Marketwise, Inc. Q3 FY2021 Earnings Call

Ladies and gentlemen, thank you for standing by. And welcome to the MarketWise Third Quarter 2021 Earnings Call. During today’s presentation, all parties will be in a listen-only mode. As a reminder, this conference call is being recorded. I would now like to hand the conference over to Jonathan Shanfield, Head of Investor Relations at MarketWise. Please go ahead.

Thank you, and good morning. Thanks for joining us on today's conference call to discuss MarketWise’s third quarter 2021 financial results. On the call today, we have Mark Arnold, our Chief Executive Officer; and Dale Lynch, our Chief Financial Officer. During the course of today's call, we may make forward-looking statements including, but not limited to, statements regarding our guidance and future financial performance, market demands, 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. We will disclaim any obligation to update any forward-looking statements. Actual results may vary materially from today’s statements. Information concerning our risks, uncertainties, and other factors that could cause results to differ from these forward-looking statements are contained in the company's SEC filings, earnings press release, and supplemental information posted on the Investor 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 an isolation from GAAP measures. Reconciliations to non-GAAP measures can be found in our earnings press release and SEC filings. I will now turn the call over to Mark.

Thanks, Jon. Good morning, everybody. Welcome to our third quarter 2021 earnings conference call. As you all know, we successfully closed our transactions with Ascendant and began trading publicly in late July. We're pleased to have completed the transactions and the transition to operating as a public company. There was a lot of hard work by our team and all of our advisors to get through our current state, and we have a lot to be proud of. And with that said, we're excited about the opportunities that we see in front of us as a newly public company. We're going to discuss the highlights of our third quarter results and some of the trends we're seeing in our marketplace. But first, I would like to touch on a couple of recent developments. As you saw in our press release yesterday and over the past two weeks, we have made a number of significant announcements. First, a couple of weeks ago, we announced that we successfully entered into a credit facility with a syndicate of five banks that will provide a revolving line of credit for up to $150 million. This is a significant milestone for MarketWise as it is the first committed credit facility in our history. Now, we did not draw any funding at closing, and we do not have any immediate plans to borrow, but this facility will provide important backup liquidity for the company, as well as capacity for acquisition financing. One thing I'd like to note, while the headline number of $150 million provides meaningful capacity to the company, it is still small relative to our adjusted cash flows from operations, representing less than one turn of leverage. And while we may use this debt facility as part of our acquisition strategy, one thing you should not expect is for us to become a highly leveraged company. Additionally, given the amount of cash generated, we would expect to be able to pay down any borrowings relatively quickly over time. We're very pleased with the participation of all our new lenders, and I want to thank each of them publicly now for their support. It’s an important step forward for the company that we achieved this quarter. Additionally, we announced yesterday that our Board of Directors authorized the repurchase of up to $35 million in shares of Class A common stock. The purchases under this program will be made from time to time and at the discretion of the management of the company. The timing of the repurchases will depend on market conditions and other requirements. We anticipate that the share repurchase program will extend over a two-year period or earlier if $35 million in aggregate shares have been repurchased. This program does not obligate us to repurchase any certain dollar amount or certain number of shares, and the program may be extended, modified, suspended, or discontinued at any time. Philosophically, we believe repurchasing shares when it is highly accretive to do so is a proper deployment of capital and provides support for our investors when we view that stock as significantly undervalued. We believe our share price recently, by most any measure, is undervalued, and we intend to repurchase shares when the returns realized from those repurchases are highly accretive to our investors. We are reaffirming the strength of the business, and with the adoption of this plan, the tremendous value we believe exists at these prices. Our business is CapEx light, and we have sufficient excess cash on our balance sheet today, which could be put to work for a buyback without impacting our company's ability to grow. Turning to the third quarter of 2021 results, our business continued to perform well as our subscribers continue to engage with and explore our research products and software solutions. During the third quarter, our revenues grew 43%, and our total subscribers, free and paid, grew 54%. Our year-to-date billings totaled $578 million and have already exceeded last year’s total billings of $549 million. Our year-to-date adjusted cash flow from operations grew to $192 million as compared to $134 million for all of 2020. We continue to have a very good year with our third quarter results. We're very happy with the performance of the company, and now that the go-public transaction is complete, we are focused on executing on our strategy going forward. As I have mentioned in the past, I would encourage our shareholders to keep the long view in mind. We've been in business for over 20 years, always profitable, and always treated our equity holders well. During that long history, there have been periods like this one where year-over-year growth has been up significantly, and we can't promise our investors that our results will always go up. What we can do is promise to do our best to run the business with the best interest of our shareholders in mind. Our leadership team has a tremendous amount of skin in the game, owning nearly 29% of the new company post-closing. Our economic interests are very aligned with yours. More on the long-term nature of our business in a minute. But first, I want to briefly touch on some quarterly trends that we highlighted in our second quarter call. Throughout this quarter, we saw a continuation of market dynamics from late spring and summer related to the travel and leisure boom that we have discussed previously. As COVID statistics improved, people began to re-engage in activities outside of the home. We saw a movement of eyes off screens as travel and leisure activities increased and online engagement leveled off. As you may recall, on our second quarter earnings call, we described this pattern of behavior and shared that what we had seen at the end of the second quarter was continuing through the summer and possibly into September. It was our thought that as the summer ended and as the school year began in the fall, people would begin reengaging in a more normalized fashion. While this took a bit longer than we would've liked, we have begun to see some early signs of this normalization throughout the month of October. Specifically, we had 11.4 million total landing page visits in October, which was a 17.5% increase over the June to September four-month average. We've also seen early signs of an uptick in the rate of new paid subscriber additions in the month of October and a modest decrease in our per unit subscriber acquisition costs. While it may be too early to extend this trend throughout the balance of the year, what I can say is that we have a very busy schedule planned for the fourth quarter, and I expect us to finish the year strong. As I've said throughout the year, our goal is to be the trusted resource of financial information and a leading financial wellness platform for self-directed investors. To that end, we continue to deliver high-quality research and our community continues to grow with almost 14 million total subscribers now. We continue to expand the breadth and depth of our products and brands, and continue to look for ways to expand our reach, engage our readers, and provide best-in-class actionable research for the self-directed investing community. Our business has been profitable for 20 years. We have never had an unprofitable year. I can tell you with certainty that our business does not always move in a straight line. There are times when subscriber growth is rapid and other times when it pauses. Over the long term, we've been very successful maintaining a balance between growth and profitability, but always with an eye towards profitability. We make decisions with our long term in mind, which we know could adversely impact our short-term metrics. But the beauty of our business is our ability to capture trends in real time and manage to maintain that balance. Specifically, as we saw digital ad costs begin to escalate this year, on a per-subscriber basis, we were able to reduce the spend very quickly. The key value driver of our business is the relationship between our subscribers and our analysts and editors. As our metrics show, the value of our subscribers increases over time as they move through the life cycle of a paid subscriber to high value to ultimately ultra-high value customers over time. Again, I can't stress this enough; this is a relationship business, and we believe and have proven over time that the quality of our research and content is highly valuable to our customer base. I'll now turn it over to Dale to discuss more of the specific financial results.

