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spk03: Greetings. Good morning and welcome to the MarketWise Second Quarter 2021 Earnings Conference Call. During today's presentation, all parties will be in a listen-only mode. Following the presentation, the conference line will be open for questions and instructions to follow at that time. As a reminder, this conference call is being recorded. I would now like to turn the call over to Mr. Jamie Lillis, Managing Director at Solberry Trout. Please go ahead, sir.
spk06: Thank you, Operator, and good morning. Thank you for joining us on today's conference call to discuss MarketWise's second quarter 2021 financial results. On the call today, we have Mark Arnold, Chief Executive Officer, and Dale Lynch, 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 statement. Information concerning our risks, uncertainties, and other factors that could cause results that 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 as a substitute for or in isolation from GAAP measures. Reconciliations to non-GAAP measures can be found in our earnings press release and our SEC filings. Now I'll turn the call over to Mark.
spk07: Thank you, Jamie, and good morning, everybody. Before I get started, I'd like to take a moment to thank all those people who helped us through our SPAC process and public offering, which culminated in our first day of trading on the NASDAQ on July 22nd, under the ticker symbol MKTW. The many months of hard work by our fantastic team here at MarkWise, our trusted advisors, and the loyal support of our subscribers contributed to the success of our offering. So thanks to all of those folks for all of your hard work and support. Importantly, our public listing provides MarketWise with additional flexibility to take full advantage of the growth opportunities that lie ahead of us, including investments in technology and our community, additional partnerships, and of course, M&A activity. I'd like to start today by providing a brief overview of MarketWise and our mission for those investors who were not able to hear our story during the roadshow. Then I'll briefly review the highlights of our second quarter performance before I turn the call over to Dale for a more detailed discussion of our results. We'll then open up the call for your questions. So to understand what we do, I think it's important to understand our origin story, and you'll see how a simple idea over the last two decades has really turned into what has proven to be a scalable platform to deliver what I believe is best-in-class investment research for the self-directed investor. We have a very unique set of products at a full spectrum of price points, and investment content that offers our audience an incredible value proposition that cannot be found elsewhere. Institutional research is the closest in content to what we provide because it is actionable, but it is usually hard to digest and very expensive. What we do is provide actionable content designed for self-directed retail investors and deliver it in a way that allows them to form long-term relationships with world-class experts to help them meet their financial goals. In the 80s and 90s, the independent investment research space was inconsistent, and there were very few credible offerings available to the public that we would characterize as high-quality, trusted research. Our founders surveyed this landscape and knew there was a better way to provide independent research to the self-directed investor. That started with delivering great content and treating the readers how we would want to be treated if our roles were reversed. When we do that right, a relationship is formed between the reader and the writer and goodwill is built up between the reader and the operating brand. Fast forward two decades, and today we are a leading independent research subscription service serving millions of self-directed investors with a diverse portfolio of operating brands. Our research is a trusted source of financial information for our subscribers, and we have a community today of 13 million people, and approximately 1 million of these are paid subscribers. At present, we have 12 primary consumer-facing brands that offer more than 160 products, and we continually look for new ways to strengthen our portfolio of products and services. Given our success and the size of our subscriber base, I'm often asked, what is your secret sauce? Well, there are really four main drivers of our success. It begins with our powerful content platform. Our compelling content creates strong relationships between our editors and our customers. The second driver of our success is our strong customer focus. We are very focused on our customer satisfaction, and you can see this in our more than 90% annual revenue retention rate. The third factor is our business model, which is extremely scalable with very little in the way of CapEx requirements. Our digital platform, high average revenue per user, and high margins contribute to our capital efficiency, and we can scale our business very cost-effectively. Finally, we are extremely data-driven. leveraging real-time data feedback for campaign efficiency and the use of artificial intelligence and machine learning to improve the efficacy of our operations. We believe our global addressable market is very large and growing, and it includes asset managers, financial information services companies, and investment research. We believe the trend is increasingly for investors to manage their own money, and we think all three of these industry segments are in play for us. In the U.S. alone, there are over 60 million self-directed investors. And on top of this significant opportunity, we believe our addressable market is set to grow even faster as the millennial generation ages and their investable assets increase over time. In our eyes, the market for self-directed investing is ripe for innovation and disruption and changing dramatically and doing so in ways that strongly favor our business. First, we have a rapidly increasing retiree population with 10,000 Americans retired in every day. This is an age group that has significant investable assets and very much wants investment education. As a result, baby boomers represent the majority of our customers today. However, the aging of millennials is a significant future opportunity for our business given that 72% of this generation