MarketWise, Inc. (NASDAQ:MKTW) Q2 2022 Earnings Conference Call August 8, 2022 11:00 AM ET
Company Participants
Jonathan Shanfield – Head of Investor Relations
Mark Arnold – Chairman & Chief Executive Officer
Dale Lynch – Chief Financial Officer
Conference Call Participants
Devin Ryan – JMP Securities
Operator
Thank you for standing by, and welcome to MarketWise Second Quarter 2022 Earnings Call. At this time, all participants are in a listen mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded.
I would now like to turn the conference over to Jonathan Shenfield, Head of Investor Relations at marketwise. Thank you.
Jonathan Shanfield
Good morning, and thank you for joining us on today’s conference call to discuss MarketWise second quarter 2022 financial results. On the call today, we have Mark Arnold, our Chief Executive Officer; and Dale Winch, our Chief Financial Officer.
During the course of today’s call, we may make forward-looking statements, including, but not limited to, statements regarding our guidance and future financial performance, market demand, growth prospects, business strategies and plans and our ability to attract and retain customers. These forward-looking statements are based on management’s current views and assumptions and should not be relied upon as of any subsequent date, and we disclaim any obligation to update any forward-looking statements. Actual results may vary materially from today’s statements. Information concerning our risks, uncertainties and other factors that could cause results to differ from these forward-looking statements are contained in the company’s SEC filings, earnings press release and supplemental information posted on the Investors section of the company’s website. Our discussion today will include certain non-GAAP financial measures. These non-GAAP financial measures should be considered in addition to, but not a substitute for or in isolation from GAAP measures. Reconciliations to non-GAAP investors can be found in our earnings press release and SEC filings.
Now, I’ll turn the call over to Mark.
Mark Arnold
Thanks, John, and good morning, everybody. Welcome to our second quarter 2022 earnings call.
The second quarter of 2022 continue the same market and investor dynamics we experienced through the first quarter of the year, reflecting increased volatility and uncertainty in the U.S. and the global markets. Record inflation prompted the Federal Reserve to embark upon an aggressive monetary tightening cycle, and this prompted concerns across the investment community and investors that a recession or hard landing as possible or — which contributed to the market sell-off that continued through the second quarter and ultimately resulted in what has been highly reported as the worst first half of the year for stocks in 50 years.
Given this environment and the uncertainty in the economy and the markets, it’s not surprising that investors have remained cautious as the market sell-off has continued through the middle of the summer. — subscribers continue to evaluate and assess the market to determine how to adjust their investment strategies. This situation has resulted in a hesitance regarding their investments, similar to what we saw earlier in the year. We believe this combination of factors continues to impact our current financial performance as can be seen in our second quarter results, where our revenues declined 9.9% year-over-year to $128 million.
Our billings declined 36.5% year-over-year to $117.5 million, and our adjusted cash flow from operations was $26.8 million, down from $59.4 million in the second quarter of 2021. Our quarter’s results continue to reflect lower consumer engagement and fewer new subscribers as compared to the prior year as a result of the economy and post-COVID market outfaces. Dale will give you more details on our subscriber engagement in a few minutes. As students of the markets and investors ourselves, we believe the individual investor is reactive in this environment in an understandable way by stepping to the sidelines are taking time to evaluate market sentiment based on their own risk appetite. This is not a new phenomenon as we have been 3 challenging markets before.
We’ve seen periods like this during the dot-com crash in the early 2000s and again, during the 2008-2009 financial crisis. In each of those cases, it took time for individual investors to fully reengage in market activities. And during those periods, we managed our business through the cycle by developing new content that address the current financial environment, managed our marketing spend and costs appropriately and ultimately, we experienced significant organic growth when individual investors reentered the market. We understand that to position the company for long-term growth, we need to maintain and improve profitability and continue to generate strong cash flows, and we are focused on doing just that.
Fortunately, we are in an enviable position in a positive cash flow, a strong balance sheet and no debt, which allows us to take advantage of opportunities where many of our competitors cannot. As a result, we are adjusting to the current market cycle, both from a content perspective and operationally as we focus internally to improve efficiencies and execute on our strategic objectives. Along those lines, there are several initiatives that I had mentioned previously that I want to provide an update on.
