MarketWise, Inc.

financial crisis, it took some time for individual investors to fully re-engage in market activities. Importantly, we managed our business through that period by developing new content that addressed the particular financial environment, managed our marketing spend and costs appropriately, and ultimately experienced significant organic growth when individual investors re-entered the market. We expect this cycle to be similar. During the summer, as investors resumed pre-COVID travel and leisure routines, Subscribers were hesitant to spend on new subscriptions. As our customer acquisition costs remained high, we focused on streamlining our marketing spend and reducing overhead. I'll give you more detail on that in a moment, but first let me provide some high-level financial results. For the third quarter, we generated $119.9 million in revenues measured on a GAAP basis, a decline of 14.7% as compared to the year-ago quarter. Billings declined 23.9% year-over-year, to $105.1 million, and our adjusted cash flow from operations was $13.1 million, down from $34.7 million in the third quarter of last year. Our quarter's results continue to reflect lower consumer engagement and fewer new subscribers as compared to the prior year as a result of continued market volatility and reduced direct marketing spend during the quarter. With respect to our cost reduction initiative, During the second quarter, as our billings declined, we saw an opportunity to reduce our cost structure to defend our margins. We started that process in the second quarter, and those efforts continued through the third quarter. We originally targeted approximately $37 million in cash savings, which was a 15% reduction in our budgeted overhead. And as of the end of the third quarter, I'm happy to report that we are on schedule. We targeted two areas of cost savings, overhead and direct marketing. In the quarter, we achieved an almost $8 million reduction in the run rate of overhead expenses, or $31 million annualized, as compared to the first quarter of 2022. In addition to reducing our overhead spend, we also reduced our direct marketing spend by $18 million in the quarter, or approximately $6 million per month. And while we have realized these savings on a cash basis, a portion of these savings are not immediately reflected in our GAAP results, but will be recognized over time. In total, we realized $26 million in cash savings versus our target. Additionally, we identified another $6 million in budgeted overhead expenses that will not be incurred in the second half of this year. This keeps us right in line with our cost savings initiative outlined in last quarter's earnings release. As a result of these actions, we have had significant improvement in our margins. Specifically, in the first half of this year, we collected $254 million in billings, and recognized $28 million in adjusted CFFO, resulting in an adjusted CFFO margin of 11%. In the third quarter, by contrast, even though billings declined to $105 million, we recognized $13 million in adjusted CFFO for an adjusted CFFO margin of 12.5%. This margin improvement is a direct result of our cost-cutting initiative and we expect this trend to continue through the remainder of the year. We believe that given the current market environment and until marketing costs improve, this is a prudent way to manage our business by focusing on efficiencies, maintaining our margins, and protecting our cash flow. I would also remind everyone that our direct marketing spend is variable, and we have a high degree of discretion and are able to react to changes in advertising costs. So while we have reduced direct marketing expense in the current quarter, We may increase our marketing spend going forward when it makes sense in order to drive new subscriber acquisition and revenue growth. While our revenues, billings, and adjusted cash flow from operations were impacted by lower consumer engagement and fewer new subscribers as compared to the prior year, we have reduced our cost structure based on our over 20-year experience and are managing the business to protect margins based on the current environment. Our goal is to grow the business maintain and improve our profitability, generate strong cash flow, and continue to execute on our strategic objectives. Along those lines, let me take a few minutes to provide a brief update on some of the strategic initiatives that we have underway, as I have in the past. First, our editors and analysts continue to adjust to the current market environment and are working hard to produce content and recommendations for our subscribers. During the third quarter, we launched five new publications, which reflect our analysts' best ideas for addressing the current investing environment. Those products cover themes that include healthcare investing, options trading strategies, and energy. We also continue to streamline our product offerings where it makes sense. As always, our analysts cover a broad variety of investing strategies, which helps ensure that we have content that resonates with subscribers. We have seen significant changes in investing sentiment over the past year in both the United States and abroad, and our editorial teams are adapting to that environment. Second, our efforts to further incorporate data science and artificial intelligence in our operations continued through the third quarter. The work we are doing in data science is progressing nicely as we continue to work through the initial stages of what we believe will lead to substantial long-term benefits for MarketWise. Currently, we are focused on customer and transactional data, improving our conversion rates, increasing our direct mail conversions, and working to decrease the rate of customer chargebacks. This process starts with a deep dive into data collection, analysis, and modeling in an effort to generate insights into how we can improve