Thanks, Mark. This has been an extremely busy quarter for MarketWise; we’ve achieved several milestone events, as Mark mentioned. Before I get into a discussion of our third quarter results, I first want to recap two of those items that Mark mentioned in the comments. First, on October 29th, we closed on a $150 million revolving credit facility with a syndicate of five banks, with HSBC Bank and Bank of Montreal Capital Markets as joint lead arrangers and joint book runners. The rest of the syndicate included Silicon Valley Bank, Wells Fargo Bank, and PNC Bank. We're thrilled to be working with these five bank partners, and again, as Mark mentioned, I want to thank them for joining our team. This facility provides for an additional $65 million accordion feature. It has a three-year term, and borrowings will spread the LIBOR will range at 150 or 225 basis points. There's also an unused commitment fee of 25 to 35 basis points. We did not make any borrowings on the facility at closing, but it does provide us some important financial flexibility, serving as a backup source of liquidity and additionally providing capacity to execute on our M&A transactions. As Mark mentioned and just emphasized, we plan to pursue a conservative approach to leverage. Second, as we announced yesterday, our Board of Directors has approved a share repurchase program of up to $35 million of our Class A common stock over a two-year period. As a newly public company, we've seen a lot of volatility in our shares since our public listing, and frankly, we believe the true value of the stock seems disconnected from these current valuation metrics. Mark did a very good job summarizing that we intend to repurchase shares when the purchase price is highly accretive to our remaining shareholders. Our cash generation and low CapEx requirements make this repurchase program an opportunity to put some of that excess cash to work. Okay. So turning now to our financial results. Third quarter 2021 revenue was $140.7 million compared to $98.1 million in the third quarter of 2020, which reflects a 43.1% increase. We continue to see the results of the investments that we made for the past several years across our business. Billings decreased by $11.8 million, or 8%, to $238.1 million this quarter compared to $149.9 million in the third quarter of 2020. We believe this decrease is due in large part to reduced engagement of our subscribers or potential subscribers who continued to prioritize travel and leisure in lieu of spending time on our devices as COVID restrictions eased in late spring and continued through September. We believe this travel and leisure boom and related decrease in investor engagement began in earnest in mid-second quarter 2021 and continued throughout the third quarter. Approximately 38% of our billings this quarter came from lifetime sales, 61% from term sales, and 1% from other billings. As we've mentioned before, billings can vary quarter to quarter due to the nature of us collecting all invoices upfront as well as campaign mix and efficacy. So moving on down the income statement. Cost of revenue is $62 million this quarter compared to $26.7 million for the year-ago quarter. Included in the cost of revenues was $46.3 million of stock-based compensation compared to $13.7 million in the year-ago quarter. If you were to exclude stock-based compensation from cost of sales, sales margins as a percent of revenue would have been 89% this quarter as compared to 87% in the year-ago quarter and generally in line with our historical averages. One thing I'd like to emphasize is that 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 holders were treated as stock-based compensation. On a go-forward basis, as those original Class B units converted to straight common unit, meaning straight common equity, we expect to incur significantly lower stock-based compensation at a level that would be consistent with the traditional stock-based compensation plan for our employees. Sales and marketing costs were $82.6 million this quarter compared to $56.9 million in last year's quarter, an increase of $25.6 million. Included in these amounts were stock-based compensation of $32.6 million this quarter compared to $0.9 million in the year-ago quarter. As we mentioned previously, as you saw our per unit acquisition costs, our previous acquisition costs remained higher throughout the third quarter; we reduced our marketing expense. Excluding stock-based compensation, our sales and marketing costs decreased by $6.1 million this quarter as compared to the second quarter of 2021. If you recall included on the assumptions paid on various slide decks that we posted to our website, we included an assumption that on a GAAP basis, the average cost to acquire a new subscriber in 2021 would approximate the average of those costs for 2019 and 2020. Despite the higher unit costs, we've seen over the past several months, year-to-date, the average cost to acquire our customer in 2021 is in line with the slightly below the average of 2019 and 2020. General and administrative costs this quarter were $356.3 million compared to $79.9 million in the year-ago quarter. Included in these amounts were stock-based compensation of $333.6 million this quarter compared to $58.8 million in the year-ago quarter. Excluding stock-based compensation, our G&A costs increased about $1.6 million year-over-year. That was driven by a $2 million increase in payroll due to increased headcount, a $1.6 million increase in software costs, and a $0.8 million increase in travel-related expenses. These increases were partially offset by a $3 million decrease in professional fees. So we ended the quarter with a net loss of $366.2 million compared to a net loss of $68.3 million in the third quarter last year. The increase in the loss was due to an increase in stock-based compensation of $339.1 million, partially offset by a $42.5 million increase in net revenues. So look, we think cash flow should matter to most investors, and therefore our non-GAAP measure of adjusted cash flow from operations. To be clear, this metric adjusts for stock-based compensation associated with our old Class B profits distributions historically and only unusual and non-recurring items going forward. This quarter, adjusted cash flow from operations was $34.7 million compared to $55 million in the third quarter of 2020. Our adjusted cash flow from operations margin, which is adjusted cash flow from operations as a percent of billings, was 25.2% in the third quarter of 2021 compared to 36.7% in the third quarter of 2020. As Mark mentioned, this brings our year-to-date total adjusted cash flow from operations to $192.1 million as compared to $134.3 million for all of 2020. Now let's turn to some of our key metrics. Our paid subscribers grew from 786,000 in the third quarter of 2020 to 965,000 this quarter, which represents a 22.8% increase. We saw our free subscribers increase from 8.1 million a year ago to 12.8 million this quarter. ARPU has improved to $772 from $752 last year. The total paid subscribers of 965,000 this quarter did decrease by 30,000 as compared to the second quarter of 2021. As we discussed last quarter, the decline in paid subscribers this quarter was due to factors, which we believe are related to the travel and leisure boom associated with the dramatic reopening of the economy that began in the second quarter and continued through the summer. First, the cost of advertising began to increase in the second quarter and continued throughout the third quarter, as the travel and hospitality industry significantly increased the usage of digital mediums to market their products. This has tended to increase our per unit acquisition costs. We focus closely on our breakeven metrics. As our per unit cost increased, we will adjust and reduce our marketing spend to adapt to the changing market conditions. We'll continue to evaluate our unit costs and believe there should be some normalization here as we get into the fall. Importantly, and in fact, Mark mentioned earlier, we have seen signs of this improvement already with improving customer engagement and increases in landing page visits and increases in direct-to-page conversion rates. This has resulted in an uptick in the rate of new paid subscriber additions in the month of October and through the month of November so far. This has reduced our acquisition costs. As Mark highlighted earlier, we do have a very active campaign scheduled for the fourth quarter and expect to finish the year strong. Having said that, the lower engagement that we've been talking about since the second quarter did persist for about five months, and therefore reduced the ability to add paid subscribers significantly during that period. Therefore, we're going to take this opportunity to modestly adjust the forecast largely to reflect this lost period of time for which customer engagement was reduced. We’re adjusting our 2021 full-year paid subscriber forecast to 970,000 from 1.08 million. As a result of the change in paid subscriber forecast, we're reducing our full-year 2021 billings forecast to $740 million down from our original $750 million forecast, and taking our adjusted cash flow from operations forecast to $210 million from $212 million. Our ARPU forecast increased to $753 from $717 as a result of the lowered forecast paid subscriber amount combined with the other forecast changes I just mentioned. We're also adjusting our GAAP revenue forecast to $540 million down from $560 million, but this change is mostly to reflect the higher sales mix of billings toward lifetime sales versus term sales than we estimated at the beginning of the year. This mix shift toward higher lifetime sales is ultimately a good long-term story for us, as lifetime subscribers continued to purchase high-value subscriptions at higher rates through time and stay with us for a long period of time. I'd like to reiterate an important concept on our business operations, which contributed to our financial success over 20 years. We're very disciplined around our marketing spend, and we closely watch our unit costs versus the revenue that we can bring in. If our per unit costs decrease over time, we will ramp our spend and take advantage of that situation. That's certainly what you saw in the first quarter of this year, throughout the second half of 2019, and all of 2020. Conversely, as unit costs increase for whatever reason, we'll decrease our spend. We will evaluate and we'll pass. This is what we saw during the second and third quarter of this year. This is our business model at work. The beauty of this business model is that we can adjust quickly, redirect dollars to other campaigns, and if need be, pull back and pause on subscriber acquisitions for a period until our unit costs decrease or market conditions improve. When we do this, subscriber additions will slow, and that's what you've seen in the past two quarters. On the other hand, when customer acquisition costs decline or our marketing ROI increases, you'll see us increase our direct marketing spend and potentially significantly add new subscribers. With that, let's turn it back to Mark for some closing comments.

