MarketWise, Inc. Q3 FY2021 earnings call

• Successfully closed transactions with Ascendant and began trading publicly in late July. - Entered into a $150 million revolving credit facility with a syndicate of five banks, providing backup liquidity and acquisition financing capacity. - Board of Directors authorized repurchase of up to $35 million in shares of Class A common stock. - Third quarter revenues grew 43%, total subscribers (free and paid) grew 54%. - Noted market dynamics related to travel and leisure boom affecting online engagement, but saw early signs of normalization in October with increased landing page visits and new paid subscriber additions. - Business has been profitable for 20 years, with a focus on long-term growth and profitability, balancing subscriber growth and profitability. - Stock based compensation changes due to conversion of Class B units to common equity, resulting in lower future stock based compensation.

In the third quarter of 2021, MarketWise's revenue was $140.7 million, a 43.1% increase compared to the third quarter of 2020. Paid subscribers grew from 786,000 in the third quarter of 2020 to 965,000 in the third quarter of 2021, a 22.8% increase. Free subscribers increased from 8.1 million in the previous year to 12.8 million in the third quarter of 2021. ARPU improved to $772 from $752 last year. Billings decreased by 8% to $238.1 million. Year-to-date billings totaled $578 million, exceeding last year's $549 million. Year-to-date adjusted cash flow from operations grew to $192 million compared to $134 million for all of 2020.

• Adjusted 2021 full year paid subscriber forecast to 970,000 from 1.08 million. - Reduced 2021 full year billings forecast to $740 million from $750 million. - Adjusted adjusted cash flow from operations forecast to $210 million from $212 million. - Adjusted GAAP revenue forecast to $540 million from $560 million, mostly due to sales mix shift toward lifetime sales.

• Increase in advertising costs leading to higher per unit subscriber acquisition costs. - Market environment changes affecting user engagement and subscriber growth. - Execution of stock repurchase program dependent on market conditions and other requirements.

Q: First question, just want to dig in a little bit on the environment and kind of the travel and leisure boom. Obviously, there's a couple aspects of that, that you guys highlighted. There's one, the impact on advertising and marketing and pushing rates higher, but then two, just people taking vacations and traveling for first time since pandemic, which makes sense. I'm curious how the marketing and advertising market is around travel and leisure today, are you seeing them pull back kind of where that pendulum is? And then also, as we think about maybe not the fourth quarter but looking into the next year, if you do have maybe still little bit higher rates of advertising and marketing, but people are engaging more. I mean, you're still generating very good returns on investment. I know it's not where it was in the first half of this year. But would you maybe lean in more just because ultimately your growth is important and you're still, again, getting very good long term returns on that investment?

A: Devin, the second half and what you just said there is spot on exactly. I mean, we have not seen significant reductions in the volume of advertising from the travel and leisure crew. I mean, it made a tilt off here a little bit but nominally that wasn't the change. What we are seeing instead -- and that's sort of enumerator effect in our costs, that's just the ad cost. The other component is conversion rates, engagement and conversion rates. And that's what we're alluding to, that's where we're seeing the improvement. In October, we did mention that the stats for engagement were noticeably better in October, both in terms of like landing page visits. We also said that conversion rates were higher kind of across the board free to paid -- and direct pay, free to paid and then within our distinct subscribers, you also saw improved conversion rates in October. So we're starting to see that and that has continued basically through the November month to date. So to your point, first quarter of 2021 was sort of one of those anomalous quarters where everything was incredible. Costs are low, conversions were high, engagement was full. We can be very successful and produce very good returns even with these higher elevated display ad costs, as long as we can get back to some normal level of customer engagement. We're pretty good at connecting directly with customers and we think our marketing copy is good. We think our content is very good. And with those two ingredients, the only third ingredient we really need is [surmise] back on screens, people paying attention to these sorts of things and we are starting to see that, and that's very encouraging.

Q: And then I guess a follow-up here on the buyback, great I think to see that and just shows how you guys were thinking about the sock and also just evolving the capital deployment strategy. As we think about the $35 million, how does that factor into the bigger picture view at the firm around excess capital? And appreciate you're generating a lot of excess capital in the business model. But I guess maybe the question is more how you guys are thinking about your excess capital position. And then just now that you're public and I know having dialogs around new opportunities. How incremental investments evolving or the pipeline of even inorganic, any more color you can share around kind of just developments that have happened kind of post being a public company would be helpful?

A: So we've gone through some changes recently. Historically, we have generally aspired to keep at least $100 million of cash on the balance sheet. And frankly, we've always been like I think pretty much well in excess of that. We've been $240 million of cash on our balance sheet. But generally I would say that our target has been $100 million, and that's mostly just for rainy day for M&A but basically, it's primarily as a contingency and as backup. As Mark mentioned, we've been profitable every year of our existence. But generally speaking, I would still target cash around $100 million. We have a backup line of credit now, which helps tremendously. So if you look at that liquidity, you've got essentially -- we’ve got $130 million of cash and $150 million of incremental capacity, you've got $289 million of total capacity. And if you look at our earnings rate through the course of the year, we've been there in something between $12 million to $17 million a month. So we're going to build cash pretty quickly given that we're retaining earnings and not paying them out in form of dividends. So we will see a cash build on the balance sheet. We do have very active interest in M&A and that was one of the primary motivations for going public. So you should think of the most likely use of funds for the cash on the balance sheet will ultimately be rebuilding a chest to be active in the M&A markets. We intend to retain earnings for now and build that war chest for acquisitions. So I think right around 100 I would still target as the minimum. But frankly, you're going to see the cash kind of from where it is now, it should just continue to grow 3 times.