these metrics. We are confident these short-term goals can be realized in the next 12 months, with further gains to come over time. While we are making progress in this area, I should mention that this is a long-term effort, and the quantitative results may take time to develop. Ultimately, we believe greater integration of data science will significantly improve our overall free-to-paid conversion rates, help to lower our subscriber churn, and improve our ARPU. The third area of focus is the integration of our technology products with our research brands to further enhance our product offerings. Last year, we were successful bringing Chaikin Analytics onto our platform while generating over $27 million in billings. In the second quarter, we experienced similar success with our Altimetry brand and marketing its products to our audience. And in fact, our most recent marketing campaign for Altimetry was the most successful in terms of billings over the past two years, and that occurred in the third quarter. As you may recall, 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 into a uniform accounting standard provides insight into a company's valuation potential so that retail investors can better identify public companies that are both undervalued and poised for growth. During the third quarter, we moved forward to further align another of our technology brands, Tradesmith, with our InvestorPlace business. Tradesmith began as a simple way to track portfolios using trailing stops and has evolved into a powerful suite of risk management and portfolio analysis tools. This suite of tools features volatility-based buy and sell alerts, stock screener tools, a robust rating system, and a very successful options trading tool, all of which further empower the self-directed investor. We look forward to driving incremental revenue and growth through these offerings going forward. Because we believe that offering technology products along with our content brands leads to significant ARPU improvement as well as better subscriber retention. As we go forward, we plan to continue to offer quantitative tools and products with our investment research, both in our existing brands as well as in our M&A efforts. Lastly, our Pan MarketWise technology platform is another strategic initiative that continues to be an area of focus. And we have made significant progress over the past few quarters to develop this platform to accommodate our multiple brands and allow consumers to explore all of our investment content in one location. We recently moved in this quarter, Q3, the MarketWise platform from its beta test environment to a live destination at MarketWise.com. I would encourage all of you to go and explore the site. The MarketWise.com site allows us to deliver products and integrate marketing amongst our brands, which should lead to lower our overall cost of digital marketing going forward. In addition to making progress on our strategic initiatives, We also took a meaningful step to improve our capital structure in the third quarter. We initiated a tender offer to exchange all outstanding warrants for shares of Class A common stock. At the time of the offer, there were approximately 31 million warrants outstanding, consisting of approximately 21 million public warrants and 10 million private warrants. The exchange was completed on September 30th, and as of the end of the third quarter, there were no remaining warrants for MarketWise shares outstanding. We believe the Warren Exchange offers several benefits for our capital structure. Through the exchange, we issued approximately 6 million Class A common shares, which increased our public shares by approximately 26%. This increase in shares added to our public float and our trading liquidity. While increasing our public share float, the exchange was minimally dilutive to our total shareholder base. The transaction was approximately 1.9% dilutive to our total share count. Finally, eliminating the warrants simplifies our capital structure, which should make it easier for us to execute future corporate financing activities, including a potential secondary capital offering, acquisitions, and other strategic initiatives without continuing to bear the overhang of our prior SPAC transactional capital structure. On the M&A front, we executed a small acquisition of a publishing group and folded it into our existing Winans Media entity. This group is made up of an experienced team who publish products focused on tech, early stage private investing, and data-driven investing based on market indicators. This is a relatively small organization as measured by revenues, subscribers, and editorial staff. However, we're very excited about the talented people that have joined our team. We look forward to growing their existing business as we have done in the past with other acquisitions. Before I turn the call over to Jimmy, I'd like to take a moment to thank Dale Lynch for his efforts while he was a part of Market Wise. As we disclosed at the end of August, Dale resigned his position as CFO. He was an instrumental part of our team during this time, and he helped us to establish a strong finance and accounting team, initiate best-in-class processes, and install financial systems and controls that allow us to make the transition to the public markets. Dale has been a friend and an advisor He will be missed, and we wish him well. But in the interim, we promoted James McGinnis, our corporate controller, to the position of acting CFO. And I have full faith that Jimmy and the team are in a great position to execute on our initiatives going forward. We have already begun the process of looking for a permanent CFO and have been actively engaged in this effort. And although it may take some time to find the right fit, I am confident in the process and our team. Now let me turn the call over to Jimmy to discuss the financial results of the quarter.