Thanks, Dale. So before we take your questions, I want to thank everybody in the MarketWise organization, all of our employees, partners, and affiliates; they worked so hard over many years to get us to this point. One last thought before we move to questions: when I look at what we accomplished this past quarter, what I see is putting into place many of the fundamental pieces that we need for our next leg of growth and execution of our strategic plan going forward. That started with the closing of our go-public transaction in July. The closing of the transaction gives us the public company platform to grow going forward. In my eyes, being public should help us attract more readers, attract more talent, and provide currency for our M&A strategy. Closing on the transaction also afforded us the opportunity to adopt an incentive compensation plan for employees. We adopted that plan and made meaningful awards to more than 150 of our colleagues. We were not able to have an equity plan of this scope as a partnership previously. We haven't ever taken in venture capital or private equity money. This was a key step for us, because it accomplished two things. First, it expanded the number of people working at the company who have an equity interest in our business and a vested financial stake in our results, from roughly a dozen or so people to now over 150 of our most talented and senior folks. Second, it puts those recipients shoulder-to-shoulder with our public shareholders and directly aligns their economic interests with the economic interest of our investors. Incentivizing our senior leaders to drive results that are good for our investing public is a basic but important step forward for our business, and one that I think is crucial to our future performance. As we indicated, we also closed on the credit facility. Adding this facility will give us much more flexibility from an operating capital perspective, something we've never had in place in our 20-year history despite all our growth and profitability. With the public company float, cash on the balance sheet, and a debt facility in place, we are now very well positioned to execute on our organic and inorganic growth priorities going forward. We have the key pieces in place now that will complement our strategic plans going forward. With that said, I'll turn the call over now to the operator so that we can take some questions.

