MKTW - NASDAQ

Thank you and welcome to the MarketWise First Quarter 2023 Earnings Call. During today’s presentation, all parties will be in a listen-only mode. Following the presentation, the conference will be open for questions with instructions to follow at that time. As a reminder, this conference call is being recorded. I would now like to hand the conference over to Jonathan Shanfield, Vice-President of Investor Relations at MarketWise. Please go ahead sir.

Thank you and good morning. We appreciate you joining us on today's conference call to discuss MarketWise's first quarter 2023 financial results. With me on the call today, we have Amber Mason, our Chief Executive Officer; Stephen Park, our Interim Chief Financial Officer; and Lee Harris, our Senior Vice President of Financial Planning & Analysis Before I get started, I want to point out that we've also published a supplemental earnings press presentation on the Investors section of our website www.marketwise.com under the Quarterly Results tab. This document is designed to provide additional information and context to our current earnings release and 10-Q filing. We hope you find it's helpful in understanding not just the current quarter's results, but also the way we look at the business. We welcome your feedback as we work to improve our communications and give you the information most relevant to our performance. For those of you participating in our conference call via webcast, we are sharing a few slides to highlight certain information we are discussing during the call. All of the information presented in those slides is also available in the content of this call or in a supplemental earnings presentation I described above. 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 subscribers. 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 our 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 as a substitute for, or in isolation from GAAP measures. Reconciliations to non-GAAP measures can be found in our earnings press release and SEC filings. Now, I'll turn the call over to Amber.

