MarketWise, Inc. — Q3 2021 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2021. MarketWise provides subscription-based investment research, software, education, and tools. The July 21, 2021 business combination with Ascendant Digital Acquisition Corp. made MarketWise, Inc. the public parent; the transaction was accounted for as a reverse recapitalization. Comparisons with 2020 reflect the accounting predecessor, MarketWise, LLC.
Financial and operating performance
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Total net revenue | $140.7m | $98.2m | $402.5m | $257.3m |
| Operating loss | $(373.1)m | $(67.3)m | $(996.9)m | $(164.3)m |
| Consolidated net loss | $(366.3)m | $(68.3)m | $(989.8)m | $(165.7)m |
| Net loss attributable to MarketWise, Inc. | $(399.5)m | $(67.6)m | $(1,021.9)m | $(164.1)m |
| Operating margin | (265.2)% | (68.6)% | (247.7)% | (63.9)% |
- Q3 revenue grew 43.3% year over year, led by term and lifetime subscriptions. Nine-month revenue increased 56.4%.
- Reported losses were dominated by Class B unit compensation expense: total stock-based compensation was $412.6m in Q3 and $1,061.1m for the nine months. This largely reflected fair-value changes, transaction-related accelerated vesting, and distributions; the former Class B liability awards ceased generating expense after the transaction.
- Q3 consolidated net loss included $42.8m of post-transaction net income from July 22 through September 30, but only $9.7m was attributable to MarketWise, Inc.; reported post-transaction EPS was $0.39. The quarter also included a $9.9m warrant-liability gain and $3.1m tax expense.
- Billings were $138.1m in Q3, down 8% year over year and 25% sequentially. Adjusted cash flow from operations (CFFO), a non-GAAP measure, was $34.7m for Q3 versus $55.0m; adjusted CFFO margin was 25.2% versus 36.7%. For nine months, adjusted CFFO was $192.1m versus $118.3m.
- GAAP operating cash flow was $58.6m for nine months, versus $73.0m in 2020. Investing cash flow was $(8.2)m and financing cash flow $(27.2)m, including $135.5m of distributions to members and $113.3m of transaction proceeds.
- At September 30, cash and cash equivalents were $137.6m; current assets were $235.8m and current liabilities $434.2m. Deferred revenue and other contract liabilities totaled $704.9m. The balance sheet reported no borrowings outstanding; total liabilities were $845.4m, substantially including deferred revenue and warrant liabilities.
Changes, outlook, and notable items
- Paid subscribers rose 22.8% year over year to 965,000, but fell 3.0% from June. Free subscribers reached 12.8m. ARPU was $772, up 2.7% year over year but down 6.2% sequentially.
- Management attributed weaker billings and sequential subscriber trends to elevated digital advertising costs and lower prospective-customer engagement amid increased travel and leisure activity. It reduced Q3 sales and marketing spend by about $6m from Q2, excluding stock-based compensation. Management reported early signs of higher paid-subscriber additions and modestly lower acquisition costs in October and early November, and expected some cost normalization in Q4; this was not formal financial guidance.
- Deferred revenue represented $704.9m of remaining performance obligations; the company expected to recognize approximately 47% over the next 12 months. Revenue recognition over subscription terms means changes in sales may affect reported revenue with a lag.
- In October, the company entered a three-year revolving credit facility of up to $150m, with a $5m letter-of-credit subfacility and possible, lender-approved incremental commitments or term loans up to $65m. It is secured by substantially all assets of the borrower and guarantors and includes interest-coverage and leverage covenants. This facility was entered into after quarter-end.
- In November, the board authorized up to $35m of Class A share repurchases through November 3, 2023; repurchases are discretionary and not obligatory. The company also reported a one-time $10m bonus to its founder in Q3.
- The company had not recognized a Tax Receivable Agreement liability at quarter-end because no relevant unit exchanges had occurred. Under the agreement, it may owe former owners 85% of certain realized or deemed tax benefits; payments could be substantial or accelerate in specified circumstances.
- Disclosure controls were deemed ineffective as of September 30 because previously identified material weaknesses in account reconciliations/documentation and formal risk assessment had not been fully remediated.
Key facts for investors to verify
- How much of future reported expenses and earnings volatility will remain after the transaction-related Class B compensation ended, and how should the unusual 2021 compensation charges be interpreted?
- Whether billings, paid-subscriber additions, churn, ARPU, and customer acquisition costs stabilize after the Q3 declines; compare management’s early Q4 observations with subsequent results.
- Cash conversion and liquidity: reconcile the nine-month cash flow statement with MD&A’s Q3 standalone operating cash flow figure of $(92.6)m, and monitor deferred contract acquisition costs, distributions, and deferred revenue.
- Facility availability, borrowing, collateral, covenants, and any impact on distributions or other capital uses; distinguish the post-quarter facility from September 30 debt balances.
- Potential future Tax Receivable Agreement obligations, tax-asset recoverability, and the effects of the Up-C structure and noncontrolling interests.
- Progress remediating material weaknesses, and the potential dilution and governance implications of the dual-class structure, unit exchanges, warrants, and earnout shares.