Thank you. Our first question comes from Devin Ryan with JMP Securities.

First question, just want to dig in a little bit on the environment and kind of the travel and leisure boom. Obviously, there are a couple of 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 the first time since the pandemic, which makes sense. It's good to hear that people are now kind of spending more time online, and you're seeing it in the landing page data and some of the other data you shared. 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 a 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?

Devin, what you mentioned about the second half is absolutely correct. We haven't observed significant decreases in advertising volume from the travel and leisure sector. There was a slight dip, but it wasn’t a substantial change. Instead, we're seeing an impact on our costs primarily related to advertising, along with factors like conversion rates and engagement. In October, we noted a marked improvement in engagement statistics, with increased landing page visits. We also experienced higher conversion rates overall, including free to paid transitions, and among our distinct subscribers, we observed improved conversion rates as well. This trend has continued into November. To your point, the first quarter of 2021 was quite extraordinary, characterized by low costs, high conversions, and robust engagement. We can still achieve significant success and generate good returns despite the elevated display ad costs, provided we can return to more typical levels of customer engagement. We excel at connecting directly with customers, and our marketing and content quality is strong. The key factor we require is having people actively engaged and paying attention, and we are beginning to see that, which is very encouraging.

And then I guess a follow-up here on the buyback; great, I think to see that, and just shows how you guys are thinking about the stock 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? I 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 dialogues around new opportunities, how are incremental investments evolving or the pipeline of even inorganic opportunities? Any more color you can share around kind of just developments that have happened post being a public company would be helpful.

We've gone through some changes recently. Historically, we have generally aspired to keep at least $100 million of cash on the balance sheet. Frankly, we've always been pretty much well in excess of that. We've had $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 a rainy day for M&A, 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. If you look at that liquidity, essentially, we’ve got $130 million of cash and $150 million of incremental capacity, you've got $289 million of total capacity. Looking at our earnings rate through the course of the year, we've been running between $12 million to $17 million a month. We're going to build cash pretty quickly given that we're retaining earnings and not paying them out in the 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. You should think of the most likely use of funds for the cash on the balance sheet as ultimately 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. I think right around $100 million, I would still target as the minimum. But frankly, you're going to see the cash from where it is now; it should just continue to grow three times.

And then just on that point on acquisitions, just to kind of follow the logic here. I know you can’t be probably explicit. But just how are the dialogues going and the pipelines developing just as you again are building cash? I would think you have a little bit more visibility here as a public company?

Yes, I can’t, of course, comment on specific targets or ongoing discussions that we're having. What I will reiterate is something I said before, which is the number of inbound inquiries that we've had have increased dramatically, and the size and scale of those inquiries has gone up as we had not only planned for but hoped. I think we're very well positioned now, as I mentioned a minute ago, with more tools in our toolkit from a capital perspective, a public company float, a debt facility, growing cash on the balance sheet, and the ability to buy back shares when we think it's highly accretive to do so. To me, those are the capital allocation tools that good management teams need in order to treat the shareholders well and manage the business going forward, still allowing themselves the currency for M&A activity. I feel like we've got all the things we need to embark upon that bigger broader M&A strategy that I've alluded to throughout the year. That’s why I think when I look back on our third quarter, I think it was tremendously productive from our standpoint because I think we’re prepped and ready to execute our strategy going forward. I can't comment on specific targets, but I'm very excited about what we have going on in our M&A activity. I’ve got the team and the tools now to execute on that strategy going forward. That was a key milestone for us to get to after the closing, and we’ve done that in the first quarter that we’ve been public.

To the extent that we have the public presence now, we're getting more inbound phone calls about other firms that either are interested in potentially selling themselves or part of themselves to us or partnering with us in some form or fashion. So I think just, you've always said that in the past too, but it's a very good point to emphasize. The visibility is helping a lot too in that channel.

Our next question comes from the line of Alex Kramm with UBS.

Starting with the commentary about October or maybe even November, that you've given a lot of good color there. I think I heard you say that subscribers increased. I don't know if that was on a gross basis. So maybe to put you on the spot on a net basis. Have you been adding subscribers so far this quarter?

We mentioned that the growth we referred to involved two comparisons. One was year-over-year, where we saw approximately a 23% increase in paid subscribers. However, on a sequential basis, we experienced a net decline of 30,000 subscribers, dropping from about 994,000 to roughly 965,000. This decline was primarily driven by a significant reduction in new subscriber additions, a trend we have been discussing since the second quarter and continuing into the third quarter. The changes began in mid-May of last year, were enforced through June, and stayed largely the same for July and August. September showed slight improvement, and October has been noticeably better. The net reduction in paid subscribers was almost entirely due to the slowdown in new subscriber additions.

So in October, you have added paid subscribers on a net basis versus the end of the third year?

We haven't disclosed that specific number. What we're telling you is that we've had a significant uptick in gross adds in October.

So unless churn has changed, you should have added on a net basis, if I hear you correctly…

Correct. Yes, that's a good assumption.