Thanks Jon and good morning everybody. Welcome to our first quarter 2023 earnings call. On this morning's call, I will provide a brief overview of our first quarter results. I'll tell you why I think we're in one of the greatest businesses in the world, and I'll show you some progress on our strategic plan. We've also put together a supplemental deck to this earnings call. There's some cool stuff in there that should give you more of an operator's perspective on business. Steve will wrap-up with a more detailed review of our financial results, and then we'll take your questions. Let's get started. First, touching on our Q1 results. The market has been volatile and economic uncertainty persists as it has over the last 18 months. Through all of this, we have stayed committed to the course we set in 2022, specifically to reign in overhead costs and direct marketing spend. I'm pleased to report that we have maintained our expense discipline. In the first quarter of 2023, direct marketing spend was roughly $24 million lower, on a cash basis, than the first quarter 2022. Additionally, our overhead costs were down $6.3 million on the same basis. When times are tough, we tighten our belts to maintain profitability. Revenues on a GAAP basis were $126.2 million, a decline of 7.7% as compared to the prior year. Billings declined 28.5% year-over-year to $97.2 million. However, given our cost discipline over the past year, we delivered $30.6 million in net income from operations for the first quarter, an increase of $13.1 million or 75.7% as compared to the first quarter of 2022. In addition, our adjusted cash flow from operations was $3.9 million, an increase from $1.1 million from first quarter 2022. As we discussed on last quarter's call, we paid our annual employee and management bonuses in the first quarter. While we reported higher adjusted cash flow from operations as compared to the prior year, these bonus payments hit our cash flow results for the period. This will be our normal practice going forward and we would expect our cash flow and adjusted cash flow from operations margins to be lower in each first quarter as compared to the remainder of the year. Despite the difficult market environment, we're pleased with our ability to cut spending and achieve these results, but we know we can do better. As I mentioned on our last call, I've been in this business for over 17 years. Many of them spent operating one of our largest revenue producing publishers. Given my experience, I know that MarketWise can create enormous value for all our stakeholders, including employees and shareholders. It's hard to see right now with the drop in the market and our results since we've gone public, what an extraordinary business financial publishing is. So, I want to show you a little bit of what I've seen and learned during my career here, why I love working in this industry, why I think this business has such extraordinary potential. And before we begin, I just want to give a little hat tip to Richard Russell, who wrote the well-known Dow Theory Letters for decades, and to my colleague, Brian Hunt, who helped show me the ropes years ago. So, why do I love what we do at MarketWise? First and foremost, financial publishing has an unlimited market because we sell online and not in a brick-and-mortar store, we reach people all over the country and the world. We're also scalable. We sell our product, data, and research to thousands or tens of thousands of people without increasing our cost of production. We have low overhead and we're capital efficient. We don't need an extremely large staff, just the right talent. And we don't need equipment or physical inventory to generate revenue. Our largest investments are in people and marketing and we can scale those up in boom times and scale them back when they need to. And we have an amazing file of customers. Once we develop a relationship with our subscribers and create a track record of success, we find they're willing to buy multiple products from us. The best potential subscriber is an existing subscriber. And on top of that, we get to help people. We're sharing ideas and giving them tools to control their financial future that wouldn't otherwise be accessible. In other words, financial publishing is an incredible industry. We can do good work, attract top quality talent, charge premium prices, keep our costs low, and produce high margins. Even when subscriber engagement is down, like now, this is still a great cash generating business, and I have great optimism for our future. On last quarter's call, I outlined five priorities for the coming year. Let's take a look at how we're doing. First, I believe it's most important to serve our subscribers well. Our publishers are working hard to provide great investing ideas for the current market. And more importantly, we're exploring what our experts believe are the big ideas in the next 12 months and beyond. For example, most recently, our biggest hits in terms of sales and subscribers are coming from trading and software products. As for investing themes, we're seeing increased interest in artificial intelligence and macroeconomic stories, what we like to call doom and gloom. As always, we look to enhance our lineup and bring new ideas to market. In the quarter, we introduced 12 new products and retired another eight publications. Because we're always looking for ways to add value to our subscribers, our