Thanks, Mark, and good morning, everyone. As Mark described, the market factors that impacted our business in the first half of the year continue to persist throughout the third quarter. High inflation, fear of a looming recession, and the Fed's policy of aggressively increasing interest rates continue to impact equity markets as they remain in bear territory during the quarter. Not surprisingly, we continue to see retail and self-directed investors hesitate to engage in purchasing new investment research as market volatility remains elevated. Let me provide an update on consumer engagement and conversion rates before turning to the financial review. During the quarter, we continued to see lower engagement related to these market influences in our decision to slow down our direct marketing spend. As we discussed in last quarter's call, we identified cost savings from both existing overhead and direct marketing. This quarter, we reduced direct marketing significantly as we worked to preserve cash flow margins. As a result, we anticipated our engagement metrics to be somewhat lower due to these reductions. In third quarter 2022, our landing page visits were approximately 27 million, down 15% from both the first and second quarter 2022 levels. However, our landing page to paid subscriber conversion rates were exactly the same as in the first half of the year. Similar to the prior quarters, this decline had an impact on both billings and new subscriber acquisitions this quarter. As we have said, our subscribers have slowed the pace of their buying behavior as a result of the macroeconomic conditions. so it is taking longer for our customer to move through their subscriber journey with us than in the past. However, as we have said over the past few quarters, our high-value and ultra-high-value subscribers continue to purchase additional subscriptions, which has led to an all-time high in active cumulative spend by all subscribers. We believe this is another indication of customer satisfaction and that these subscribers find value in our products and remain with us for the long term. Turning to the financials. GAAP revenue was $119.9 million this quarter compared to $140.7 million for the third quarter of 2021, a decrease of $20.7 million or 14.7%. The decrease in revenue was driven by a $16.9 million decrease in term subscription revenue. We recognize $72.9 million in deferred revenue this quarter. Billings were $105.1 million compared to $138.1 million for the year-ago quarter, a decline of $33 million. We believe the decrease is due in large part to reduced engagement of new and existing subscribers. The challenges that emerged in the first half of 2022 continued into the third quarter, which we believe further contributed to prospective and existing subscribers delaying their purchases. Sequentially, our $105.1 million in the third quarter billings declined 12.4 million or 11% from second quarter 2022. This decline was driven by one, a decrease in entry-level subscriptions, in close proportion to lower direct marketing spend during the quarter as a result of our cost reduction initiative, and two, lower conversion rates as compared to the prior quarter. Approximately 33% of our billings came from membership subscriptions, 66% from term subscriptions, and 1% from other billings in the third quarter of 2022. This compares to 45% of our billings from membership subscriptions 54% from term subscriptions, and 1% from other billings in the third quarter of 2021. As we disclosed last quarter, we are actively working to reduce expenses and began work on a cost reduction initiative targeting $74 million in total expense savings. We anticipated reducing overhead by an annualized amount equal to approximately $37 million or 15% of budgeted overhead. Through the third quarter, we achieved almost $8 million or approximately $31 million of annualized overhead reductions as compared to the run rate in first quarter 2022. In addition, we identified and expect to recognize $6 million in savings related to 2022 eliminated budgeted overhead spend, bringing our total annualized overhead savings to $37 million. Additionally, we targeted 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 direct marketing expenditures as compared to the average monthly spend in the first half of the year. During third quarter 2022, we reduced our total direct marketing spend by $18 million, or approximately $6 million per month, in line with our target. We continue to look to reduce our direct marketing spend when it proves to be less efficient. However, I should remind everyone that this reduction is dependent on market factors. If marketing costs improve, we may decide not to cut marketing spend to this degree and instead focus on subscriber acquisition. In summary, through the third quarter of 2022, we are on track to achieve the cost reductions contemplated in our initiatives announced last quarter. Cost of revenue was $14.5 million this quarter compared to $62 million for the year-ago quarter, a decline of $47.5 million. This decline was driven primarily by a decrease of $45.6 million in stock-based compensation expense related to holders of Class B units, a $.8 million decrease in credit card fees, and $.7 million decrease in outsourced customer service expense. The current quarter's stock-based compensation included $.4 million of expense related to both our current incentive stock award plan and our employee stock purchase plan, as compared to $45.6 million in Class B compensation expense in the year-ago quarter. As a reminder, from the time of the combination with