And then maybe another quick one, going back to the third quarter. I mean, obviously, as you just said, again, the paid subscriber number declined. The good thing I would say is that if you look at your high-value and ultra-high-value clients, those going up quarter-over-quarter, it's good to see that. I will say that the growth rate slowed. So you did add but it's slowed. Just curious with all the talk about being more focused on upselling, et cetera. I would have liked to see a little bit of an increase there. But is that just a function of the same environment even hitting the upsells?

Yes, the engagement dynamic is the key here. When engagement was less, you saw that kind of effect across the board. The engagement impact on free to pay conversions, direct to pay conversion, high-value conversion, ultra-high-value conversion; people simply were away from their devices. With that, that kind of vents all of our conversion curves down in the second quarter. But what we're trying to tell you now is that a month and a couple of weeks doesn't make a quarter, but having said that, the month and a couple of weeks that we've seen in October and the first part of November here, we have seen a reversal of that and improvement in all those metrics.

And then just lastly, and this may be too far forward looking. But clearly, I think last quarter you took away the fiscal year '22 forecasts or guidance rather. Clearly, you're already telling us subscribers are going to be lower at the year-end. Obviously, things could improve next year. But I guess how are you thinking more broadly about fiscal year '22? If the subscriber growth is a little bit slower, to what degree do you think you still have the ability to make billings or then maybe most importantly, since you said, do the right thing for shareholders, deliver on the operating cash flow line, all else equal? If you're not seeing a lot of improvement, is my point.

Look, we're going to come out with our 2022 guidance in the fourth quarter cycle. I think we mentioned that previously on another call, and that's still the plan. So stay tuned for that. We'll have a lot more specificity to say then. Your questions just broadly around the outlook for the future. What we're seeing is some normalization in the environment here so far in the fourth quarter. Mark and I both looked at these trends. We both think that we're going to finish the year strong. We're going to hit our new adjusted forecast, which I think we're adjusting down by a percent in terms of billings and something like 10% in terms of subs. Now that reduction in sub forecasts flows through to the future. Having said that, you're building off of a smaller base. As things begin to normalize, which we are seeing, we expect things to get back to a more normal rate of conversion: free to paid, direct to paid, and then ultimately, as your existing subscribers become high-value, and also high-value conversion rates. When you look for the past two years, 2020 was a good year, the second half of '19 was a good year, the first quarter for 2021 was an insane quarter. You're not going to have conversion rates like you did in the first quarter of '21. You should never model those; that was an incredible quarter. But what we are seeing are conversion rates that are in line with the averages that we really saw in the second half of 2019 and throughout much of 2020, and those are very good years. As long as we get back to adding net paid subs and we can continue that engagement and then work and convert at those rates that I just alluded to, which are sort of the averages between the second half of '19 and throughout most of '20. Second quarter of ‘21 was a pretty good quarter and in line with previous quarter’s conversion rates. Those conversion rates work very well as long as you have a growing paid subscriber base. We've seen a pause here for five or six months, or two quarters essentially. We're starting to see some normalization of that. We'll come out with specific numbers and forecasts for you here in a couple of months, but so far, we're encouraged by what we’re seeing. I just would caution investors on two things. Mark alluded to this. One, take a long-term view. We are going to steadfastly resist this sort of quarter-to-quarter momentum and constantly emphasize year-over-year comparisons because that's how our business really functions. We did make some decisions in the third quarter. We could have added more subs; we could have done it. It would have cost us a lot more and we would have reduced our breakevens and maybe not gotten the marketing ROI that we wanted. We could have added probably tens of thousands of additional subscribers in the third quarter if we wanted, but uneconomically, we chose not to. We knew it was going to result in a reduction in adds, and it did result in that and resulted in a modest cost, but that was the right decision to do for our shareholders in terms of maintaining our returns. You’ll continue to see that flex, and we just encourage everybody to take that 12 to 24-month view on the business model that works over the long term. We're encouraged by what we're seeing here in the first part of the fourth quarter. Just give us a couple more months to firm up exactly how we're going to think about our guidance, and then we’ll get you guys' numbers, but so far, we're encouraged about what we’re seeing.

Our next question comes from the line of Kyle Peterson with Needham and Co.

Just want to touch on churn and what you guys saw in the third quarter. I think in the second quarter, you guys mentioned kind of it was toward the high end of what you guys historically see. Did that continue in the third quarter? Just trying to get an estimate on what you guys are seeing in terms of gross adds in both CAC and 3Q.

Yes, we mentioned that the churn rate in Q2 and Q3 remained similar, at the higher end of our expected range. In the third quarter, there was no significant change in that metric. This is largely attributed to gross additions rather than any shifts in churn dynamics.

And then I guess just one quick follow-up. I know the ‘21 forecast is coming down a little bit from kind of where it's the last quarter, but it's still above what you guys originally had when you announced the deal back in March. So maybe if you could just walk us through some of the things that have changed, because it seems like if you compare things from March, things are better and maybe just kind of the travel and leisure boom is just kind of weighing on kind of short term. So how should we think about some of the other progress that's been made across the rest of the business?

I believe Mark has some insights to share as well. We continue to advance on the strategic priorities we've discussed with you and other investors. Our goal is to create a MarketWise technology platform that integrates all our brands, allowing for product fulfillment, increased traffic aggregation, and enhanced engagement. We believe this will ultimately lower our customer acquisition costs over time, raise brand awareness, and foster customer loyalty. Our technology-driven products, when consolidated onto a single platform, are more likely to gain traction. These products tend to promote stickiness among our customers but require greater visibility. We're dedicated to this initiative. Mark has also highlighted our focus on mergers and acquisitions; we consistently seek out new analysts, writers, editors, and products to sustain our momentum. The business initiatives Mark has long discussed are financially sound. As for our outlook, we typically advise waiting until our fourth-quarter cycle to finalize our guidance. So please stay tuned. We don't necessarily need a significant drop in display ad costs as long as we maintain good engagement, which we are experiencing currently. Display ad costs remain relatively stable, perhaps slightly down, but our cost per acquisition is decreasing due to improved engagement and conversion rates. As engagement metrics improve, we expect conversion rates to follow, which should help lower our CPA even with current display ad costs remaining elevated.

