MarketWise, Inc. — Q3 2023 Form 10-Q
Reporting period: Three and nine months ended September 30, 2023. MarketWise provides subscription-based investment research, software, education, and tools. Unless otherwise stated, amounts below are in millions of dollars; financial statements are unaudited.
Financial results and liquidity
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Total revenue | $106.2 | $119.9 | $336.0 | $384.7 |
| Operating income | $11.0 | $21.7 | $50.6 | $62.5 |
| Operating margin | 10.4% | 18.1% | 15.0% | 16.2% |
| Consolidated net income | $12.0 | $16.5 | $52.4 | $73.6 |
| Net income attributable to MarketWise, Inc. | $0.1 | $(4.0) | $1.6 | $13.7 |
| Operating cash flow | $12.1 | $9.9 | $44.9 | $37.8 |
Revenue was predominantly subscription-based. Q3 membership subscription revenue rose to $48.2 million from $46.9 million, while term subscription revenue fell to $57.4 million from $72.1 million. Nine-month revenue declined in both term and membership subscriptions. Interest income helped results: nine-month net interest income was $3.1 million, compared with $0.6 million of net interest expense in 2022. The filing does not provide a conventional gross-margin figure.
At September 30, cash and cash equivalents were $194.0 million, versus $158.6 million at December 31, 2022. Current assets were $313.0 million and current liabilities $362.4 million. Total liabilities were $698.5 million, and total stockholders’ deficit was $246.6 million. There were no borrowings under the revolving credit facility. The $150 million facility matures October 29, 2024; MarketWise reported compliance with its covenants.
Nine-month investing cash outflow was $1.7 million, mainly software development costs; financing cash outflow was $7.8 million, mainly distributions to noncontrolling interests and tax withholding on vested stock awards. Deferred revenue and other contract liabilities totaled $619.2 million. Management said approximately 47% was expected to be recognized as revenue over the following 12 months.
Material changes and operating trends
- Q3 revenue declined 11.5% year over year; nine-month revenue declined 12.7%. Management attributed the declines principally to weaker subscriber engagement and lower billings.
- Q3 operating income declined by about 49%, and operating margin contracted to 10.4% from 18.1%. Nine-month operating expenses fell 11.4%, but not enough to offset lower revenue.
- Billings were $95.5 million in Q3, down 9.1% year over year; nine-month billings were $288.9 million, down 19.4%. Q3 billings were down 0.7% sequentially.
- Paid subscribers were 774,000, down 13.4% year over year but up 3.1% from June 2023. Average revenue per user was $496, down 10.8% year over year and up 1.2% sequentially. Free subscribers rose 6.0% to 16.3 million, while active free subscribers fell 6.9% to 4.0 million.
- Sales and marketing expense fell 18.8% for the first nine months, largely from a $47.2 million reduction in marketing spend. Q3 sales and marketing expense increased 1.6% year over year, including higher amortization of customer acquisition costs.
- Operating cash flow improved year over year for the first nine months, notwithstanding a $44.3 million reduction in deferred revenue that reduced operating cash flow. Deferred contract acquisition costs provided a $23.6 million cash benefit.
Management commentary, outlook, and notable items
- Management cited soft consumer engagement, subscriber purchase delays, inflation, market volatility, higher interest rates, and geopolitical uncertainty as factors weighing on demand. It increased marketing spend in Q3 as gross new subscribers rose 87% from Q2, citing favorable unit costs and acceptable payback.
- In October 2023, the founder returned as Chairman and CEO, and the company announced an internal review intended to improve operational alignment, efficiency, cash flow, and intrinsic value. No formal revenue or earnings guidance is provided in this filing.
- Management stated that cash and operating cash flow should be sufficient for working capital and capital expenditure needs for at least the next 12 months. The company also said future capital needs depend on subscriber growth, renewals, marketing, product investment, and other factors.
- Continuing losses at Buttonwood Publishing led to a $0.6 million intangible-asset impairment in Q3. Its remaining intangible assets were $7.7 million; further impairment could materially affect results.
- The Board declared a special $0.15-per-share dividend and matching LLC-unit distribution, totaling approximately $50 million, payable December 1, 2023. The company also stated its intention to pay quarterly dividends, subject to Board approval. The special payment is subsequent to quarter-end.
- MarketWise, Inc. owned 10.6% of MarketWise, LLC at quarter-end; 89.4% was attributed to noncontrolling interests. Most consolidated net income was therefore attributable to noncontrolling interests.
- Disclosure controls and procedures were deemed ineffective as of September 30, 2023 because previously identified material weaknesses in financial reporting controls had not been fully remediated. Management said additional review procedures supported the fair presentation of the reported statements.
- Risks include subscriber acquisition and renewal, consumer engagement, economic and financial-market conditions, regulatory compliance, acquisitions, liquidity and capital needs, the Tax Receivable Agreement, and remediation of internal-control weaknesses. The company reported no legal proceedings as applicable in this filing.
Important facts for investors to verify
- Whether subscriber, engagement, ARPU, and billings trends stabilize, and whether increased marketing spend produces durable customer growth and acceptable payback.
- Whether the Buttonwood business incurs further impairment or continues to generate losses.
- The cash and liquidity impact of the approximately $50 million special distribution, ordinary dividends, tax distributions, and any future Tax Receivable Agreement payments.
- Progress and evidence of remediation of the material weaknesses, given management’s conclusion that disclosure controls were ineffective.
- The distinction between consolidated earnings and the much smaller amount attributable to MarketWise, Inc. shareholders, given the company’s 10.6% LLC ownership interest.
- Facility renewal or repayment plans before the October 2024 maturity; no facility borrowings were outstanding at quarter-end.