identifies themselves as self-directed investors. Every month we provide actionable investment ideas, and this premium research is complemented by our software and easy-to-use tools. We are able to keep our subscribers engaged and provide our subscribers with insights they're looking for at prices they can afford. Other providers of such diverse content are typically for institutions and inaccessible from a price standpoint for most self-directed investors. Other solutions only serve a limited segment of the market, which many investors quickly outgrow. We believe that investing is a lifelong pursuit, so we are interested in developing a long-term relationship with our subscribers. Yes, we provide investment education and research, but by no means are our products dry or boring. Our editors are tried and true investment experts, and they like to write in ways that are personally engaging for their subscribers. And when I look across the competitive landscape, this is another area where we differentiate ourselves. I'll now turn to the strategic initiatives that have driven our business over the past few years and where we are headed next. When I stepped into the CEO role in 2017, we had real opportunities to increase the scale of the business and invest in our operating companies and content. As we built out the platform, we ultimately doubled our number of lead editors, more than doubled our number of primary customer-facing brands, and more than tripled our number of products. We also scaled a sizable free-to-pay subscriber origination channel. And by the middle of 2019, many of these new initiatives had taken hold, and the business began to accelerate. Our billings grew nearly 40% between the first and second quarter of 2019, and this revenue growth trajectory largely has continued over the past two years. The story is the same in terms of total subscriber relationships, as we grew from 3.8 million in the first quarter of 2019 to 13 million by the second quarter of this year. This acceleration in growth is a direct result of the investment that we've made in the business and the fact that we have built a diverse and critical mass of content, people, and technology that allows us to drive attractive growth going forward. And this leads me to our vision for the company. We want to be the leading financial wellness platform for self-directed investors. We want to expand our reach and discoverability through new channels, consumption mediums, and branding. We want to build deep network effects by increasing social connections and leveraging our rapidly growing community. And we want to expand the use of machine learning and data science and expand our SaaS product development and acquisition. We also have many organic and inorganic growth opportunities in front of us, opportunities that have increased in number during the process of going public as we had hoped. On this front, I want to highlight that we have a long and very successful track record of highly accretive acquisitions. Over the past 10 years, we have successfully identified, acquired, and integrated a number of M&A opportunities. Typically, we look for either one, editorial content that we think will be enriching to our customer base, or two, we look for a business that is not being run as effectively as ours that we think we can bring onto our ecosystem and help to improve. On the editorial or new content front, we often identify a key area of content that we want to add or a key personality that we think will fit well in our models. We bring them onto our platform, provide a turnkey solution for them, and then integrate them onto our operations infrastructure. This has been incredibly successful for us in the past. In one recent example, we helped a lead editor scale his business from approximately 6,000 subscribers when he came on board to more than 100,000 subscribers 18 months later. And the business is very profitable. On the M&A front, we acquired a business in 2017 that was not performing well and was losing money. But we saw the potential. Once it was integrated onto our platform, the business made more than $12 million in 2020. Another example is our acquisition of Chaiken Analytics, which we acquired in January of this year. Following the acquisition, we integrated that business onto our platform and formally introduced their products to our existing subscribers in May. The Chaiken products are quite good, and the broader distribution of those products to our subscribers allowed us to quickly recoup our initial investment and we expect to see considerable opportunities for growth with their product suite going forward. Now I'd like to spend some time walking through briefly the highlights of our second quarter results before handing the call over to Dale to dive deeper into our financials. During the second quarter, our revenues grew 71.7% year over year, and our billings increased 50.4% year over year. That helped increase our adjusted cash flow from operations by 59% year over year. With these numbers, we are very pleased with our results, and this quarter was our second highest quarter ever in both billings and adjusted cash flow from operations. Our business continued to perform well as the subscribers continued to engage with and explore our research products and software solutions. That resulted in significant growth in our year-over-year results. And when you consider that a number of our senior leaders are working on the GoPublic transaction, I think that makes our results even more impressive. While we are very pleased with our financial results, I would encourage our shareholders to keep the long view in mind. We have been in business for over 20 years, always been profitable, and treated our equity holders well. And during that long history, there have been periods like this one where our year-over-year growth was up significantly. Now, we can't promise our investors that things will always go up like they did in this period. What we can do is promise to do our best to run the business as if it were our own money at risk. because it is. Our leadership team has a tremendous amount of skin in the game, so our economic interests are aligned with our shareholders. This approach has served us very well over time, and we have no plans to change that approach now that we are a public company. And with that said, I'll turn the call over to Dale to provide a deeper dive into our numbers.
