Marketwise, Inc. Q3 FY2022 Earnings Call

Thank you for standing by, and welcome to the MarketWise Third Quarter 2022 Earnings Call. I would now like to hand the conference over to Jonathan Shanfield, Head of Investor Relations at MarketWise. Thank you.

Good morning, and thank you for joining us on today's conference call to discuss MarketWise's Third quarter 2022 financial results. On the call today, we have Mark Arnold, our Chief Executive Officer; and James McGinness, our acting 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 statements. Information concerning our risks, uncertainties and other factors that could cause results to differ from these forward-looking statements are contained in our company's SEC filings, earnings press release, and supplemental information posted on the Investors section of the company's website. Our discussion today will include certain non-GAAP financial measures. These non-GAAP financial measures should be considered in addition to, but not as a substitute for, or in isolation from GAAP measures. Reconciliations to non-GAAP measures can be found in our earnings press release and SEC filings. Now I'll turn the call over to Mark.

Thanks, John, and good morning, everybody. Welcome to our third-quarter 2022 earnings call. Before I get into our results, I want to comment on some of the forces impacting our business. The dynamics that we saw in the first half of this year with respect to the financial markets and macroeconomic conditions continued in the third quarter. Investor engagement continued to be subdued, given the heightened level of market volatility and macroeconomic uncertainty. The Federal Reserve's aggressive efforts to combat inflation, including yesterday's rate increase, has many believing that we are already in or soon will be in a recession. As a result, and as you might expect, investors remain cautious and continue to sit on the sidelines until there is more clarity on the direction of the financial markets. Our subscribers, both new and existing, are no different. They continue to evaluate market trends and the impact of monetary policy while delaying purchases of investment research before fully stepping back into the market. We have seen similar behavior patterns by retail investors and the industry forces and metrics that we monitor. Industry trading platforms have recently reported declines in the number of daily average trades to levels last seen in late 2020. We believe investors are increasingly hesitant to consider incremental investing due to concerns about the volatile economy and the impact of inflation. This hesitancy continued to impact our business in the third quarter, similar to what we experienced in the first half of the year. As we discussed on our last earnings call, we have seen downturns over our long history and are confident that as the economy begins to settle, inflation comes under control, and market volatility subsides, the investors will re-engage like they have in prior cycles. We expect that they will resume purchases of investment research as their appetite for risk and investing returns. During the 2008, 2009 financial crisis, it took some time for individual investors to fully reengage 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 continue 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 initiatives 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 cash flow from operations, resulting in an adjusted cash flow from operations margin of 11%. In the third quarter, by contrast, even though billings declined to $105 million, we recognized $13 million in adjusted cash flow from operations for an adjusted cash flow from operations 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 into 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 in the 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 average revenue per user. 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 shaking 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. 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, Trade Smith, with our Investor Place business. Crazemoth 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 average revenue per user 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 30, and as of the end of the third quarter, there were no remaining warrants for MarketWise shares outstanding. We believe the warrant 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 published products focused on tech, early-stage private investing, and data-driven investing based on market indicators. This is a relatively small organization in terms of 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 MarketWise. As we disclosed at the end of August, Dale resigned from 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 adviser. 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 remained 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 and 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 work to preserve cash flow margins. As a result, we anticipate our engagement metrics to be somewhat lower due to these reductions. In the third quarter 2022, our landing feature 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 customers 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 recognized $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 a decrease in entry-level subscriptions and a close proportion to lower direct marketing spend during the quarter as a result of our cost reduction initiatives; 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 the first quarter of 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 approximately $6 million reduction to monthly direct marketing expenditures as compared to the average monthly spend in the first half of the year. During the third quarter of 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 expense 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 $0.8 million decrease in credit card fees, and a $0.7 million decrease in outsourced customer service expense. The current quarter stock-based compensation included $0.4 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 Ascend in July and through the end of the third quarter of 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 unitholders 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 the third quarter of 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 the third quarter of 2022 was $16.5 million compared to a net loss of $366.3 million in the third quarter of 2021. We recognized stock-based compensation expense of $2.2 million in the third quarter of 2022 and stock-based compensation expenses related to the Class B units of $409.9 million in the third quarter of 2021. Adjusted cash flow from operations 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 cash flow from operations margin was 12.5% in the third quarter of 2022 as compared to 25.2% last year. However, adjusted cash flow from operations 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 cash flow from operations 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 the third quarter of 2021 to 894,000 this quarter, a 7.4% decline driven by a decrease in overall consumer engagement. We saw our free subscriber base continued to increase from 12.8 million a year ago to 15.4 million at the end of the third quarter of 2022, a 20.4% increase. Average revenue per user declined to $556 this quarter from $772 last year, driven by a 31% decrease in average trailing 4-quarter billings combined with a 4% decrease in average trailing 4-quarter paid subscribers. We believe the billings decline is primarily due to the volatile economy that has persisted since the first quarter of 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 and trading liquidity. The exchange was completed on September 30, and as of the end of the third quarter, there were no remaining warrants for MarketWise 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 expenses 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 view 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. While the Winans 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.