long-term readers, the folks who know us well, including our high and ultra-high value subscribers remain loyal to us, and that's what I want to show you. In our new supplemental deck, we provide a few charts which reveal more about the long-term nature of our subscribers and the impact of renewals and revenue retention on our cash flow. Let's take a look. On page 12, you'll see we have over 290,000 membership subscribers, what we used to call lifetime readers. And that number continues to grow even as we have navigated a difficult economy in the past 18 months. Also on that page, you'll see that on average, our membership subscribers purchased approximately five additional subscriptions, including an additional membership subscription. And membership subscribers typically spend over $5,000 after their initial membership subscription with us. Then on page 11, you'll see our renewal revenue. I think this is one of the best measures of the success of our business. Over the past five quarters, we've averaged a total of $40 million in upgrade and renewal billings each quarter. Long-term subscribers are the core of our business and I'm proud of the trust they have in our publications and our company. I wanted to point out that along with some other information in the supplemental earnings presentation, we have started highlighting a subset of our free subscriber base, which we call active free subscribers. Active free subscribers are those free subscribers we have engaged during the most recent quarter. This group of free subscribers is most likely to continue to consume content and convert to a paid subscriber in the short-term. Active free subscribers decreased by 0.6 million or 11.5% to 4 million this quarter as compared to 4.6 million as of March 31st, 2022. The year-over-year decline in active free subscribers is a result of the general decrease in engagement in the retail investing community. I added this metric because this is how I track our success in converting free readers to paid readers. And I want to give you more insight into the way I look at our business. Another key component of our strategic plan, as you know, is to continue to focus on cost, and improve our margins. We did a lot of work on this last year and while that effort was successful, we're still looking for opportunities to become even more efficient and profitable. Last quarter, I mentioned that our professional fees, mostly accounting and legal, had increased during our go public transaction and it was time to take a closer look. Year-over-year, we have reduced our professional fees approximately 24% and we are still looking to bring additional work in house for additional savings. Talent retention and acquisition are critical to this business and we are focused on retaining the best of the best and bringing in new talent to our lineup. We are well down the road to bringing a permanent Chief Financial Officer in house, someone who can be a partner to me in guiding the organization. Additionally, hiring a Chief Operating Officer, to work between our revenue producers and our corporate services, will improve our performance and align both sides of our business. I'm also focused on the culture of our company and the work our teams do together. We have a fantastic group of people here and when we all row in the same direction, we get there faster. We also continue to work on ways to improve our share price and the liquidity in our stock. We just approved a quarterly dividend of $0.01 per share for our Class A public shareholders, and a quarterly distribution of $0.01 per share for our Class B shareholders. As of this morning, this dividend represents a 2.4% annual yield. Compare that to the current S&P 500's yield of 1.7% and the Russell 2000's yield of 1.6%. We're able to establish this dividend because we generate positive annual cash flow even at the bottom of the cycle. And even after the dividend, we have plenty of cash available take advantage of the future growth opportunities. Over our 20-plus year history, our company has consistently returned capital to its owners. This dividend is another step in our evolution as a public company. As we've discussed before, the overall market for M&A remains attractive. We continue to look for ways to add existing businesses that will complement our operations, including bringing on new editorial teams, software, and technologies. The current market for potential transactions remains active and we are evaluating opportunities to determine the right fit, strategies, and valuation. Once again, while we are active in this market, we are also committed to sound financial transactions with acceptable levels of risk and return for our shareholders. Finally, before I turn it over to Steve to give you a rundown on the financials, I want to address the recent shareholder filing asking for engagement with the Board and management. I'm happy to share that we recently came to an agreement that all parties feel good about. Our proxy statement will include a board slate that is a combination of our original Board members and some new faces. These folks are known to us and are working for the best interest of the company and our shareholders. With this agreement in place, we can return our focus to our mission, delivering great investing ideas to the retail investor. With that, I will turn the call over to Steve to review the financial results of the quarter.