spk05: Yes. Hey, thanks, Mark. So turning to our financial results, Second quarter 2021 revenue was $142.1 million compared to $82.8 million in the second quarter 2020. That's a 71.7% year-over-year growth. We continue to see the results of our significant investment in the business across our platform, our content, our people, new technologies, and our significant free-to-pay distribution channel. Billings were $185.1 million this quarter compared to $123.1 million a year ago. That's more than a 50% year-over-year increase. Approximately 45% of our billings this quarter came from lifetime sales, 54% from term sales, and 1% from other billings. Keep in mind that our billings can vary quarter to quarter due to the nature of us collecting all of our invoices up front, as well as campaign mix and efficacy. First quarter 2021 was a record well beyond our forecast at $255 million in billings. That's nearly a $100 million sequential increase. But our second quarter was also very strong, with high conversion rates, conversion rates in line with to a bit higher than those we saw in 2020, just not quite as high as they were in the first quarter of this year. Our cost of revenue is $26.8 million this quarter, compared to $27.5 million a year ago. Included in this cost of revenue is $10.6 million of stock-based compensation, compared to $15.1 million in the year-ago quarter. If you were to exclude stock-based comp from our cost of sales, sales margins of percent of revenue would have been 89% this quarter as compared to 85% in the year ago quarter, and generally in line with historical averages to slightly above. One thing I'd like to emphasize is from the time of the combination with Ascendant and going forward, the stock-based compensation attributable to our original Class B units will cease. These units were treated as derivative liabilities rather than equity prior to our merger with Ascendant. As such, they had to be remeasured each quarter, and the change in fair value was included in stock-based compensation. Also, any distributions of profits paid to Class B and holders were treated as stock-based comp as well. However, on a go-forward basis, as those original Class B units convert to straight common units, meaning straight common equity, we expect to incur significantly lower stock-based compensation consistent with that of a traditional stock-based comp plan for our employees. Moving on with the financials, sales and marketing costs were $56.9 million this quarter compared to $49.2 million last year. Included in these amounts were stock-based costs of $0.8 million this quarter compared to $1 million in the year-ago quarter. Our per-unit cost of customer acquisition increased this quarter, but the aggregate spend decreased to $56.1 million from $77.7 million in the first quarter of this year. This is a normal near-term adjustment for us. We are well accustomed to adjusting to these sorts of market fluctuations. General and administrative costs were $64.7 million compared to $84.5 million in the year-ago quarter. This includes $36 million in stock-based compensation this period as compared to $62.5 million in the year-ago quarter. If you exclude stock-based comp, our G&A costs increased about $6.7 million year-over-year. This was driven by a $3.7 million increase in incentive compensation accruals, an increase of $1.7 million in payroll and benefit costs due to increased headcount, primarily within our business units, and $1.5 million increase in cloud computing and software fees due to increase in transaction volumes and telecom costs, partially attributable to COVID as we all worked from home. General and administrative costs this quarter included $3.2 million in non-recurring expenses associated with our SPAC IPO process. So look, we ended the quarter with a net loss of $8.4 million on a gap basis compared to net loss of $81 million in the year-ago quarter. The decrease in loss is primarily due to an increase in revenue of $59.3 million as well as a $31.2 million decrease in stock-based compensation expense. This is partially offset by an increase in the amortization of deferred contract acquisition costs of $10.6 million and an increase in comp and benefits of $8.6 million as a result of aggregate increased headcounts. But we really think cash flows should matter most to investors, and therefore our emphasis and our main non-get measure is adjusted cash flow from operations. To be clear, this metric only adjusts for stock-based compensation expense associated with our old Class B profits distributions historically. And going forward, it will only adjust for any unusual or non-recurring items. This