Our first question comes from Alex Kramm with UBS.

I wanted to get started on the expense side. One of the things I look at, and I hope you look at this as well is obviously your kind of cash cost, which is really just billings in the quarter minus cash flow from operation adjusted cash flow. That number, that cash cost actually moved up quarter-over-quarter from Q2 to Q3 from like 91% to 92%. Now maybe there's some one-time items in there, so maybe you can talk about that. But I would have expected your cash cost to actually come down given all the steps that you've taken. So wondering if we're missing something there and then also the related question, of course, is how should we be thinking about cash cost into the fourth quarter, given continued steps that you talked about?

That's a good question, Alex. Yes, as we mentioned, we have taken a lot of steps beginning in Q2 and into Q3 to cut our costs in two broad areas: direct marketing and overhead. I'm pleased with the developments there, and we've seen significant improvements in our numbers. Now, let me hand it over to Jimmy McGinnis, who can provide more details on the fluctuations you may notice between the numbers you described regarding billings and adjusted cash flow from operations.

Yes, Alex. That's a great question. We definitely take that into consideration, and it's reasonable to analyze the numbers in that way. However, there are some one-time factors in the cash flow for Q1 and Q2 that affect your calculations. The major factor is a significant accounts receivable and the timing of its collection, which resulted in a large cash outflow in Q1 and a substantial cash inflow in Q2. This explains the increase from $1 million in cash from operations to nearly $26 million or $27 million in Q2. When comparing Q2 to Q3, it does appear skewed, and the margins reflect this distortion. However, looking at the cash flow from operations and margins over the first six months of the year, the cash flow from operations margin is 11% compared to 12.5% in Q3. When considered this way and excluding significant working capital adjustments, it's clear that our margins have improved in the third quarter, thanks to our cost reduction initiatives, lowered marketing expenses, and reductions in overhead costs. Regarding your second question about Q4, Mark can elaborate further. On the overhead side, we still have more to address, but we will continue our cost reduction efforts. As we mentioned in previous quarters, we will adjust our approach to direct marketing based on market conditions. We are on track with the planned savings for direct marketing in the latter half of the year. However, if consumer engagement improves in Q4, we will increase our direct marketing spending to leverage that market and drive subscriber growth.

That's right, Jamie. As we included in our filings and then also here a few minutes ago in our script, we talked to you all about a plan for cost reductions at the end of Q2. We are executing and are directly in line with that plan through Q3. So we're very pleased from that standpoint and have seen meaningful margin improvement relative to what we saw in the first half of the year, and we expect that trend to continue in Q4.

Speaking of Q4, one more, I guess, quickly. You now mentioned the whole, if things improve and maybe we'll ramp up marketing spend again, the question is, have you actually started that already, given that it's one month in the quarter. But then more importantly, are you seeing something that makes you wonder about that trend? I mean, for example, are you getting more opportunities to advertise cheaper, i.e., is the macroeconomic environment making it easier for you to get, I guess, ad space. Again, I'm not really in that space, but it seems like things are slowing down elsewhere, maybe some of your broader competitors that have ramped up spending in the last year coming out of COVID have maybe receded a little. So just wondering if you're seeing better opportunities, and that's why you're at least contemplating getting a little bit more aggressive here?

