MarketWise, Inc. — Q1 2022 Form 10-Q
Reporting period: Three months ended March 31, 2022. MarketWise provides subscription-based investment research, education, software and tools for self-directed investors. Financial statements are unaudited. Unless stated otherwise, dollar figures below are in millions.
Financial performance and liquidity
| Metric | Q1 2022 | Q1 2021 |
|---|---|---|
| Total revenue | $136.8 | $119.7 |
| Operating income (loss) | $17.4 | $(614.9) |
| Net income (loss), consolidated | $23.0 | $(615.1) |
| Net income (loss) attributable to MarketWise, Inc. | $5.8 | $(614.5) |
| Cash from operating activities | $1.1 | $92.3 |
| Billings | $136.0 | $255.3 |
| Adjusted CFFO, non-GAAP | $1.1 | $98.0 |
Operating margin was 12.7% and consolidated net margin was 16.8%; net income attributable to MarketWise, Inc. was 4.3% of revenue. Adjusted CFFO margin was 0.8% of Billings. Revenue grew 14.3%, driven by subscription revenue: lifetime subscriptions were $51.5 million versus $40.2 million, and term subscriptions were $84.6 million versus $77.5 million.
Cash and cash equivalents were $125.7 million at March 31, 2022, plus $0.5 million restricted cash. Total assets were $416.4 million; total liabilities were $810.4 million and total stockholders’ deficit was $394.0 million. Deferred revenue and other contract liabilities totaled $711.6 million, including $317.9 million current. The filing reports no outstanding borrowings under the $150 million revolving credit facility, which matures October 29, 2024; the company was in compliance with its covenants. The facility is secured by a first-priority lien on substantially all assets of MarketWise, LLC and guarantors.
Changes versus the prior comparable period
- Revenue increased $17.1 million, or 14.3%, but Billings fell $119.3 million, or 46.7%. Management attributed lower Billings to reduced subscriber engagement and delayed purchasing amid post-pandemic shifts and economic and geopolitical uncertainty.
- Paid Subscribers declined 9.3% year over year to 908,718 and 6.5% from December 31, 2021. Free Subscribers grew 33.6% year over year to 14.5 million. ARPU fell 22.9% year over year to $636.
- Operating cash flow fell to $1.1 million from $92.3 million. Management cited working-capital movements, including higher accounts receivable and lower accrued expenses, as well as lower Billings and continued marketing spending amid high acquisition costs.
- The reported profit comparison is heavily affected by the 2021 pre-transaction accounting for Class B unit awards: Q1 2021 included $601.1 million of stock-based compensation expense, versus $2.6 million in Q1 2022. The July 2021 reverse recapitalization also changed the capital structure, so prior-period EPS is not presented.
Outlook, risks and unusual items
- No quantified financial guidance was provided. Management said cash on hand and operating cash flows should support working capital and capital expenditure needs for at least the next 12 months, while noting future capital needs may depend on growth, marketing, product investment and public-company costs.
- Management expects sales and marketing to remain the largest operating expense and anticipates continued investment in subscriber acquisition and platform development. It also expects subscription revenue to benefit from recognition of previously deferred revenue.
- Management described weaker subscriber engagement, high digital advertising and acquisition costs, and macroeconomic and geopolitical uncertainty—including inflation, market volatility, Federal Reserve tightening and the war in Ukraine—as factors affecting acquisition and purchase timing. It estimated the unusually large Q1 2021 subscriber cohort contributed about 60,000 additional churned subscribers in Q1 2022.
- Q1 2022 consolidated net income included a $6.7 million gain on warrant liabilities; the gain and $1.5 million income tax provision were fully attributable to the controlling interest. MarketWise owned 7.2% of MarketWise, LLC at quarter-end; 92.8% was noncontrolling interest.
- The company repurchased 2,143,446 Class A shares for $11.5 million during the quarter under its $35 million authorization. After quarter-end, it repurchased another 341,271 shares for $1.6 million.
- Disclosure controls and procedures were deemed ineffective as of March 31, 2022 because of unremediated material weaknesses involving contemporaneous documentation and account reconciliation, and a formal, documented risk-assessment process. Management reported remediation work was ongoing and stated the financial statements fairly present the periods shown.
- Management identified potential risks including subscriber renewal and acquisition, marketing effectiveness, adverse financial-market or economic conditions, acquisition execution, regulation, and internal-control remediation. It reported no material changes to the risk factors in its latest Form 10-K; legal proceedings were not applicable.
Important facts for investors to verify
- Whether the sharp Billings and operating-cash-flow declines persist, and how subscriber counts, churn, ARPU and renewals trend in subsequent quarters.
- How much revenue growth continues to come from deferred revenue already collected, versus new billings and customer demand.
- The drivers and sustainability of cash conversion, including working-capital movements, contract acquisition spending and marketing efficiency.
- Progress in remediating the material weaknesses and restoring effective disclosure controls.
- Potential cash demands from tax distributions, public-company costs, the Tax Receivable Agreement if triggered, and continued share repurchases; no TRA liability had been recorded at quarter-end.
- The effect of the Up-C structure and 92.8% noncontrolling interest on the relationship between consolidated results and earnings attributable to MarketWise, Inc. shareholders.