quarter, adjusted cash flow from ops was $59.4 million compared to $37.3 million in the year-ago quarter, up nearly 60%. Adjusted cash flow from operations margin, which is adjusted CFFO as a percent of billings, is 32.1% in the second quarter this year compared to 30.3% in the year-ago quarter. This brings our year-to-date total adjusted cash flow from ops to $157.3 million. That's more than the entire $134.3 million that we registered in all of last year. If you're interested in the reconciliation of adjusted cash flow from ops, that information is in our press release as well as our 8K that we filed this morning. I would like to highlight, too, our annual Rule of 50 concept that we talked to many of you about on our roadshows over the past nine months. The definition of that is gap revenue growth plus our adjusted cash flow from operations margin. We really think of it on an annual basis. But having said that, just as a proxy, our gap revenue growth this quarter was 73% and our margin was 32%. If you do the simple math, I think that's more than 50%. So keep in mind, this is one of our best quarters ever. Now let's turn to some of our key metrics. Our paid subs grew from $0.7 million a year ago to $1 million this quarter. That's a 45.5% increase. We saw our free subs increase from 6.8 million a year ago to 12 million this quarter. ARPU improved to $823 million this quarter from $748 last year, an increase of more than 10%. Total paid subs of a million this quarter did decrease nominally compared to first quarter 2021. The slight decline in paid subs this quarter is due to factors which we believe are related to the travel and leisure boom associated with the dramatic reopening of the economy. First, we saw advertising costs begin to increase late in the second quarter as the travel and hospitality industries started to market their products very heavily in digital mediums. That tended to increase our per-unit acquisition costs a bit. Additionally, toward the end of the quarter, we began to see what some are referring to as a revenge travel boom. as Americans began to make up for the inability to travel for the past year and a half. As a result, we believe it currently costs a little bit more to get the attention of prospective new customers who are venturing out rather than focusing on their investments. We focus closely on our break-even metrics. As our per-unit subscriber acquisition costs increase, we'll adjust and focus our marketing on existing customers, for which that cost is close to zero. We'll continue to evaluate our unit costs and believe that there should be some normalization as we get here into the fall and the back-to-school season. Look, this is a really good chance to explain an important concept in our business. Some of you have heard this before. This has contributed to our financial success over the last two decades. We're very disciplined around our marketing spend. We closely watch our per-unit costs versus the revenue we can bring in. Our per unit cost decrease over time will ramp our marketing spend to take advantage of the situation. That's certainly what you saw in the first quarter of this year and, frankly, throughout the second half of 2019 and really all of 2020. Conversely, as per unit costs increase for whatever reason, we'll decrease our aggregate marketing spend and we'll evaluate and we'll test and we'll adjust. That's what we saw in the second quarter of this year. The beauty of our business is is that we can adjust quickly, redirect dollars to other campaigns, and if need be, pull back briefly on new subscriber acquisition until our unit cost decrease, marketing ROI increases, or market conditions change. When we do this, subscriber additions may decline, but margins should expand. On the other hand, when customer acquisition costs decline or our marketing ROI increases, we'll increase our direct marketing spend in aggregate and we'll drive new subscriber acquisitions. Moving on, total free subs increased sequentially by 1.1 million in the second quarter this year. The momentum in building the free subscriber pool continues to be a valuable source of new paid subs. Total free subscribers of 12 million at June 30th represents a 75.6% increase as compared to 6.8 million in the year-ago period. And finally, turning to ARPUs, second quarter ARPU was $823, an increase of 10% from the $748 in the year-ago quarter. This growth was driven by strong ongoing high-value, ultra-high-value conversions that's indicated by our customers buying additional high-value content at higher price points. And with that, let's turn it back to you, Mark, for some closing comments.