Yes, that's a good question. And you're right about the dynamic. We continue to see so far elevated advertising costs, and our customer acquisition costs remain high. And in that environment, what we're going to do is what we've done here recently, which is defend our margins and focus on profitability a little bit more than we had in the first half of the year. That's what we've seen so far. But your point is valid. If we see a gap and see ad costs come down, we're going to take advantage of that. And so all we're doing is just trying to signal to you and everybody else that when we see the market dynamic change, we have the ability to pivot and ramp up marketing to take advantage of those dynamics and acquire more subscribers if the costs come down.

All right. Great. And then just one very quick one. Since we are, as I just said, one month into the quarter already. Any metrics that you can share in terms of landing page visits, et cetera, that may be helpful in October so far? So we think about the fourth quarter, I mean, as the market has obviously recovered a decent amount, so just wondering if you're seeing engagement change at all?

Yes, it's a good question. And you're right. That is one of the metrics we look at to try to gauge both the activity of investors, but also the activity of our subscribers. We've largely seen the same trend that we've seen earlier in the year, and we think that's largely due to the macroeconomic conditions. I'm not surprised by it, honestly, as an investor myself, as I look at the market, there is a large divergence in the range of outcomes that we're seeing. And this plays through in our editorial; honestly, while earlier in the year, I think a lot of our editorial talent, I can tell you just from talking to him, had a difference of opinion, but were worried about the direction of the markets. Now what has happened as months have come and gone, is that inside our editorial ranks, people have essentially picked sides. There is a divergence on which way our experts think that the market is going to go. So, I think it's going to be a prolonged downturn. Others think that it's going to come back and that we're a long way into what is a bull market, which typically lasts between 18 and 24 months. And so we've got a divergence in our editorial ranks. I think that makes perfect sense and resonates with what we're seeing in the market. In other words, we're seeing that investors and subscribers also have a divergence in what they think is going to happen. And that naturally results in a little bit of cautious behavior and hesitance to not only engage with our content but also spend. And so, we're seeing that play out in our business as the level of activity that we saw, especially in Q1 2021, but really throughout the full year of 2021 has slowed, along with the macroeconomic environment.

Our next question comes from the line of Devin Ryan with JMP Securities.

I want to come back just on expenses real quick. I appreciate a lot of moving parts, and you gave a lot of detail on the call. So if I missed something, I apologize. But I'm just really just trying to kind of drill into like the right jumping-off point. So you're on target on the cost reduction plan. The third quarter was noisy. I think you mentioned $6.6 million in professional fees in the G&A. Is the right jumping-off point for G&A, once all the initiatives are kind of run through, is that kind of in the low $20 million range? Or I just want to make sure that from a modeling perspective and that we're clear here, just because I think, again, third quarter was a bit noisy in your kind of process on the initiatives. I just want to make sure that we're all kind of aligned on that.

Yes, thank you, Devin. I’m not surprised that both questions so far have been about costs, as that has been a key focus for us this year. As you know, we are constantly trying to balance growth and profitability. Over the past few years, we've increased our workforce significantly while our business was on a strong upward trajectory. However, following the economic slowdown and particularly after the invasion of Ukraine, we realized that we might be facing a prolonged downturn. Starting in Q2 and continuing through Q3, we sought ways to manage our business for better cost efficiencies. While it may seem obvious, I’ll specifically address your question shortly and then pass it to Jimmy for more details. In our analysis, we focused on two main areas: overhead and direct marketing, though we did consider other expenses too. We made substantial progress in Q3 towards our cost reduction targets. We operate on a cash basis instead of a GAAP basis, and looking at our cash situation, I see many positive indicators, which is why I expressed satisfaction with our results; we are returning to our expected margins. Regarding G&A, we've pinpointed some areas for cuts in Q3, but we still have work to do. We are making continuous improvements through Q4, which I believe will enable us to reach our total cost goal of approximately $74 million, based on our Q1 run rate. That’s a bit of the broader context. I'm not sure if Jim wants to share more details about the G&A figures, but we are pleased with the advancements we have made. We recognized that action was necessary, and I recall you raised questions about our strategies for defending margins and enhancing cash flow during our spring earnings call. I'm happy to say we’ve taken those steps, which is something I am proud of now.