Thanks Amber and good morning everyone. As Amber described, market factors that impacted our business throughout 2022 continued through the first quarter of 2023. Retail investors remain uneasy. They continue to show concerns about the highly volatile economy, the trajectory of inflation, and the potential for recession this year. Coupled with this uncertainty and volatility, investors were also impacted by recent bank failures, concerned for additional failures, and the lingering issues of credit availability and deposit safety. As a result, we continue to see retail and self-directed investors hesitate to engage in purchasing new investment research and this continues to negatively impact our billings and financial results. Just a reminder, and as Jon mentioned earlier, we published a supplemental earnings presentation this morning along with our press release. This information can be found on our website ww.marketwise.com under the Quarterly Results tab. In the first quarter of 2023, our landing page visits were approximately 24 million, up 3% from fourth quarter 2022 levels. However, our overall conversion rate was approximately 15 basis points lower this quarter as compared to the prior quarter. This is the first quarter in the past year, we have seen a meaningful drop in the overall conversion rate of customers coming to our websites. We believe daily average trading volumes at certain brokerages and our retail investor engagement tend to move similarly. In the first quarter, we saw a daily average trading activity increased 9% compared to the prior quarter, which was higher than our 3% increase in landing page visits. We believe the higher trading volumes have coincided with the banking crisis, which resulted in significant retail trading outflows from retail investors' liquidating positions and raising cash, given the panic that swept the banking sector in early March. As in the prior quarter, our subscribers were also slow, the pace of buying additional subscriptions, given the macroeconomic conditions. So, it is taking longer for our customer to move through their subscriber journey with us than in the past. However, even in this environment, our high value and ultra-high value subscribers continue to purchase additional subscriptions. This led to an all-time high in active cumulative spend by all subscribers. We believe this is another indication of customer satisfaction and that subscribers find value in our products, which is why they remain with us for the long-term. Turning to the financials. GAAP revenue was $126.2 million this quarter compared to $136.8 million for the first quarter of 2022, a decrease of $10.6 million or 7.7%. The decrease in revenue was driven by a $7.6 million decrease in term subscription revenue and a $3.1 million decrease in membership subscription revenue. Billings were $97.2 million compared to $136 million for the year ago quarter, a decline of $38.8 million. Levels of engagement declined in early 2022 and plateaued during the second half of 2022, continuing through the first quarter of 2023. We believe the decrease is due in large part to reduced engagement of prospective and existing subscribers. Sequentially, our 97.2 million in fourth quarter billings decreased 3.8 million or 3.7% from fourth quarter 2022. This decrease was primarily driven by lower conversion rates in our various marketing campaigns in the quarter. Approximately 37% of our billings came from membership subscriptions, 62% from term subscriptions, and 1% from other billings in first quarter 2023. This composition of billings remains unchanged from the first quarter of 2022. As we discussed last quarter, our cost reduction initiative that we began in second quarter 2022 were successful in reducing both run rate overhead expense and direct marketing expense through the end of 2022. As a reminder, we achieved approximately $36 million in annualized run rate overhead savings as compared to first quarter of 2022. In addition, we reduced marketing over the second half of the year by approximately $40 million. Throughout the first quarter of 2023, we have maintained this expense reductions and continue to look for further efficiencies in our overhead and marketing. Of course, as we have said before, marketing is our most significant variable cost and our use of direct marketing and the related cost is dependent on market factors. If we see subscriber engagement in the per unit cost of acquisitions improve, we may look to increase our direct marketing spend from current levels and focus subscriber acquisition. So, even in the face of declining subscriber billings, as a result of these savings, we recorded GAAP net income from operations of approximately $30.6 million, an increase of approximately $13.1 million or 75.7% over the prior year's quarter. On a GAAP basis, total operating expenses were reduced approximately $23.8 million or 20% as compared to the first quarter of 2022. Cost of revenue was $15.3 million this quarter compared to $17.6 million for the year ago quarter, a decline of $2.3 million. This decline was driven primarily by increase of $1 million in outsourced customer service fees, a $0.8 million decrease in credit card fees, and a $0.6 million decrease in salaries and related benefits expense. Sales and marketing costs were $48.7 million this quarter compared to $68.2 million in the year ago quarter, a decrease of $19.5 million. This decrease was primarily driven by a $25.1 million decrease in direct marketing expense related to our cost reduction, initially -- the initiative partially offset by $4.4 million increase in the amortization of deferred contract acquisition costs, and a $1 million increase in salaries and related benefits expense. General and administrative costs this quarter were $28.0 million as compared to $30.5 million in a year ago quarter, a decrease of $2.5 million. The decrease was primarily driven by a $1.6 million increasing compensation, a $0.9 million reduction in state, franchise, and sales tax expense, a $0.7 million decrease in professional fees, and a $0.5 million decrease in dues and subscriptions. This was partially offset by a $1.6 million increase in incentive compensation and profits interest expense. Adjusted cash flow from operations was $3.9 million in the first quarter of 2023 compared to $1.1 million in the year ago quarter, with the increase primarily due to a $7.6 million increase in net income, and an $8 million change in the fair value of derivative liabilities, offset by a $13.5 million decrease from working capital accounts. Adjusted cash flow from operations margin was 4.0% in the first quarter of 2023 as compared to 0.8% last year. As we discussed on our last quarterly earnings call, we made annual bonus payments for the company first quarter of the year. While we accrue for this expense on a GAAP basis throughout the year, the timing of the payments impacts our cash flow and adjusted cash flow from operations in the first quarter. We believe that our cash flow margins will trend back towards prior period levels throughout the remainder of the year. Our paid subscriber base declined from 909,000 at the end of first quarter 2022 to 777,000 this quarter, a 14.5% decline, driven by a decrease in overall consumer engagement. As compared to fourth quarter 2022, our paid subscriber base was down 64,000 or 7.6%. As Amber described earlier, we are now providing information on active free subscribers, a subset of our total free subscriber file. During the quarter, active free subscribers decreased by 0.6 million or 11.5% to 4 million as compared to 4.6 million as of March 31st, 2022. The year-over-year decline in active free subscribers is a result of decreased engagement with our subscriber community as consumer engagement continues to be sought. Average revenue per user declined to $493 this quarter, from $636 in first quarter 2022, driven by a 31% decrease in average trailing four-quarter billings combined with an 11% decrease in average trailing four-quarter paid subscribers. We believe the billings decline is primarily due to the volatile economy that persisted since first quarter of 2022. This is less subscribers and potential subscribers hesitant to purchase or upgrade as they assess the latest economic data and the impact of the Federal Reserve's recent and future interest rate decisions. As Amber discussed earlier, our initiation of a quarterly cash dividend earlier today is another step to increasing shareholder value. We view the $0.01 per share quarterly dividend has a conservative capital return to our shareholders, allowing them to benefit from our cash flow generation, while still providing the company with more than sufficient cash balances for operation. We're also confident that providing this dividend does not impact our ability to take advantage of any future growth opportunities, including acquisitions that may become available to us. Finally, before I turn it back to Amber, I want to emphasize that while our results are not where we want them to be, we have made progress in improving our efficiencies and are generally pleased with the financial results given market conditions. As we continue to wrestle with the impact of declining subscriber counts, along with slower movement through our sales funnel, we have been able to deliver improved income reduction in our operating expense base and positive cash flow. We continue to look for further opportunities to create efficiencies, both in operating and overhead reductions, where we feel we can make meaningful improvements while maintaining the strength of our core businesses. And with that, I'll turn it back to Amber.

