29.4 million.
- Investing outflows included $69.5 million, net of acquired cash, for OTB and $20.5 million of capitalized software development costs. Financing included $70.0 million borrowed under the credit facility.
- Debt was $70.0 million at quarter-end, bearing a stated 5.43% interest rate. The facility had $28.3 million of available borrowing capacity after letters of credit; the company reported compliance with its covenants. The facility maturity was extended to December 2, 2023.
- Management said existing cash, expected operating cash flow and credit-facility access should meet liquidity needs for at least 12 months from the filing date, subject to customary borrowing conditions.
Material changes, outlook and risks
- On July 11, 2022, NerdWallet acquired On the Barrelhead (OTB), a credit-driven product recommendation platform, for preliminary purchase consideration of $118.2 million: $75.7 million cash and $43.2 million stock, net of amounts treated as post-combination expense. The acquisition added $68.1 million of preliminary goodwill and $50.1 million of intangible assets. Purchase accounting remained preliminary.
- The acquisition was partly financed with $70.0 million of credit-facility borrowings. OTB employee retention and inducement awards are accounted for separately from purchase consideration, including up to $15.0 million of potential cash retention awards.
- Management did not provide a specific revenue or earnings forecast in the supplied filing text. It expects continued investment in personnel and the business; investment timing and scale may vary with growth and macroeconomic conditions. It expects MUUs to grow over time, but notes that user levels may fluctuate.
- Key stated uncertainties include market volatility, inflation, rising interest rates, consumer demand, partner relationships, marketing returns, competition, platform security and availability, and the ability to integrate acquisitions. The company also noted that additional financing, if needed, may not be available on favorable terms.
- Contingent consideration liabilities were $30.3 million at quarter-end, measured using significant unobservable inputs; remaining earnout consideration for the 2022 performance period was expected to be settled over the following 12 months. Management reported no legal matters expected to have a material effect and no loss accrual for litigation.
Important facts for investors to verify
- Whether growth in credit cards, banking, SMB and personal loans can offset mortgage and insurance weakness, and whether user growth translates into partner transactions and revenue.
- How marketing investment affects revenue growth and profitability, particularly given Q3 Adjusted EBITDA margin compression and higher sales and marketing expense.
- OTB’s contribution and integration progress, final purchase accounting, acquisition-related compensation expense, and earnout outcomes; the company said it could not separately quantify OTB’s post-close revenue or operating loss contribution.
- Liquidity and debt-service capacity, including credit-facility availability, variable-rate exposure, covenant compliance and the December 2023 facility maturity.
- The sustainability of reported net income given the quarter’s substantial tax benefit and the continuing full valuation allowance against net U.S. deferred tax assets.