Yes. And I'll just add a little bit to that. Devin, obviously, as you know, we don't provide any guidance. But I think you're hitting on the right point where we do expect, I think, in the future as we're wrapping up some of these key initiatives that we have, one, not just the cost reduction initiative, but we've also completed our implementation of RevPro, our big revenue platform, which we should see some cost savings in there moving forward. There has been some noise in our G&A costs in the current year. But yes, I think it's probably safe to say that we should see some reduction in G&A costs moving forward. But to try to put a number on that, I just don't think we can do that. Obviously, as Mark said, we manage our business on a cash basis, and so there's obviously some GAAP implications on this that we wouldn't try to get into on this call.

The follow-up is maybe a couple of parts, but just thinking about the subscription growth and kind of just I think just the revenue trajectory of the firm. So I appreciate it's a complicated backdrop. The first part is, Mark, are you seeing any, I guess, signs of impact on business just from inflation itself as people may be getting tighter on how they spend money that could be impacting subscriptions? My guess is probably not because of the affluent average customer, but I'm kind of curious there if there's anything to look at. And then the bigger picture question is just around monetization opportunities. You guys continue to make progress on free group. Just whether there are other things you guys were thinking about to be able to monetize the momentum you have in the brand and the traction of the enterprise. You have, I think, connectivity with probably 20% of self-directed investors with your free group. And so just trying to think about whether there may be other avenues to really monetize that traction beyond maybe just the traditional subscription model that you're doing today?

Thank you for your question, Devin. Regarding your first inquiry about the impact of inflation, I see it in two parts. Firstly, concerning pricing, we haven't significantly changed our prices throughout our history. Our marketing team conducts constant price tests within their campaigns, including evaluations of fulfillment costs related to subscriptions. We conduct these tests regularly as market conditions change, and we have stabilized our pricing. Unlike some businesses, we do not apply standard institutional price increases. Instead, we occasionally test prices with our audience, which has remained consistent. To date, there hasn't been a notable shift in our pricing strategy. However, as you've pointed out, we mainly target individuals with higher portfolios who tend to utilize our fulfillment and research products the most. These clients seem less affected by the inflationary trends evident in the economy. Consequently, we're not witnessing significant price sensitivity within our subscriber base. That said, we have observed a decrease in overall activity levels, likely due to the current market volatility, especially following the Fed's recent interest rate hikes and the mixed messages surrounding them. Our readers are often more informed than the average investor, and they are keenly aware of these developments as we analyze them in our content. This collective uncertainty has contributed to a slowdown in business activity. While our high-value customers remain engaged and continue to purchase, the overall pace has decelerated, which aligns with expectations. To address your second question, we are still adding free readers and paid subscribers, although the growth rate for these additions has diminished, partly resulting from our reduced direct marketing efforts. We anticipate that subscriber acquisition rates will decrease, which makes sense under the circumstances. Nonetheless, we aim to provide valuable content that engages our free readers. Based on patterns from previous cycles over the last 20 years, attracting free readers and new paid subscribers, even at lower price points, will eventually benefit our business. As we continue to nurture trust and deliver quality content, subscribers are likely to see the value and move to higher price points over time. It’s reasonable to expect that establishing this trust may take longer given the current market uncertainties. Feedback indicates that while our content is appreciated, some potential subscribers are hesitant to commit to higher prices for financial research right now, choosing to wait and observe how the situation unfolds. Whether factors like midterm elections or a slowdown in Fed rate hikes will serve as catalysts, I cannot predict. However, these scenarios could be positively received by the market, as could resolutions related to the geopolitical situation in Ukraine. In the meantime, we remain focused on providing valuable content to our readership and strive to build the trust necessary to encourage them to embrace higher price points. Lastly, in response to your question about leveraging our brand's momentum, I am optimistic about the launch of marketwise.com. This initiative represents a new investment and channel for subscriber acquisition that we have not fully utilized before. While it has taken time to launch, I’m pleased we have achieved this strategic goal. Moving forward, our next step will involve investing to attract readers through this platform and guiding them on their journey to explore our wide-ranging content across our brands, which we have not done previously. This approach presents a new growth opportunity for us, and while I don't foresee immediate ad revenue increases in Q4 due to this launch, it has the potential to become a new revenue stream over time.

