NerdWallet, Inc. — Q2 2023 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2023. Unaudited results; dollar amounts are in millions unless otherwise noted.
Business context
NerdWallet operates a personal-finance website and app that connects consumers and small and mid-sized businesses with financial-product providers. It earns revenue across credit cards, loans, and other verticals. Its July 2022 acquisition of On the Barrelhead (OTB) expanded credit-driven product recommendations, including personal loans.
Financial results
| Metric | Q2 2023 | Q2 2022 | H1 2023 | H1 2022 |
|---|---|---|---|---|
| Revenue | $143.3 | $125.2 | $312.9 | $254.3 |
| Operating loss | $(4.2) | $(9.0) | $(5.0) | $(18.1) |
| Net loss | $(10.7) | $(9.3) | $(9.0) | $(19.8) |
| Adjusted EBITDA | $20.7 | $12.7 | $41.6 | $21.6 |
| Adjusted EBITDA margin | 14% | 10% | 13% | 8% |
| Net loss per share, diluted | $(0.14) | $(0.14) | $(0.12) | $(0.29) |
Revenue grew 14% in Q2 and 23% in H1 year over year. Q2 adjusted EBITDA improved, but net loss widened by $1.4 million, mainly as higher revenue was offset by higher expenses and a $7.1 million income tax provision. H1 net loss narrowed by $10.8 million. Adjusted EBITDA is a company-defined non-GAAP measure; its exclusions include stock-based compensation and depreciation and amortization.
- Revenue by vertical: Q2 credit cards $51.2 million, down 6%; loans $23.1 million, down 4%; other verticals $69.0 million, up 48%. H1 credit cards rose 13%, loans declined 23%, and other verticals rose 62%.
- Operating metric: Average monthly unique users were 22 million in Q2, up 9% year over year; H1 averaged 23 million, up 8%.
- Expenses and margins: Q2 sales and marketing expense increased 11% to $98.8 million; cost of revenue rose 61% to $13.1 million. Operating loss narrowed to $4.2 million from $9.0 million. Q2 net loss margin was 7%, unchanged from the prior-year quarter.
- Cash flow: H1 operating cash flow was $6.4 million, versus cash used of $14.4 million in H1 2022. Investing used $15.3 million, including $14.9 million of capitalized software development costs; financing used $8.0 million. Cash decreased $16.8 million to $67.1 million.
- Liquidity and obligations: Cash and cash equivalents were $67.1 million at June 30, down from $83.9 million at year-end 2022. The company reported no outstanding balance on its $100 million credit facility and $98.5 million available, net of letters of credit. The facility terminates December 2, 2023. Total liabilities were $45.6 million, including lease liabilities.
Material changes and management commentary
- Other-vertical growth was driven by banking revenue (up 139% in Q2), insurance (up 41%), and SMB products (up 13%). Management attributed banking growth partly to higher interest rates.
- Loans remained pressured: mortgage revenue declined 33% in Q2 and student-loan revenue declined 37%, which management attributed to higher rates and macroeconomic conditions. Personal-loan revenue increased 32%, incorporating OTB.
- Credit-card revenue fell in Q2 as financial-services partners reduced marketing amid more cautious underwriting. Management noted that credit-card revenue nevertheless increased for H1, citing improved user experiences and partner alignment.
- The company paid $30.9 million of contingent consideration during Q2; the related liability was fully settled. H1 cash payments for contingent consideration and related deferred earnout compensation totaled $32.6 million.
- A $20 million share-repurchase authorization was announced in May. The company repurchased 141,000 shares for $1.3 million during Q2, leaving $18.7 million under the authorization at June 30.
- Management expects MUUs to grow over time and believes cash, future operating cash flow, and credit-facility access will meet liquidity needs for at least 12 months from the filing date. The filing provides no specific revenue or earnings guidance.
Risks, contingencies, and unusual items
- The Q2 income tax provision was $7.1 million despite a $3.6 million pretax loss. Management used a discrete effective-tax-rate method because the annual-rate method was considered unreliable; a full valuation allowance remains against deferred tax assets.
- Management cited inflation, rising interest rates, tighter credit, and broader macroeconomic uncertainty as risks, with mortgage and student-loan activity particularly exposed. Partner marketing and underwriting decisions may also affect revenue.
- The company said it was not aware of legal matters expected to materially affect its financial position, results, or cash flows and had no material potential-loss accrual. Litigation outcomes remain uncertain.
- Management reported effective disclosure controls as of June 30, 2023, with no material change in internal control over financial reporting during the quarter.
Investor facts to verify
- Whether growth in banking, insurance, and other verticals can offset continued weakness in mortgages, student loans, and credit cards.
- How much future operating cash flow depends on non-cash add-backs, capitalized software spending, and working-capital movements.
- The effect of the expiring December 2023 credit facility and the availability or terms of any replacement financing.
- Why the tax provision remains elevated relative to pretax results, and whether future tax expense or deferred-tax-asset valuation assumptions change.
- The returns on marketing spending and the effect of stock-based compensation, which was $11.3 million in Q2 and $19.9 million in H1, on reported results and dilution.
- Execution and integration risks associated with OTB, and the scale and timing of any further share repurchases.