Our next question comes from the line of Jason Holstein with Oppenheimer.

A few questions. There's been a ton of articles just about the focus on self-directed investors. I think there was another one this week. I think this week's article talked about younger investors right now. They are kind of shying away from paying people to manage wealth because they need the value. So one, I guess the question is, how are you thinking about doing a better job attracting younger readers? Is this part of the M&A strategy? Is there kind of investment to recruit authors who tend to focus more on kind of content that is more appealing to younger and just crypto, or I don't know, NFTs, or other things like that? That's question number one. Question number two. Look, I mean, it's been well publicized that advertising CPMs have gone up. You have all these headwinds going on in advertising. So it wouldn't be a surprise that your kind of cost spread would have gone up, obviously exacerbated. Maybe talk a little more about how you think about kind of playing the ad inflation cycle to your benefit. So I would imagine that CPMs tend to be lower in the first half than the second half. It’s typically better time to be more aggressive on subscriber acquisition, just relative to overall to the extent that you see seasonality in your business. So, kind of two questions there. And then just kind of applause the buyback; I think it's smart. There's clearly a lot of technical factors that are kind of weighing on your stock right now. I think where businesses that generate significant free cash, it's a good idea.

I was going to say, let me kick it off, Jason. I appreciate that and appreciate the kudos on the buyback program. We agree, obviously, that we just think it's a smart thing to do given the price dynamics we're seeing and our attitude about shareholder returns. As far as focusing on younger investors go, I think we are talking about the same articles. There was one, I think, in the Wall Street Journal recently that was talking about a guy that Goldman Sachs has been recruiting where I think he said he puts 90% of his investable assets in cryptos. I don't know if that's the one you're referencing or not. But yes, it's a good question. So, the answer is yes, right? Certainly, M&A and focusing on the younger generation and folks who have investable assets is one of the things we have looked at in our M&A criteria. Also, you mentioned the editorial recruiting. We're also doing things along those lines as well. If you look at the average age of our editors, it's not up in the 60s at all. We tend to over time recruit younger folks who are looking towards the future, thinking about investing trends going forward, a decade or two, but who also have some experience in the space enough to think about how the future is going to develop. That's certainly something we're doing too. The other thing we do that you didn't mention is our marketing groups are always looking for pockets of subscribers in all kinds of different channels, including channels that are more focused upon by younger folks. Having said all that, as I’ve said before, we do not consider ourselves a boomer company or a millennial company. We focus on attracting investors. To the extent that investors with real assets and real portfolios tend to be younger, as this whole market runs on, great, we want those folks. Those folks tend to like the guy in your article or in the Wall Street Journal article and tend to focus on more exciting asset classes, like cryptos and cannabis; sometimes, they're more frequent traders. Our job is to put products that espouse investing strategies that we think will beat their comparable indices and put those products in front of those groups, whether they're young or old. So yes, we're focused on that younger generation, but not just them. We're also focused on investors that are older in age.

Just add to that. Look, we have a pretty rich portfolio of cryptos, and I would assume the customer set on that skews younger than some of our other asset classes. So a lot of our most successful campaigns this year have been crypto-based campaigns. We're certainly seeing that interest. I think through time, you’re going to naturally gravitate and see our customer base become younger. We're seeing it happen; it's still the law of numbers. But having said that, our youngest end of our customer distribution grew 400% last year. So we're seeing that change. We are always thinking about the channels that we market through and the techniques we use to market and how we can start to reach through adjusted channels this younger customer set. We think we have the product set to appeal to young customers. What we're experimenting with is some of the techniques of marketing and the channels through which we market to specifically get more access to younger customers organically and then Mark mentioned too that M&A strategy is an obvious thing to think of there too.

On the question regarding the seasonality of display ad costs and our management approach, this is a crucial point. In Q2 and Q3, we experienced something atypical for summer. You might notice decreased engagement, especially in August. Typically, July is decent and September is good, but August tends to be less productive. This summer slowdown isn't usual for us; rather, it's tied to the significant pandemic effects and the surge in travel, which has led to less time spent on devices. We wouldn’t suggest modeling a significant spike in Q1 followed by a noticeable drop in the summer; it's more about the influences affecting the market, as we observed in Q2 and Q3. We closely monitor CPMs. Our marketers, who are highly experienced, are watching these closely and will experiment to see if our conversion rates can offset higher CPMs. A higher CPM doesn’t deter us; we will keep testing. If our conversion rates and engagement can manage those higher CPMs, that's a positive outcome for maintaining ROI, even if it becomes slightly more costly. In summary, I would not predict seasonality on a quarter-by-quarter basis. Instead, we will ensure our management team informs you each quarter, similar to the last two quarters, about any external factors impacting our market, such as increases in unit costs that may affect returns, leading us to adjust spending. Conversely, if we encounter high conversion rates, strong engagement, or significant CPM reductions, we will communicate that as well. It's our responsibility to provide you with insights about industry trends to assist with your quarter-to-quarter forecasts. Mark and I are focused on long-term strategies, while we appreciate your quarter-by-quarter viewpoint and will strive to provide that context. However, I wouldn't encourage modeling seasonal spikes or declines; it doesn’t operate that way. Mark, feel free to add anything since you have extensive experience in this area. I have, but I would concur. I don't see season-to-season seasonality or month-to-month seasonality. I've run those metrics a number of times just out of curiosity, if nothing else, and haven't seen any quarter-related trend relative to time on the calendar nor season of the year.