Our next question comes from the line of Jeffrey Meuler with Robert W. Baird.

I guess on average, how long is the lag between macro and market factors versus sort of what you see in the subscriber base? And I guess probably the best comparisons are obviously all weighing the tech bubble. But if the bear market continues through later next year, when is the inflection then on the engagement levels?

That's a great question. You're approaching it the right way. We aim to minimize that lag as much as possible. The answer to your question largely depends on the duration of the current conditions; we are experiencing 50-year high inflation in a challenging macro environment. Different financial experts, including leading bank figures and analysts like Ray Dalio, have varying opinions on how dire the situation is. I cannot predict what that lag will be at this point. However, like in previous times, our objective remains to present the right content to our audience and cultivate that value-based relationship I mentioned earlier. When we achieve that, regardless of whether the market is bullish or bearish, people tend to feel more comfortable spending with us as they become more familiar with our products and the outcomes they provide. The persistence of these conditions doesn't necessarily change things; rather, during periods of market instability like the first half of this year, it becomes challenging to identify which marketing efforts and content will connect with our readers. When there is a clear market direction, whether upwards or downwards, we adjust our strategy and tailor our content accordingly. The uncertainty about the market's direction has been difficult. For instance, I recently attended a reader conference where an analyst posited that we might be in the midst of a long secular bull market, suggesting the current corrections are typical of such extended periods that could span 10 to 20 years. He projected a significantly higher stock market in the long run, though not necessarily within this calendar year. Contrarily, other analysts are forecasting a tough period ahead. This divergence is clear, and we are already beginning to adapt our content to better align with our readership and the prevailing market conditions to foster trust. We started adapting earlier this year as the market began to shift, and I expect our results to improve as we continue to expand our margins. However, I cannot predict how long these market conditions will persist.

And then I appreciate, obviously, the reduction of direct marketing expenses and protection of the margin. But I guess, has there been any change in the strategy, I guess, around what the back-end campaign and marketing toward current users? And I guess I'm asking because conversion rates seem to be holding up well there. I guess, is there any intention to lean into marketing with already-existing subscribers? Or is that just kind of steady?

Yes, you bet. I mean, of course, that's an area that we concentrate on and always have. When you think about our marketing efforts, we have two main vectors. We're trying to acquire new subscribers, and that would include free subscribers as well as paid subscribers. Then, we're fulfilling our content and exposing our reader base or paid reader base to additional content either inside their operating brands or across our operating brands. What we do is we typically concentrate on both, but depending on the cost of advertising and our customer acquisition costs, we will accelerate or decelerate our efforts on acquiring new subscribers contingent on market conditions. I think I described that earlier. But to your point, in terms of putting other content in front of our current readers, that remains an area we focus on quite a bit, very much. We are doing so now, as you would expect. But like I described earlier, we are seeing good conversion rates among our better subscribers, meaning the folks that are in the high-value category and our ultra-high-value category are still behaving as our best customers. They're continuing to spend more with us and continuing to consume the content they like. What we've seen is that the level of activity from people moving from the lower price points into the high value or the ultra-high value has slowed as the economy has slowed.