Ascendant in July and through the end of third 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 compensation. Also, any distributions of profits paid to Class B unit 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 at a level that is consistent with traditional stock-based compensation plans. For third quarter 2022, our total stock-based compensation expense was $2.2 million. Sales and marketing costs were $51.6 million this quarter compared to $82.6 million in the year-ago quarter. a decrease of $30.9 million. This was driven primarily by a $31.5 million decrease in stock-based compensation expense and a $5.1 million decrease in direct marketing expense related to our cost reduction initiative, partially offset by a $6.1 million increase in the amortization of deferred contract acquisition costs. General and administrative costs this quarter were $29 million as compared to $356.3 million in the year-ago quarter. a decline of $327.3 million. The decline was primarily driven by a $332.8 million decrease in Class B stock-based compensation expense and a $1.8 million decrease in incentive compensation. This was partially offset by a $6.6 million increase in professional fees, of which $2.1 million was related to the warrant exchange transaction completed in the quarter. Included in these amounts were stock-based compensation expense of $1.2 million this quarter as compared to $333.6 million in the year-ago quarter. Net income in third quarter 2022 was $16.5 million compared to a $366.3 million net loss in third quarter 2021. We recognize stock-based compensation expense of $2.2 million in third quarter 2022 and stock-based compensation expenses related to the Class B units of $409.9 million in the third quarter of 2021. Adjusted CFFO was $13.1 million in the third quarter of 2022 compared to $34.7 million in the year-ago quarter, with the decline primarily due to the decrease in billings. Adjusted CFFO margin was 12.5% in the third quarter of 2022 as compared to 25.2% last year. Adjusted CFFO margin improved from 11% for the first half of 2022 to 12.5% this quarter as a direct result of our cost-cutting initiative, and we expect this trend to continue through the remainder of the year. Adjusted CFFO this quarter was impacted by the decrease of $18 million in direct marketing spend associated with our cost-reduction initiatives and net changes in working capital, excluding changes in deferred revenue and changes in deferred contract acquisition costs, which decreased cash by $6 million largely due to a decrease in accrued expenses this quarter. Our paid subscriber base declined from 965,000 at the end of third quarter 2021 to 894,000 this quarter, a 7.4% decline driven by a decrease in overall consumer engagement. We saw our free subscriber base continue to increase from 12.8 million a year ago to 15.4 million at the end of third quarter 2022, a 20.4% increase. Our PUD declined to $556 this quarter, from $772 last year driven by a 31% decrease in average trailing four-quarter billings, combined with a 4% decrease in average trailing four-quarter paid subscribers. We believe the billings decline is primarily due to the volatile economy that has persisted since first quarter 2022, leaving 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 Mark mentioned, we initiated a tender offer to exchange all outstanding warrants for shares of Class A common stock. At the time of the offer, there were approximately 31 million warrants outstanding, consisting of approximately 21 million public warrants and 10 million private warrants. Through the exchange, we issued approximately 6 million Class A common shares, which increased our public shares outstanding by approximately 26%. This increase in shares outstanding increased our public float in trading liquidity. The exchange was completed on September 30, and as of the end of the third quarter, there were no remaining warrants for market-wise shares outstanding. Before I turn it back to Mark, I want to reiterate that we continue to work on our cost reduction initiative and look to realize further reductions to overhead expense and direct marketing. We believe these are both necessary and prudent steps as we look to navigate the current macro environment. In the end, after focusing on improving our overall cost structure and efficiencies, we will be in a better position to execute on opportunities for growth and expansion as markets begin to stabilize.

Thanks very much, Jimmy. As I reflect on this past quarter, I want to share that from my perspective, I'm very pleased with the developments that have taken place. As I look at the business, I see the impact of some of the tough decisions that we made in the summer taking hold, and I can see that in meaningful profit margin improvements. The actions we have taken and the results we have seen are consistent with our management philosophy which I have shared with you all in the past. That is, we manage the company with a long-term in mind, always with an eye towards profitability. This past quarter, we took meaningful strides towards meeting a number of our strategic goals, including at MarketWise.com and in the area of data science. And while the YNAS transaction may not have a meaningful impact on our revenues or profits in the short term, I expect it will have a very meaningful impact on the growth of our business in the longer term. I also think that the steps we took to simplify our capital structure this quarter will help us improve the liquidity of our public float as we go forward. I will now turn it over to the operator for your questions.