And just a quick comment. I think, look, your churn is attractively low. We love if you gave that out quarterly. It kind of worked well for Peloton and some others. But I would just ask that perhaps you guys at least update that once a year, perhaps when you report your December quarter.

Our next question comes from the line of Jeff Meuler with Baird.

On paid subs engagement, I understand the environmental factors that are outside of your control. But what are you doing differently to drive increased engagement among the paid subs? And then the second part of it; I understand that the engagement is going to impact current period net revenue retention. So I guess what I'm wondering is how much of a leading indicator is it for future paid subs retention and upselling? You said earlier this is a very unique period, obviously, I get that. But I don't know if there's other historical parallels where you've had a three- or six-month engagement roll and if there's anything to draw from that in terms of producing mix?

As for the last part first. Jeff, if you look historically, I only see one sort of really strong and parallel, and that was the period of time post-financial crisis. We did see the market crash; it tried to recover, it bounced, and stuck in the mud for a period of time. With that sort of stuck-in-the-mud environment where things weren't moving up, volatility had waned and investor interest in the market waned, we did see a pause in new subscriber adds for, I think, three or four or so quarters post-financial crisis. That's probably the closest parallel that we're seeing to this current dynamic. Now, this is totally different causal factors, but the end result is somewhat similar in terms of a pause in new subscriber growth that lasted more than three months. I mean, this was almost two full quarters that we saw. After that, as the market eventually began to recover and faith in the market began to return, fund inflows, trading volume increased, and the stock market began its gradual march higher. We saw significant growth following that year: billings growth, profit growth, margin expansion, everything – subscriber growth. But that's probably the most distinct parallel in our 20-year history to what we're seeing right now. Your question around engagement and how we handle it: I didn't totally follow the question. I think you're asking what did we do to improve engagement? We don't stop trying and testing new ideas. We're cautious and adjust our marketing strategies and product focus, reallocating resources to the products that are performing well in the current environment. Recently, we've noticed a shift towards more crypto engagement because it has been effective. However, we cannot simply enhance overall engagement across the board. With the advancements in MarketWise technology, we believe we have a substantial aggregation of traffic that can shield us from wider industry engagement downturns. This is one of the key reasons we are committed to this direction. It’s a complex initiative that requires time and effort to yield results, and we're actively working on it, but it won't happen overnight.

What I would say is, while it may take time, I'm very confident in what we can do over a longer timeline. We have high-quality content; the key value drivers are the engagement we have. We believe those relationships foster retention over time, and as we invest in our editorial and reinforcement of our offerings, I believe strongly that the data will show improvement over time. It will take time for those relationships to strengthen and to verify our sanctuary, but it's central to our business model and value proposition.

Our next question comes from the line of Ygal Arounian with Wedbush Securities.

I think we've covered most of the ad-related questions, but I have one more to discuss. Let's consider a scenario where ad rates do not return to normal and remain high for an extended time, possibly even increasing further. How would this impact your strategy? Would you need to raise prices to maintain a certain threshold, or would you lower it? I’d like to explore that situation. Additionally, I would appreciate an update on terminal analytics and the software tools that seemed promising when you first went public.

I'll handle the financial part first, Mark, and then you can handle the strategic part. In terms of how we handle higher or elevated CPMs, to be clear, elevating CAC is not a new thing. The degree of elevation and the suddenness of it in the second quarter was striking; that has not been something that we've seen so fast, so quick to such a magnitude. Having said that, CPAs and CAC are going up 20% to 25% a year, really from 2015 through 2020 constant, that was the CAGR growth if you look at industry studies. So we can handle elevating CPAs. We handle that by a couple of methods. One is we're always adjusting the pricing of our campaign products in relation to the cost that it costs to bring in that subscriber. We're always looking at LTV to customer acquisition costs. The initial price versus the cost per acquisition is a constant metric; it's real-time. It's sort of the holy grail that our marketers will look at. So pricing is an important part of that to a degree, and we can handle that. It's also the efficacy of marketing copies. When we're looking at our forecast, we are always assuming elevating CAC because that's just the industry trend. We've been able to maintain our breakeven from 2015 to 2020 and into 2021 through the first quarter. Our targets are to pay off our variable CAC in 90 days and to get to full breakeven seven to nine months. Guess what? Even with CAC going up 20% to 25% a year in the period I just mentioned, we maintain all of those breakeven metrics. CPAs within 90 days and full breakeven in seven to nine months. It's a combination of how to price the product relative to the cost, and if the conversion rates aren't successful, then you pause and redirect those marketing dollars to a different campaign that can hit its metrics. We can manage an escalating CAC; it was just the suddenness of it and the fact the denominator wasn't working in Q2 and Q3 because the engagement fell very sharply. That really was the differential issue primarily, which is the engagement problem.