As we have discussed before, our editors and analysts are adjusting to the current market environment and working hard to produce new content and investing ideas for our subscribers. Our analysts continue to cover most major investment asset classes, which helps ensure that we have content that resonates in changing market conditions. As we have seen major changes in investing sentiment occur in the United States and globally, our editorial teams are analyzing and writing about where markets are headed and developing additional content that they believe will fit these market conditions.
During the second quarter, we launched several new publications, which reflect our analysts’ best ideas for addressing the current investing environment. Additionally, as we reflected on current market conditions, we retired or consolidated a half dozen other publications from our portfolio, which either don’t fit the current investing environment or overlap content-wise with other products we offer. This will result in cost savings and greater operational efficiency going forward.
We also expanded our effort to further incorporate data science from artificial intelligence in our operations. We partnered with subscale in the second quarter to accelerate our progress, and we believe this effort will lead to substantial long-term benefits to market wise. Integrating data science and artificial intelligence further into our business will be a multiyear process that starts with a deep dive on the data collection, analysis and modeling, ultimately generating insights and results, which turn information into action.
The initial phase of this project with subscale is focused on customer and transaction data, improving our conversion rates, increasing our direct mail conversions and working to decrease the rate of customer chargebacks. These are short-term goals, which we expect to realize in the next 12 months, and our initial efforts are currently underway. Ultimately, we believe greater integration of data science into our business will significantly improve our overall free-to-pay conversion rates, helped to improve and lower our subscriber churn and increase engagement in terms of active users of paid content and improve our ARPU overtime.
We are also actively working to integrate our technology products with our research brands as a way to further enhance our product offerings to subscribers. Last quarter, we detailed the success we realized bringing shaking analytics onto our platform, generating over $27 million in billings in 2021. More recently, we have had similar success with our Altimetry brand. Altimetry is one of our research brands that combines its proprietary method of deconstructing GAAP financial statements and reassembling those financials in a way to assess the company’s true value. Their process of deconstructing GAAP financials in the uniform accounting standard provides insight in the company’s valuation potential and profitability so that retail investors can better identify public companies that are undervalued and poised for growth.
During the quarter, Altimetry marketed their product to stage researchers audience, resulting in $3.4 million in building, its highest billings for an individual optimetry campaign in almost 2 years. When we promote technology products with our content brands, we have found significant ARPU improvement as well as better subscriber retention. We have another significant internal technology and content brand combination that we are actively working on and hope to complete in the third quarter.
In the future, we plan on offering additional quantitative tools and products with our investment research, both in our existing brands as well as in our M&A efforts. I also want to provide an update on the development and rollout of our TAM market-wise technology platform. Our technology team has made significant progress over the past quarter and continues to develop this platform to accommodate our multiple brands and allow consumers to explore investment content from all of our brands in one location.
Our vision is that this umbrella platform will host a community of millions of readers, enabling us to enhance engagement, improve our marketing efficiency and ultimately provide us with a source of traffic for new customers. We completed the full rollout of this new platform for Sandfire Research earlier in the year, and we have seen positive results from users already, including increased time on page for investors researching new content and products, enhanced engagement within site tools, including charts and dashboards and greater access to our video media. This platform will also encourage more cross-selling between brands, which should drive better retention and ARPU while providing a digital advertising revenue stream. We began beta testing of the full platform in July and look to launch the platform more broadly in early 2023.
As you can see, we have a number of initiatives underway that we believe will drive growth and profitability over time. Because of our strong balance sheet and positive cash flow, we are in a unique position to be able to make the necessary investments to drive long-term value for our shareholders. We are also cognizant that our company has experienced a period of significant growth over the last 3 years, having increased the number of product offerings, publications, analysts and associates while transitioning to be a publicly listed company more than a year ago. Along with that growth in scale came increases in overhead and overall corporate expense. After this period of significant growth and considering current market conditions, we launched a cost reduction effort and have found opportunities to increase efficiencies and optimize our expense structure. Because our direct marketing spend is highly variable, and we can react quickly with changes in advertising costs.
