MarketWise, Inc. — Q2 2022 Form 10-Q
Business and period. MarketWise operates a multi-brand, digital subscription platform providing investment research, software, education, and tools. This unaudited report covers the quarter and six months ended June 30, 2022. Dollar amounts below are USD.
Financial performance and position
| Metric | Q2 2022 | Comparable period / change |
|---|---|---|
| Total revenue | $128.0 million | Down 9.9% from $142.1 million |
| Operating income (loss) | $23.4 million | Compared with a loss of $8.9 million |
| Operating margin | 18.3% | Compared with (6.3%) |
| Net income (loss), consolidated | $34.0 million | Compared with a loss of $8.4 million |
| Net income attributable to MarketWise, Inc. | $11.9 million; $0.53 per diluted share | Compared with a loss of $7.9 million; prior-period EPS not presented |
| Cash from operating activities | $26.8 million | Down 54.5% from $58.9 million |
| Adjusted CFFO, non-GAAP | $26.8 million; 22.8% of Billings | Down 54.9%; prior margin 32.1% |
Six-month results: Revenue was $264.8 million, up 1.1%; operating income was $40.8 million, versus an operating loss of $623.8 million; and consolidated net income was $57.1 million, versus a loss of $623.5 million. Operating cash flow was $27.9 million, down from $151.2 million. Prior-year results included exceptionally large noncash Class B Unit compensation expense, making year-over-year profit comparisons less representative of underlying operating trends.
In Q2, subscription revenue was primarily term subscriptions ($77.4 million) and membership subscriptions ($49.9 million); non-subscription revenue was $0.8 million. Term subscription revenue fell $13.6 million year over year. For the first half, membership revenue increased $11.3 million, while term and non-subscription revenue declined.
At June 30, cash and cash equivalents were $151.2 million, compared with $139.1 million at year-end 2021. Total liabilities were $786.2 million, including $701.1 million of deferred revenue and other contract liabilities. The company had no borrowings under its $150 million revolving credit facility, which matures October 2024; it reported compliance with its financial covenants. Stockholders’ deficit was $359.6 million.
Material changes and operating trends
- Q2 Billings declined 36.5% to $117.5 million; first-half Billings declined 42.4% to $253.5 million. Management attributed weakness to reduced subscriber engagement, lower conversion, high inflation, market volatility, recession concerns, and geopolitical uncertainty.
- Paid subscribers fell 9.7% year over year to approximately 898,000; free subscribers increased 25.1% to approximately 15.0 million. ARPU declined 29.5% to $580.
- Sales and marketing expense rose 14.3% in Q2 to $65.1 million, including higher amortization of subscriber acquisition costs. Management said acquisition costs remained elevated and conversion rates were below normal; it began reducing marketing spend in June.
- Cash from operations fell in the first half, with management citing lower Billings, a decrease in deferred revenue, and higher deferred contract acquisition costs.
- The company repurchased 2.5 million Class A shares for $13.1 million in the first half under its $35 million authorization. Repurchases reduce the company’s ownership percentage in MarketWise, LLC and relatively increase noncontrolling ownership.
Outlook, risks, and unusual items
- No quantified revenue, earnings, or cash-flow guidance is provided. Management said cash on hand and operating cash flow should fund working capital and capital expenditures for at least the next 12 months, while noting future capital needs could require additional financing.
- Q2 other income included a $12.1 million gain from changes in the fair value of warrant liabilities; the first-half gain was $18.8 million. These noncash valuation gains contributed to reported net income and are subject to market-price and valuation changes.
- MarketWise, Inc. owned 7.2% of MarketWise, LLC at quarter-end; 92.8% was noncontrolling interest. Consequently, consolidated earnings are not wholly attributable to MarketWise, Inc. shareholders.
- Disclosure controls and procedures were deemed ineffective at June 30, 2022 due to unremediated material weaknesses involving account reconciliation/documentation and formal risk assessment. Management reported remediation work in progress and said additional analyses supported the fairness of the financial statements.
- Management identified risks including subscriber acquisition and renewals, market and economic conditions, marketing efficiency, public-company costs, and internal-control remediation. It reported no material changes to the risk factors in its latest Form 10-K and no applicable legal proceedings.
Important facts for investors to verify
- Whether Billings, paid subscribers, conversion, and ARPU stabilize, and whether reduced marketing spending improves acquisition economics.
- How much reported earnings depend on noncash warrant remeasurement and how operating performance develops excluding unusual prior-year Class B compensation.
- The cash-flow implications of deferred revenue, contract acquisition costs, member tax distributions, and any future Tax Receivable Agreement payments.
- Progress and independent validation of remediation of the disclosed material weaknesses in financial reporting controls.
- Credit-facility covenant headroom, potential dilution from warrants and equity awards, and the effect of repurchases on the company’s LLC ownership interest.