In response to your other question about Terminal, yes, the pan-MarketWise platform we’ve been developing is intended to be an all-in-one tool and content platform for all MarketWise brands and properties. Currently, it's been launched for one of the brands that has a robust and loyal subscriber base with high lifetime values and long-term subscriptions. The initial feedback from that group has been very positive. Behind the scenes, we are diligently working on what I would call the infrastructure to integrate the other brands and enhance that property across all our MarketWise assets. This process takes time; it requires extensive testing and data migration, as well as integrating technology to ensure seamless content flow, and we are putting in significant effort on that front. We anticipate having more updates to share about this in the early part of next year, as we progress through the fourth quarter. We are determined to establish this platform, which I believe will help attract subscribers and showcase the quality of our research. It will also enable us to present content from various brands to subscribers of any one brand. We are enthusiastic about this development. On another note, we are very satisfied with how Mark and his team have seamlessly integrated into our ecosystem. Mark brings a lot of energy, intelligence, and experience in financial markets. I recently saw him, and his enthusiasm is infectious—he looks incredibly excited about the performance and our collaboration. I share his excitement because I believe the tools and content produced by his team are incredibly beneficial to our reader base. I look forward to making that content available to more of our readers across MarketWise, and we are actively doing so. This will also serve as a way to attract new subscribers from outside our ecosystem, which we have been observing lately. Overall, I am very pleased with the progress, and I think Mark feels the same way.

Our next question comes from the line of Alex Kramm with UBS.

I realized we're over an hour into this call, but just a couple of quick follow-ups, and hopefully, this is quick. One on the editorial side. I'm not sure if you disclosed this, but can you give us a number in terms of how many editors you've hired or any new products you've launched so we can see what you're doing on that end quarter-over-quarter?

I don't have the specific numbers for you, Alex, in terms of plus/minus. What I would say is someone you might know from Greenberg has joined Empire Financial; he’s only recently joined, but that information is out in the public. He's written a very nice editorial piece on why he made a career change and what prompted it and the thoughts he had going through making that decision. We're excited to plug them into Empire Financial and launch products and content around him, using his experience as a long-time investor and as well as his experience as a short-seller and bit of an analyst through lots of different properties and lots of different investing seasons. We're excited about that, but it's very early days. I can't give you any indication of what that product set will look like quite yet. We're talking about those things, but he's an exciting addition to what is already a quickly growing franchise in Empire Financial.

Yes, I did actually see that, but thanks for the reminder. And then just one quick one with maybe two quick ones on the capital front for Dale. I guess, can you just remind us what your minimum cash kind of is? How do you feel about the cash balance going forward as you obviously are starting to deploy a little bit more potentially? And then just outside of that, on the buybacks, maybe just a little bit more specific. You obviously have flexibility in terms of what you're going to do, open markets and maybe some private transactions. So I guess the question is, you have a small float, and you also have some lockups, and you have a stock price that's below that magic $10. So just curious like in terms of like on the private side; not sure how motivated insiders are. So maybe to be very blunt and specific: I mean, are you basically planning to do open market purchases this quarter, and any numbers in mind to help us here?

We are definitely planning to implement our strategy and utilize it. Our aim is to have the necessary documentation and establish our 10b5-1 plan as soon as possible. We will open our window two days after we file our quarterly report, which we are doing tomorrow. After that, our window opens. We are also working with our broker to document the 10B-18 and 10b5-1 plan and set all the parameters. There will be a brief cooling-off period, but once that's over, it should be operational. Our plan is designed to comply with the 10B-18 rules and to be sustainable over time, so we don't want to exhaust it too quickly. If the market price falls below our threshold, we will consider buying back shares. For reference, our adjusted cash flow from operations is about $210 million, which translates to approximately $0.66 per share when divided by 316 million shares. Buying back shares at $7, especially with a book value of $10, would be significantly accretive. We want to ensure that any buybacks are meaningfully beneficial and provide a margin of safety. While our existing float is small, we have some larger SPAC-related investors who may sell, which could increase our float. It's not guaranteed that our buyback program will directly reduce the float, as some shares can come from these larger investors. Our ultimate goal is to improve our stock's fundamental value, which could lead to a secondary offering and further increase our float. Attracting large investors is essential, but currently, they cannot participate due to volume constraints. Although we might reduce the float slightly over the next few months, we've tailored our program to avoid a dramatic reduction in such a short time. Our focus is on enhancing the stock price and fundamental value, paving the way for a secondary offering to achieve a meaningful float of over 100 million shares. This would help us draw in larger value investors, as we currently rely on microcap funds.

And then on the minimum cash balance, sorry if I missed that. Do you have in your mind?

So we've usually targeted $100 million, and that was prior to having a debt facility. We might rethink that balance a little bit now that we have a backup source of liquidity that's a pretty decent size. Historically, it's been in and around $100 million. If we saw some good M&A acquisition opportunities, it could run below that. Right now, we're earning $12 million to $17 million a month; that's been the run rate. We can replenish that cash pretty quickly. Since we're not distributing dividends profits, that cash balance should build pretty quickly. If we did a large, large acquisition, you would probably see some debt that would go into that in a couple of turns of debt.

Thanks, Dale. So just to reiterate, $100 million traditionally has been a good floor for us; we're open to evaluating that as we grow our cash balances. But it's been a successful strategy for us so far, and we will ensure that we maintain sufficient liquidity for operational needs while pursuing our strategic growth initiatives.

The cash build is really a war chest for our M&A strategy. The $35 million that we're using for share buybacks is a quarter's worth of cash flow this quarter. So it's not really strategically impactful; it really is cash that can be replenished pretty quickly.

At this time, we have reached the end of the question-and-answer session. I will now turn the call back over to Mark Arnold for any closing remarks.

Yes. Thanks. I just want to thank everybody for their time, once again. I think I've said what I wanted to, which is, as I look at our quarter performance, we've continued what is going to be a fantastic year. We now have all the pieces in place that I feel like are necessary and needed to fuel our ability to execute on our strategic plan going forward, from both an organic standpoint as well as inorganic. We're very excited about that and excited for the fourth quarter. And with that, I thank you all for your time and look forward to continuing the discussion going forward.

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation, and have a great day.