Thanks, Steve. To conclude, I see great opportunity at MarketWise and I'm excited to make progress every day. Our team is working hard to deliver high quality service to our subscribers and improve profitability. I'm also extremely pleased that we're in a position to provide a dividend and begin a program where our shareholders can regularly participate in our profitability. I know we've said this before, but this truly is a great business focused on serving the retail investor in a way which we know is both unique and valuable. Our principles define our mission. Deliver great investing ideas to the retail investor. Deliver these ideas written in a way that is easy to understand and execute, and treat our subscribers the way we would want to be treated if the roles were reversed. I will now turn it over to the operator for your questions.

Thank you. We will now be conducting a question and answer session. [Operator Instructions] Our first questions come from the line of Kyle Peterson with Needham. Please proceed with your questions.

We'll see if we could start out on churn at least in the paid subscriber base. Could you guys give us an approximation as to where churn was in the quarter, just trying to separate out kind of where gross subscriber additions were and kind of where how churn impacted the change in paid subs this quarter?

Hey, Kyle, this is Lee Harris. So the churn was generally, it was, we're still in this period of a normal range. We were on the slight end, the higher end of the normal range this quarter, but really nothing out of the ordinary. The churn kind of ebbs and flows with the anniversary of certain campaigns from a year prior, and it's actually already looking quite a bit better as we go into Q2. Really what's happened with subscribers is we just don't have a lot of new subscribers coming onto our list right now. And of course, we've cut back our marketing spend, so that also impacts it. And honestly, I think the paid subscriber list is going to continue to be under pressure until we see a change in the macro environment that's going to find subscribers more willing to jump in and purchase new subscriptions. It's really, in my mind, not a churn issue, it's an acquisition issue.

We are seeing some green shoots here and there for themes that subscribers are getting excited about. As I mentioned earlier, we're seeing good results in our higher price products for software and tools and themes around artificial intelligence and the macroeconomic environment. So we'll be moving those themes into the front end and looking to boost acquisition by talking about what the subscribers want to hear about right now.

Okay. That makes sense and is helpful. I wanted to squeeze in a follow-up here, particularly on G&A. Nice to see the sequential improvement on G&A. It sounds like there's still some more wood to chop here, but I guess how should we think about G&A at least while we're in, over the next few quarters, while we're kind of in a challenging growth environment, like what's a good run rate for you guys?

I think Lee should take that one.

With G&A right now, we've cut expenses in the last year. We still have some professional fees and centralized services that we're looking to get a little leaner on. So I think there's going to be some incremental benefit in lowering of that rate, but right now I don't think we're going to see a much larger decrease, right? Unless we really get into a prolonged period where the revenues aren't going to start improving.

Yes. Kyle, it's Jon. If you look at the year-over-year change in the GAAP G&A as a proxy for everything we do with cash, we've done a lot of wood topping as you said before. And now we're at the stage where we're looking at some of these back end costs, the professional fees of the corporate overhead that came on, as Amber mentioned earlier, during our go public transaction, and we're trying to take that even lower where it's necessary. We're going to have to bring some folks in and then stop paying some outside vendor stuff. So there's going to be a little bit of a put and take in there, and we don't know what's going to all fall out. But we know that at the end of the process, we'll be in a better place than we are now. I just don't think we have a dollar change to report on the significance of that yet. I do think that we're going to maintain roughly where we are now from an efficiency standpoint and not slip backwards is the goal and then add to it where we see significant savings, but there's going to be some puts and takes along the way.

Okay.

Yes, Kyle. That's the continued area of focus for me. Yes. We want to say lean on centralized costs.

Okay. That's great to hear. Thank you, guys.

Thanks Kyle. Thank you.

Thank you. [Operator Instructions] Our next questions come from the line of Jason Helfstein with Oppenheimer. Please proceed with your questions.

Thanks. So, Steve, Amber now that you've had some time to really review the portfolio. I don't want to put words in your mouth, but it sounds like you're pretty confident in the content and kind of no major changes there. You did talk about maybe kind of prioritizing certain content and kind of moving around, but that there was really no major changes that you wanted to make. That's question one. And then question two, does it look like ARPU basically has bottomed at this point? And so really again, to the point, it's really about adding new customers, it's not about the existing customers kind of like buying less or pairing back. Is that kind a fair way to look at where we are right now? Thank you.

Sure. So our content is constantly being pruned and added to by the teams and our individual publishers. So day-to-day, quarter-to-quarter, they're looking at what's working and what's not working. So they're moving faster on that, then I would be sort of up in a centralized position. My concern is that what we're doing is producing great results for subscribers, and that's something I'm also keeping a close eye on day-to-day. So I think what we'll see going forward is a lot like what we've seen in the past, will be row creating into new products where subscribers have interest and sun setting the products that are no longer performing for us. And then ARPU, yes, we don't expect to see significant drops there. Our customer -- our loyal customer base is still there. They're still buying. People are moving through our funnel more slowly than they have been in the past, but we're confident with the base of folks who are with us. You want to add anything on that, Lee?

No. That that's right. I think we're going to stay in a pretty steady zone here in the near future and then hopefully, we'll get some momentum going with revenue and acquisition and start to turning other way.

And then maybe just one follow-up. Are you looking at any M&A at this point or is the thought just kind of head down on operations?

So we're absolutely looking at M&A. So we're getting more inbound inquiries now that we're public and that folks are struggling a little bit. So we're getting more reach out than we have seen in the past. And we're also pursuing other ideas that we're excited about. So there's lots in our pipeline. We're just picky about it, and we want to make we get the right deal on the right terms.

Thank you.

Thank you. There are no further questions at this time. I would now like to hand the call back over to Amber Lee Mason for any closing comments.

Great. Thanks, everyone, for participating in today's conference call and for your interest in MarketWise. Have a great day.