MarketWise, Inc. — Q3 2022 Form 10-Q
Reporting period: Three and nine months ended September 30, 2022. MarketWise provides subscription-based investment research, financial publications, software, and tools for self-directed investors. Unless otherwise noted, amounts below are in U.S. dollars; financial statement amounts are in millions.
Financial performance
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Total net revenue | $119.9 | $140.7 | $384.7 | $402.5 |
| Operating income (loss) | $21.7 | $(373.1) | $62.5 | $(996.9) |
| Net income (loss), consolidated | $16.5 | $(366.3) | $73.6 | $(989.8) |
| Net income (loss) attributable to MarketWise, Inc. | $(4.0) | $(399.5) | $13.7 | $(1,021.9) |
| Operating cash flow | $9.9 | $(92.6) | $37.8 | $58.6 |
| Adjusted CFFO (non-GAAP) | $13.1 | $34.7 | $41.0 | $192.1 |
Q3 operating margin was 18.1% and consolidated net margin was 13.8%; nine-month margins were 16.2% and 19.1%, respectively. Q3 Adjusted CFFO margin was 12.5% of Billings, versus 25.2% a year earlier; nine-month margin was 11.4%, versus 33.2%. Adjusted CFFO is a company-defined non-GAAP measure and should not be treated as a substitute for GAAP cash flow.
- Revenue and demand: Q3 revenue fell 14.7% year over year, principally from a $16.9 million decline in term-subscription revenue. Nine-month revenue declined 4.4%; lower term and non-subscription revenue was partly offset by higher membership revenue.
- Profitability and comparability: The large improvement over 2021 primarily reflects the absence of legacy Class B unit compensation and fair-value charges that contributed $412.6 million of Q3 2021 and $1.061 billion of nine-month 2021 stock-based compensation. 2021 results are therefore not directly comparable to 2022. Q3 2022 also included a $3.9 million loss on warrant liabilities and $2.1 million of warrant-exchange costs.
- Cash generation: Nine-month operating cash flow declined 35.6% year over year, with a $24.8 million reduction in deferred revenue among the principal working-capital uses. Q3 Adjusted CFFO fell 62.3%, chiefly as Billings decreased.
- Margins and spending: Q3 sales and marketing expense was $51.6 million (43.1% of revenue), down from $82.6 million (58.7%) a year earlier. Management attributed lower spend partly to cost-reduction measures and higher subscriber acquisition costs.
Balance sheet, debt, and liquidity
- Cash and cash equivalents were $147.2 million at September 30, 2022, up from $139.1 million at December 31, 2021. Total assets were $435.2 million; total liabilities were $763.2 million, and total stockholders’ deficit, including noncontrolling interests, was $328.0 million.
- Deferred revenue and other contract liabilities totaled $690.7 million, including $318.8 million current. The company expects to recognize approximately 46% of remaining performance obligations over the next 12 months. Deferred revenue represents unearned customer billings, not debt.
- No borrowings were outstanding on the $150 million revolving credit facility, which matures October 29, 2024. The facility is secured by substantially all assets of MarketWise, LLC and specified subsidiaries; the company reported covenant compliance at quarter-end.
- Management stated that cash on hand and operating cash flow should cover working capital and capital expenditure needs for at least the next 12 months. This outlook is subject to business and market conditions and potential capital needs.
Operating metrics and material changes
- Billings, a non-GAAP operating metric defined as amounts invoiced, were $105.1 million in Q3, down 23.9% year over year and 10.6% sequentially. Nine-month Billings were $358.6 million, down 38.0%.
- Paid subscribers were 893,764, down 7.4% year over year; free subscribers reached 15.4 million, up 20.4%. ARPU was $556, down 28.0% year over year and 4.1% sequentially.
- Management attributed weaker Billings, subscriber acquisition, and ARPU to reduced consumer engagement, market volatility, high inflation, recession concerns, and subscribers delaying purchases or upgrades. It said subscriber churn returned to historical levels in Q3, while acquisition remained slower.
- Winans Media was acquired for $12.8 million in cash during Q3, adding approximately 16,000 paid subscribers; the acquisition added $8.0 million of goodwill. MarketWise also acquired an additional 3.7% interest in Chaikin for $0.3 million.
- The company completed a warrant exchange in September, issuing approximately 5.9 million Class A shares; no warrants remained outstanding at quarter-end. It repurchased 2.5 million shares for $13.1 million during the first nine months; $18.6 million remained under the authorization at quarter-end.
Outlook, risks, and controls
- The filing provides no specific revenue, earnings, or Billings guidance. Management expects operating cash flows and existing cash to support near-term needs and anticipates continued investment, while noting financing may be needed for future growth or acquisitions.
- Key disclosed risks include subscriber acquisition and renewal, weaker economic and financial-market conditions, marketing costs and customer engagement, acquisitions and integration, regulatory compliance, and the ability to remediate internal-control deficiencies. Tax distributions to MarketWise LLC’s noncontrolling owners reduce cash available for the business; the company also described possible future Tax Receivable Agreement payments, although no TRA liability was recorded at quarter-end.
- Disclosure controls and procedures were deemed ineffective as of September 30, 2022 because previously identified material weaknesses in financial reporting controls had not been fully remediated. Management reported remediation efforts underway and said additional analysis and reconciliations supported the financial statements.
- No material changes to the risk factors in the company’s 2021 Form 10-K were reported. Legal proceedings were listed as not applicable.
Important facts for investors to verify
- Whether Billings, paid-subscriber trends, and ARPU stabilize, and how management balances customer acquisition spending with cost reductions.
- The sustainability and cash conversion of reported earnings, including the effects of deferred revenue, working capital, and non-GAAP adjustments.
- Progress and timing in remediating material weaknesses in internal controls.
- The dilution and ownership effects of share issuance, the warrant exchange, repurchases, and MarketWise, Inc.’s 9% economic interest in MarketWise, LLC (with 91% noncontrolling interest).
- Capacity to meet future tax-distribution and potential TRA obligations while maintaining liquidity and credit-facility covenant compliance.