And given the persistent high unit subscriber acquisition costs and lower conversion rates, we tightened our marketing metrics through the second quarter to preserve margins and enhance profitability. We are also targeting total overhead expense reductions of approximately $37 million on an annualized basis, which we hope to have completed in the next month and much of which has already been completed. I’ll let Dale provide more detail in a moment, but this effort reflects an approximate 15% annualized reduction in budget overhead expense. This cost initiative began in the second quarter, and we expect to see incremental run rate benefits in the third and fourth quarters of this year.
Additionally, in light of the sustained high cost of marketing and hesitancy on the part of investors, we have tightened our marketing metrics and are expecting an approximate $37 million reduction to direct marketing expenditures in the second half of the year. However, this reduction will be dependent on market factors. If marketing efficiency improves, we may decide not to cut marketing spend to this decree and instead focus on more efficient subscriber acquisition — to conclude, the markets have certainly been challenging this quarter, and that is reflected in our first half results.
That said, we’ve been in business for more than 2 decades and have seen many market cycles like this. That uniquely positions us to not only weather the current market volatility, but thrive going forward as we execute our strategic initiatives, which we — which should ultimately translate to improved revenue growth, profitability and cash flow generation.
Now, let me turn the call back over to Dale.
Dale Lynch
Good morning. Thanks, Mark. As Mark touched on, the second quarter continued the challenging trend in the first quarter marked a high inflation in the Fed’s aggressive tightening policy, resulting in recession fears in an equity market that fell in the bar territory. Combination of these market influences has impacted our business as we continue to see hesitancy on the part self-directed investors complete purchases of financial research.
In terms of overall interest, investors continue to seek our products as our engagement metrics remain consistent with prior quarters. However, our purchase conversion rates from landing page visits, the final act of purchase and content continues the same low rate seen in the first quarter of this year and remains approximately 20% below fourth quarter 2021 levels. However, it is also important to note that our higher value customers conversion rates remain solid. These high-value and ultra-high-value subscribers are at the heart of our business model and are particularly important in periods of time when we’re bringing in fewer new subscribers as is currently the case. These subscribers continue to see the value in our products and are still purchasing products at rates similar to historic trends, which is currently driving the majority of our billings.
As of June 30, 2022, our cumulative high-value conversion rate and our cumulative ultra-high-value conversion rates were 42% and 32%, respectively, each representing all-time highs. It is understandable and not surprising that the retail investors continue to be unsure of the next move in the market. For all the factors mentioned previously, we believe that many retail investors remain on the sidelines, actively monitoring market activities, but possibly delaying purchases, especially for our lower ARPU customers and prospective customers. Let me provide an update on consumer engagement and conversion rates before I turn to financial review. In second quarter of 2022, our landing page visits were approximately $31 million and remained stable on a sequential basis and at roughly the same average level seen since last summer. However, this level remains approximately 18% lower than the average quarterly rate over the past 2 years.
While we’ve seen stabilization in this metric over the past 4 quarters, as we reduce our marketing spend, you should expect to see declines in this metric. These declines won’t be market-driven necessarily, but rather will be driven by the reduced level of our marketing if unit costs remain high. Our landing pad to paid subscriber conversion rates were exactly the same as first quarter 2020 levels, which was about 16 basis points or approximately 20% less than fourth quarter 2021 levels. Similar to the prior quarter, the decline had an impact on both billings and new subscriber acquisitions this quarter.
We continue to see these low conversion rates be driven by our low ARPU customers. Our high-value and ultra-high-value conversion rates this quarter remained in line with our historical averages over the past year, indicating that our most valuable subscribers continue to purchase additional content. It is also important to note that subscriber memberships, which we previously termed lifetime subscriptions continue to grow in both the memberships and the active cumulative spend by those members. This is another indication of customer satisfaction and we create confidence in the fact that these subscribers found valuing our products and remain with us for the long term.