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

Just a couple of quick questions. First on the acquisition here. I wondered if you could give us any color on the ARPU of credibility. And what sort of timeline you guys think you need at least based on historical acquisitions to get that fully integrated and the billings kind of up to snuff with the rest of the core business?

Yes, good question, Kyle. Thank you, and I'm glad you asked about it. Of course, as you might expect, we're very proud of our M&A track record and the activity and results that we've generated from that. We expect nothing less from our recent acquisition through the Winans group. It's a small team, and we folded them into what was an acquisition vehicle named Winans Media that we had. It employs a relatively small group of financial experts. They have something like a dozen publications, including several free publications like we often do. Those publications focused primarily in three areas: tech, early-stage investing, and data-driven investing based on some market indicators. While the group is relatively small as measured by revenue, subscribers, and editorial staff, we're very excited about the acquisition because we got some very, very talented people that we've known for quite some time, and we think that inside our environment, which I've in the past, described as a flywheel, I think they will do very, very well. As for your question on timeline, we have great plans, and right now, we are in the midst of integrating that business and those folks into our operation. That's what we're focused on right now. I imagine as we roll into the tail part of Q4 and early part of 2023, we will start to see the revenue and profit impacts from that business. The level and degree to which it will look like our prior acquisitions is not clear. We do have some good plans, though, and I don't think that the Winans acquisition will look very much different than our prior acquisition efforts in retrospect. It just takes some time to get those folks integrated into our business and get our marketing and editorial content plan formalized and executed. I imagine you will start to see that here as the months unfold.

I have a quick follow-up. Considering the current stock situation, I understand the buyback has faced some challenges due to the flow. I'm interested to know if you have any thoughts on potential near-term strategies to enhance shareholder value, such as a dividend, especially since you maintain a strong balance sheet and continue to generate significant cash even in a difficult market. I’m curious if there are any immediate actions you might consider that would be beneficial for shareholders while we await market conditions to improve.

Yes, you bet. It's a great question. I think about that a lot. To your point, we adopted the buyback program almost a year ago. We were excited about it because by all metrics, we thought that it would be accretive given where the share price was at the time based on our internal valuations around book value. We adopted that and started to engage in that buyback program. The trouble from our standpoint was that the market started to turn down right at that time. That, of course, affected us and provided some headwinds. That's when our already low public float as we continued to engage in those repurchases accentuated that problem that stemmed out of our original go-public transaction. At this point, we suspended the buyback activity, and there was none in the third quarter of this year. Now we still have the buyback program in place. We very much believe in being shareholder-friendly and rewarding investors for their investment. That includes using the tools in the toolkit, the buyback being one of them. Our balance sheet is very, very clean. We have a high degree of cash and no debt. Both of these are strengths in the MarketWise column. We do consider what else we can do to be shareholder-friendly given where we are. We are always thinking about our capital allocation strategies and how to provide ROI to the investors, some of whom are readers. The tools in the toolkit from our standpoint include dividends, acquisitions, which we're doing, we will ultimately lead to long-term growth. We've done some of that since we've been public, and we reported on that. I would say our M&A pipeline is very busy right now, probably the busiest I've ever seen it since I've been at the company. That is another way we're looking to deploy capital. But you're right; we think about paying off debt, which we don't have, we think about buyback programs, we think about dividends, and we think about M&A. But we do not want to hoard cash forever. We do not believe in that. We like to put the money to work, and we are constantly evaluating those choices and alternatives as we go along. We think we're doing the right thing for the long-term ownership of the business and the long-term investors which we hope to attract.

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

Just I want to start just so we can kind of level-set some things. So just to be clear, so if we look at SG&A in the quarter, we take out stock-based compensation, we take out $6.6 million of professional fees is 21.4%. Was there any severance costs in that as well?

Yes. There were definitely severance costs. We had about $1.1 million of severance during the third quarter, and that should all be in the G&A bucket.

And then I've got one for Mark. Just can you give us what the basic and then kind of the fully diluted treasury method at $2 shares are today? So that way, everyone guides a clean share number coming off the call.