spk07: Yeah, thanks, Dale. So before we take your questions, I'd like to emphasize a couple of points. First, now that we've completed our GoPublic process, we're very excited to turn our attention back to running the business and executing on our growth plans. The organic opportunities are significant in our eyes, and we now have a central holding company brand in MarketWise that we plan on using to pursue some brand awareness and the central platform using this new brand. We will, of course, build out our customer-facing brands, adding more editors and content and more brands over time, the way we've always done. And this is all with the backdrop of an adjustable market that we think has strong tailwinds in our favor. More and more people are inclined to manage their own investments and especially the younger generations. In order for younger investors to grow their investment portfolios to say $250,000 to $500,000, they need education, research, and tools to succeed. And we provide those solutions to that group as they will fall squarely in our customer demographic as they age, mature, and grow their assets. So we're very excited about all of this. We also have opportunities to leverage our data science more And Mark Gerhart and his team at Ascendant will be very helpful and are being very helpful in this regard already. And finally, we had mentioned previously that we've always been active on the M&A front. Now, with the transparency, public awareness, and currency of being public company, we are in a better position than ever to execute on this strategy. We're very excited about our future and continuing to serve our readers going forward. And with that, I'd like to turn it over to the operator for questions.
spk02: Thank you. Ladies and gentlemen, if you'd like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you'd like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up the handset before pressing the star keys. One moment, please, while we poll for questions. Our first question comes from the line of Devin Ryan with JMC Securities. Please proceed with your question.
spk04: Great. Good morning, Mark and Dale. First off, congratulations on the SPAC closing and welcome to the public markets.
spk07: Thank you.
spk04: I guess I want to start on customer acquisition costs and the outlook. Obviously, you guys gave some good detail around what you're seeing in the market. It seems like maybe some unusual drivers just with the economy reopening. So we'll see how long this lasts. But But maybe if you can just give us a little more perspective around how you're thinking about um where where you know cac may you know settle down is it still reasonable to be thinking about you know kind of somewhere in between 2019 and 2020 i appreciate a little bit of a crystal ball question in there but then also talk about this transition towards focusing on um you know the free subs which i agree is kind of the nice part of the model that you can go back and forth and just functionally what does that look like and how you, with that nice growing base there, how you expect to kind of push harder into that area.
spk05: Yeah. Hey, Devin. So, look, I mean, as you know, we don't disclose CAC in specific, but you guys can do your own math. You have enough data points to calculate it. You can calculate it kind of what you think it is year to date. You probably won't be too far off, right? And if you look at it year to date, it's actually right in line with sort of what we told you guys in our previous investor slide deck to reset expected to be the average of 19 and 20. It's almost right on the screen there. So what we're seeing here is not anomalous from the absolute number. What we saw in the second quarter, particularly later in the second quarter, was just the acuteness of the immediacy of the impact. It was like all of a sudden travel and leisure was gone for 15 months, 14 months. All of a sudden, the entire world of travel and leisure was banging Google and Yahoo and everything else in May and June. And so it was just the cuteness of the time that had an impact that was sort of dramatic in the quarter. But in aggregate, you know, year to date, we're kind of right in line with where we think we would be at year end. You know, it might ebb and flow a bit quarter to quarter, right? But, no, we don't see so far. You know, we're right on the screws to ahead of our forecast and forecast. We feel good about where we sit. On the free subs, yeah, look, that's a huge community for us. It's 12 million large now. And I'll let Mark chime in here too, but just wanted to give my nickel first since I was talking. But look, 12 million people, that's a massive community. We need to figure out how to better take advantage of that, right? We are converting them to paid, and that's an obvious benefit of the community. But there are other ways to engage that community, right? to help create some synergies. And I know Mark and his team, Gerhardt, have some thoughts on that. I know Mark Arnold certainly has thoughts on that. So, you know, stay tuned. There's a lot more to do to that set of relationships than simply convert 2% of them manually to paid. And why don't I let Mark chime in here more on that?