Turning to the financials. Revenue was $128 million this quarter compared to $142.1 million in the year ago quarter, a decrease of $1.1 million or 9.9%. I — the decrease in revenue is driven by a $13.6 million decrease in turn subscription revenue we recognized $84 million in deferred revenue this quarter. Billings were $117.5 million compared to $185.1 million for the year ago quarter, a decline of $67.6 million. We believe the decrease is due in large part to the post-COVID reduced engagement of consumers and lower overall direct-to-pay conversion rates.
The challenges that emerged in first quarter 2022 continued into this quarter, which we believe further contributed to the subscribers and potential subscribers delaying their purchases. Pentally, our $117.5 million and second quarter billings declined $18.5 million or 14% from the first quarter’s level, driven by a decline in the average card value or average expenditure repurchased in the second quarter. Approximately 38% of our billings came from membership subscriptions, 61% in term subscriptions and 1% from other billings in the second quarter 2022. This compares to 45% of our billings from membership subscriptions, 54% from term subscriptions and 1% from other billings in the second quarter 2021. Cost of revenue was $16.2 million this quarter compared to $26.8 million for the year ago quarter, a decline of $10.6 million.
This decline was primarily driven by a decrease of $10.6 million in stock-based compensation related to the holders of Class B units and a $1.3 million decrease in credit card fees, which was partially offset by a $1 million increase in salaries and benefits due to higher headcount. The current quarter stock-based compensation included $0.5 million of expense related to our current incentive stock award plan and our employee stock purchase plan. This compares to $10.6 million in Class B stock-based compensation expense in the year ago quarter.
As a reminder, from the time of the combination with Ascendant in July 2021 and through the end of second quarter 2022, there was no longer any stock-based compensation attributable to our original Class B units recognized. Prior to the transaction, these units were treated as derivative liabilities rather than equity and therefore, had to be remeasured each quarter with the change in fair value included in stock-based comp. Also, any distributions to profits paid to class fee holders were treated as stock-based compensation expense. Since the transaction and going forward, as those original Class B units converted to common units or straight common equity, we have and continue to expect to recognize significantly lower stock-based compensation, a comp at a level that is consistent with the traditional stock-based compensation plan.
For the second quarter of 2022, our total stock-based compensation expense was $2.4 million. Sales and marketing costs were $65.1 million this quarter compared to $56.9 million in the year ago for, an increase of $8.1 million. This increase was primarily driven by a $6.5 million increase in deferred CAC and a $1.7 million increase in salaries and benefits due to higher headcount. General and administrative costs this quarter were $20.4 million as compared to $64.7 million in the year ago quarter, a decline of $44.3 million. This decline was primarily driven by a $36 million decrease in Class B stock-based compensation expense, a $4.2 million decrease in incentive compensation and profit interest expenses and a $1.9 million decrease in other G&A, primarily related to sales tax exposure. This was partially offset by a $1.3 million increase in payroll and benefit costs due to higher headcount.
Included in these amounts were stock-based compensation of $1.3 million this quarter as compared to $36 million in the year ago quarter. Excluding stock-based compensation costs, our G&A costs declined $9.6 million from second quarter 2021. — and finally, net income in the second quarter was 2022 was $34.0 million compared to $8.4 million loss in the year ago quarter. We recognized stock-based compensation of $2.4 million this quarter and stock-based comp related to Class B units of $47.5 million in the year ago quarter.
Turning to cash flow. Adjusted cash flow from operations was $26.8 million in second quarter 2022 compared to $59.4 million in the year ago quarter, with the decline primarily due to the decrease in billings. Adjusted cash flow from operations margin was 22.8% in the second quarter 2022 compared to 32.1% last year. Additionally, while per unit cost remained high in the second quarter of 2022, we did initially decrease our marketing spenditure as much as might otherwise. However, as marketers continue to test their investment themes throughout the quarter and unit costs remain high, we began to reduce our spend as the quarter progressed.