Sorry, Jason. This is Mark. Could you repeat the question?

The basic shares were in the release. Let me just grab it real quick. I don't know the exact number, but our Class A common shares outstanding at September 30 were 288,250,502, and our Class B shares were 2,910,923.

We'll handle the treasury work internally. Mark asked about the possibility of advertising on marketwise.com. Considering that many users receive the newsletters electronically, why not explore a way to display ads to free users within the newsletters since you can dynamically insert them? That's my question. Also, are you monitoring click-through rates? It might be worth considering tracking click-through rates among free users as an indicator of their likelihood to convert. Have you made any decisions about changing content limits? The main concern is the ongoing cost of acquiring free users, especially since some may never convert. At some point, would you remove users who won’t convert or require them to see more ads to generate revenue? I’m just interested in your overall thoughts on improving conversion or monetization of free users.

Yes. So a couple of questions there. Thank you, Jason. You're right; I talked about marketwise.com and that being a source of ad revenue for us. We do have ad content in other places in our kits, excluding marketwise.com. So I don't want to give you their own compression. We just typically reserve that space for internal marketing instead of something external, like cars or brokerage accounts. We've found that historically to be a better use of the space and more economical for us. That said, as we expand the ad revenue relationships that I think we'll see coming out of marketwise.com, it wouldn't surprise me at all if in those conversations, folks start to explore where the boundary is and what our limits are in terms of exposing our audience to external ads in that space. I can just tell you as an approach, as long as we continue to have better monetization through our internal ads, that's what we will continue to do. But you're right to raise it as a potential. That's certainly something we look at when we consider what our audience is looking at and what else we can put in front of them that they might find attractive. In terms of the click-through rates, you're absolutely right about that. That is something we are looking at, among other things. That's in part why we're putting such an emphasis on data science. We're trying to do a better job of figuring out what our readers are interested in and when and at what price points. That's in part why I've said I was pleased with our progress in that regard; because we've made meaningful progress over the past two fiscal quarters in that area that needed to be accelerated from my perspective. I'm happy with that progress there. Your last question about content limits is something we constantly have to evaluate how we put content in front of our readers given their engagement with our content. It does make sense to balance the content they paid for, cross-sells or upsells around our products, and figuring out how to expose the ad content to them over time. But like I said before, we've largely spent our time and real estate putting the fulfillment of the content in front of the reader, which is what they paid for and then exposing them to other products and research products, either in brand or across brands.

And one last quick one more. Any reason over the long term, meaning several years that marketing doesn't go down to like a low 30s percent of billing kind of, which is where you were in like 2018, 2019?

Yes, we discuss this frequently. I believe there’s no reason to think it wouldn’t happen, but as you know, we don't plan out a year in advance or set an ad budget like many other businesses. We can adapt quickly. Our focus is on finding a balance between profitability and subscriber growth, while also managing the pace at which our readers progress from free to paid, and then to high-value and ultra-high-value customers. This process requires time. As I've mentioned since our earliest investor calls, building trust takes time. People need to feel that they are gaining valuable insights and entertainment from our content and appreciate our perspectives on markets, risks, investments, and valuations. In the first quarter of 2021, we noticed a decrease in the time it takes for someone to discover our products and ascend the value ladder. However, we are now reverting to a more typical timeline, which, as I stated earlier, usually spans the past 18 to 24 months. Given the current economic situation, it's not surprising to see that trend returning. If the macroeconomic conditions improve, which I believe they will over the long term, our customers might revert to a more conventional timeline, ideally on the shorter side of that customer journey. If that occurs, we could see a return of the compression we experienced in 2021 or shortly thereafter. At that point, acquiring subscribers would become easier and more cost-effective, allowing us to adjust our strategies based on the operating environment.

There are no further questions in the queue. I'd like to hand the call to Mark Arnold for closing remarks.

Thank you, Doug, very much. I appreciate all the support for everyone listening, and I thank you again for your time and attention. I hope you all have a great day.

Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation. You may disconnect your lines at this time, and have a wonderful day.