spk07: No, that's right. We're happy to have the community we have. And of course, we work hard to provide content to that group that we think they'll find engaging. And then ultimately, what we hope will happen is we'll intrigue them enough and get them excited to start paying for either our lower cost or our higher cost products. And we've had a lot of success doing that over time. Can we do better? Sure. I want to do better, of course. And that's one of the things I'm excited about doing going forward. That's part of why I'm excited to turn back towards operating the business and also part of why I'm excited to start working with Mark Gerhard and his team to see what lessons they learned to help use some of the tools that they developed expertise in to try to make that happen.
spk04: Okay, terrific. Appreciate all that color. And then just as a follow-up, not sure how much you can share here, but Even if you can give some Qualitative color would be very helpful just to kind of think about the pipeline of new brands or editors or analytic capabilities, you know, any flavor for Kind of the level of dialogue, you're having areas that that are interesting at the moment and and really just how the visibility of the SPAC and ascendant relationship and also the public currency is maybe helping to drive more conversation and potentially accelerate some things that are in the pipeline.
spk07: Yeah, I can't comment on specific targets, as I'm sure you know. But I've said a couple times before publicly, and I mentioned it here, today, that the number of inbound inquiries we've received has increased dramatically since we announced the merger back on March 2nd. A lot of our outbound both content and M&A activity prior to the announcement was outbound. We would occasionally have folks, you know, knock on our door, so to speak, and see if they wanted to strike a content or M&A deal, but far and away our activity was outbound. Since March 2nd, we've had a lot more inbound inquiries and a number of those opportunities are interesting. I can't comment on the specifics, but I'm very excited because what I thought would happen in the level of increased activity on the M&A front has in fact kicked in. And so we've got a couple of things that we're looking at actively now to try to see if we can plug back in our M&A activity and our M&A efforts and see if we can't add brands, and people to our ecosystem.
spk04: Okay, great. Really appreciate it. I'll leave it there, hop back in the queue, but thank you, guys.
spk05: Thanks, Devin. Thanks, Devin.
spk02: Thank you. Our next question comes from the line of Jason Helfstein with Oppenheimer. Please proceed with your question.
spk01: Thanks. I guess I'll start with two. So I think ARBU came in better than we were looking in the quarter last you know, you guys are not, you guys are keeping the full year guidance unchanged. So maybe help us. How are you thinking about kind of ARPU relative to paid subs for the rest of the year? And then just any more color you want to give us on some of the emerging initiatives like terminal and whatnot. Is that something that could be kind of additive to the model next year? Thanks.
spk05: Yeah, so, hey, Jason, thanks for the question. On ARPUs, yeah, look, you're right. I mean, 8.23, I think it was 8.25 in the first quarter, so we're keeping it pretty high. Two things go into that, just the numerator and the denominator, right? Look, our billings were incredibly strong, not first quarter numbers, but still a record for us other than first quarter. So a combination of those billing numbers being high, which showed good conversion rates, But it also has to do with the fact that we didn't grow our subs. Our subs are essentially flat in the second quarter, so that's the denominator. So that kept the ARPU a bit higher, right? Those two things together kept it higher. We've talked about our forecast at length with you guys. You know, we do like to under-promise, over-deliver. So there is, frankly, some measure of conservatism in our numbers, right? And we've said that. We feel very confident in meeting our numbers. Do we think our ARPU may come in higher than the, I think it's 717 for the full year that's in our forecast, if I remember correctly? Do I think we'll probably come in higher than that? Yeah, we probably will, right? But if you do the exact math and you do the exact billings of 750 in our forecast and you do the exact subscribers of, I think it's 1084, that math works. You know, the timing of the sub-ads matters on the denominator. But basically, you'll come out with that 717. So it really comes down to do you think we're going to beat our billings number, yes or no? And if so, are we going to be higher? and so forth, and then how quickly we can get these new subs to buy something additional. Keep in mind,
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