Adjusted cash flow from operations this quarter was impacted by net changes in working capital, excluding changes in deferred revenue and changes in deferred tax and increased cash by $13.5 million. Paid subscriber base declined from $994,000 at the end of second quarter 2021 to $898,000 this quarter, a 9.7% decline. The decline was driven by a decrease in overall consumer engagement and lower direct-to-pay conversion rates. We saw our free subscriber base continued to grow from $12 million a year ago to 15 million — 15 million subscribers this quarter, a 25% increase. declined to $0 this quarter from $823 last year, driven by a 3% increase in average trailing 4 quarter paid subscribers, combined with a 27% decrease in average trailing 4 quarter billings.
The increase in trailing 4-quarter paid subscribers is still being significantly impacted by the rapid increase in our subscriber base in the first half of last year. The decrease in trailing 4-quarter billings is due in part to second quarter 2021, our second largest quarter ever, falling out of the trailing 12-month calculation. Additionally, we believe that the billings decline is also due to the volatile economy that has persisted since first quarter 2022, leading subscribers and potential subscribers hesitant to engage for the time being. As Mark mentioned earlier, we’re actively working to reduce our expenditures, both through a reduction in overhead and through reduction in direct marketing expense.
Initially, in our Phase 1 effort, which has been largely completed, we identified $27 million in annualized reductions to budgeted overhead, which represents an approximate 11% reduction. Approximately $20 million of that $27 million were in the March year-to-date run rate of overhead expenditures, and approximately $7 million represents eliminated future budgeted spend. Going forward, this should represent approximately a $1.7 million reduction to monthly overhead costs beginning in July. This is before any severance expense that will be charged and disclosed with our third quarter report. In addition, we’re planning a second phase of overhead reductions that we’re currently identifying and we approximate that amount as an additional $10 million on an annualized basis.
We estimate that all of this $10 million would have been in the June year-to-date run rate. This would take our total overhead reductions to approximately $37 million on an annualized basis or approximately 15% of our 2022 budgeted overhead. Once the second phase is completed over the next couple of months, this will take our total month fleet reduction to overhead and expenses to approximately $2.5 million per month in aggregate, and this should begin roughly in the fourth quarter.
Additionally, in led to sustain high cost of marketing, we’re targeting an approximate $37 million reduction to direct marketing expenditures in the second half of the year as compared to the first half of 2022. This equates to an approximate $6 million reduction to monthly cash direct marketing expenditures in the second half of ’22 as compared to the average monthly amount in the first half of the year. However, as Mark mentioned, this reduction will be dependent on market factors. The marketing efficiency improves, we may decide not to cut marketing to this degree and instead focus on efficient subscriber acquisition. So we believe these are both necessary and prudent steps as we look to navigate the current macro environment.
As the market stabilized, future opportunities for growth and expansion will present themselves, and we’ll be in a much better position to execute after having taken these actions. However, until that time, we’re focused on increasing the efficiency of our cost structure and our overall business. Finally, during the quarter, we repurchased about 300,000 shares of common stock for approximately $1.5 million in total value. However, such purchases were ceased in early April. Program to date, we repurchased 3.0 million shares for $16.4 million.
And with that, I’ll turn the call back over to Mark.
Mark Arnold
Thanks, Dale. Just a final thought for me before we move to your taking your questions. As you all know, financial markets are cyclical, and our business reacts and adapt to changes in the market environment. That is what we have done throughout our company’s history, and that is what we’ve done so far this year. As the market has come down and customer acquisition costs remain high, we are adjusting our marketing spend and our overhead accordingly. And I expect that will continue through the second half of the year.
As I’ve said before, we make decisions with a long-term view in mind and try to balance growth with profitability, but always with an eye on profitability. Despite the recent market disruption, we are fortunate to be financially strong with positive cash flow, a strong cash position and no debt. And the actions we are taking now will put us in an even stronger position going forward. As a significant shareholder, that is what I would want to see for management, and that is what we are doing.
Thanks. And I’ll turn the call back over to the operator for your questions. Operator?
Question-and-Answer Session
Operator
[Operator Instructions] Our first question is from Devin Ryan with JMP Securities.
Devin Ryan
I want to start with a question just on kind of the interplay between free and paid subs, obviously seeing great growth still on the free side. And so what I want to dig in a little bit is when you think about kind of that new product development and what you guys are working on, is there an evolution of demand at all, meaning the types of products that customers may want or when you think about that huge tail of free customers, there may be other types of products that aren’t in, call it, the arsenal today that you should be delivering and maybe even low-cost products just to get them into the platform, paying something and then you can grow with them from there. So I’m just curious, as you think about that new product development, the ability to convert more of those 3 and maybe the strategy evolves a little bit.
Mark Arnold
Yes. Thanks, Devin. A couple of issues you touch on there. One is price. And so as you know, I think, we feel like we cover the price spectrum pretty well. We’ve got certainly expensive high-priced products that cost upwards in the thousands of dollars per year in subscription, and we’ve seen nice conversion rates from our historic customer base in that category. But I think your question goes more to how do you get more free free customers to convert over to the paid status? And could you change your pricing strategy to increase the number of conversions coming across. And I appreciate the logic of what you’re describing. Of course, as I’ve described in the past, what our marketers are doing is constantly testing price sensitivities around our offerings.
But I think as you also know, in our introductory price points, we go under $200 and often under $100 sometimes at price points that look like $29, $39, $49 for a yearly subscription. And when that fulfilled monthly, we think that’s very, very approachable from a price standpoint. And so we continue to test around those things, but those are pretty well established price points for us, and we feel like that’s an incredible value to the subscriber base even in the free status at those price points. In terms of the content offering, that’s exactly what I was trying to describe in my comments earlier. What our editors are doing is as the markets have changed and come off of the bull market run, which I think I don’t know if you saw indyKessler and — the Wall Street Journal had a nice article about that this morning. But as folks have reevaluated what their investment strategies are, — what we’ve done in turn is put greater emphasis on investment strategies that are more appropriate for this economic environment.
So we’ve toned down our marketing messages around the Gogo alpha-seeking products and turned our marketing emphasis more towards more value creation and often more trading type products. So a lot of what we’re seeing now, we just respond to relate to macroeconomic products and messages as well as more short-term trading strategies and messages as well. And so we continue to experiment around that. And that’s kind of the color we were trying to describe in our marketing spend is our editors try to put forth ideas in content and marketing around what the subscriber base would respond to. And that’s a little color on what we do there.
Devin Ryan
Okay. Terrific. And then just a follow-up. You guys have weathered many environments and come out on the other side stronger. Right now, you have a very strong capital base and solid floating. I’ve covered this space for 20 years, and there is cyclicality. And so this doesn’t feel normal in any way, and the pendulum will come back. But you guys are on the larger end of the spectrum. When you look at kind of the individual publisher side and what else is out there in the market, like are we seeing capitulation or close to it yet where folks may understand that like now is the time to partner with market-wise. And so there’s maybe an acceleration in appreciation that being a part of your platform could really be helpful, especially when engagement is not at, call it, a normal level or close to peak levels?
Mark Arnold
Yes, that’s a good question. I appreciate that, and it’s timely. I can tell you, I can’t speak to where maximum market capitulation is for smaller publishers because we’ve never been public until now. And so we haven’t been through one of these cycles with the public company platform and with the main recognition that people would normally respond to us. But what I can say is I can tell you that we’re receiving more inbound inquiries than ever in our M&A pipeline and in particular, around smaller publishers. To your point, I think we have some qualities to our business in both scale and financial strength that others don’t. And I think people are recognizing that and our M&A process is reflecting that. We have had a number of inbound inquiries from folks and we’re in discussions. I can’t comment on specifics, but we are busier than ever on the M&A side. And a lot of that volume includes small- to medium-sized publishers who don’t necessarily have the financial strength that we do.
Devin Ryan
Okay, great. I’ll leave it there. Thanks.
Operator
We have reached the end of our question-and-answer session. I would like to turn the conference back over to Mark for closing remarks.
Mark Arnold
Yes, thank you. I just want to thank everyone for your participation in today’s call, and thank you very much for your interest and market-wise. Have a good day.
Operator
Thank you. This does conclude today’s conference. You may disconnect your lines at this time, and thank you for your participation.
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