MARKETWISE, INC. The following discussion and analysis of the financial condition and results of operations ofMarketWise, Inc. , aDelaware corporation ("MarketWise ," "we," "us," and "our"), should be read together with our audited consolidated financial statements as ofDecember 31, 2022 and 2021 and for each of the years endedDecember 31, 2022 , 2021 and 2020 included elsewhere in this report. The following discussion contains forward-looking statements. Our actual results may differ significantly from those projected in the forward-looking statements. Factors that might cause future results to differ materially from those projected in the forward-looking statements include, but are not limited to, those discussed in the sections entitled "Risk Factors" and "Cautionary Statement Regarding Forward Looking Statements" in this report.
Overview
We are a leading multi-brand platform of subscription businesses that provides premium financial research, software, education, and tools for self-directed investors. We offer a comprehensive portfolio of high-quality, independent investment research, as well as several software and analytical tools, on a subscription basis.MarketWise started in 1999 with the simple idea that, if we could publish intelligent, independent, insightful, and in-depth investment research and treat the subscriber the way we would want to be treated, then subscribers would renew their subscriptions and stay with us. Over the years, we have expanded our business into a comprehensive suite of investment research products and solutions. We now produce a diversified product portfolio from a variety of financial research brands such asStansberry Research ,Palm Beach Research ,Chaikin Analytics , InvestorPlace, andEmpire Financial Research . Our entire investment research product portfolio is 100% digital and channel agnostic, and we offer all of our research across a variety of platforms, including desktop, laptop, and mobile devices, including tablets and mobile phones.
Today, we benefit from the confluence of a leading editorial team, diverse portfolio of content and brands, and comprehensive suite of investor-centric tools that appeal to a broad subscriber base.
2022 Highlights
The following table presents net cash provided by operating activities, and the related margin as a percentage of net revenue, and Adjusted CFFO, a non-GAAP measure, and the related margin as a percentage of Billings, for each of the periods presented. For more information on Adjusted CFFO and Adjusted CFFO Margin, see "- Non-GAAP Financial Measures." (In thousands)
Year Ended
2022 2021 2020
Net cash provided by operating activities $ 48,374 $ 63,632 $ 55,875
Total net revenue 512,403 549,183 364,179
Net cash provided by operating activities margin 9.4 % 11.6 % 15.3 %
Adjusted CFFO $ 59,324 $ 197,081 $ 134,273
Billings 459,487 729,893 548,835
Adjusted CFFO Margin 12.9 % 27.0 % 24.5 %
Cash flow from operations decreased by $15.3 million , or 24.0%, from $63.6
million for the year ended December 31, 2021 to $48.4 million for the year ended
December 31, 2022 . Cash flow from operations for the year ended December 31,
2022 was primarily due to net income of $101.2 million adjusted for non-cash
items of $0.1 million and a net decrease in our operating assets and liabilities
of $52.9 million .
Adjusted CFFO decreased by $137.8 million , or 69.9%, from $197.1 million for the
year ended December 31, 2021 to $59.3 million for the year ended December 31,
2022 , primarily driven by an decrease of $270.4 million in Billings at an
Adjusted CFFO Margin of 12.9%. The difference between Adjusted CFFO and CFFO is
primarily
45
-------------------------------------------------------------------------------- related to non-recurring expenses recognized in the period and stock-based compensation associated with distributions to the original Class B unitholders. For further information on stock-based compensation, see Note 11 - Stock-Based Compensation to our audited consolidated financial statements. Net revenue decreased by$36.8 million , or 6.7%, from$549.2 million for the year endedDecember 31, 2021 to$512.4 million for the year endedDecember 31, 2022 . The decrease in net revenue was primarily driven by a$38.1 million decrease in term subscription revenue and a$1.8 million decrease in non-subscription revenue, partially offset by a$3.1 million increase in membership subscription revenue. Billings decreased by$270.4 million , or 37.0%, from$729.9 million for the year endedDecember 31, 2021 to$459.5 million for the year endedDecember 31, 2022 . The decrease is due in large part to reduced engagement of prospective and existing subscribers, as the economy reopened beginning in mid-2021 and as additional external economic and geopolitical factors weighed on prospective and existing subscribers' mindset throughout 2022, which we believe contributed to them delaying their purchases. Cash flow from operations increased by$7.8 million , or 13.9%, from$55.9 million for the year endedDecember 31, 2020 to$63.6 million for the year endedDecember 31, 2021 , primarily due to net loss of$953.9 million adjusted for non-cash items of$927.8 million and net changes in our operating assets and liabilities of$89.8 million . Adjusted CFFO increased by$62.8 million , or 46.8%, from$134.3 million for the year endedDecember 31, 2020 to$197.1 million for the year endedDecember 31, 2021 , primarily driven by an increase of$181.1 million in Billings at an Adjusted CFFO Margin of 27.0%. Net revenue increased by$185.0 million , or 50.8%, from$364.2 million for the year endedDecember 31, 2020 to$549.2 million for the year endedDecember 31, 2021 . The increase in net revenue was primarily driven by a$129.9 million increase in term subscription revenue and a$57.7 million increase in membership subscription revenue, partially offset by a$2.6 million decrease in non-subscription revenue. Billings increased by$181.1 million , or 33.0%, from$548.8 million for the year endedDecember 31, 2020 to$729.9 million for the year endedDecember 31, 2021 . We believe this increase is due in large part to strong membership and high-value subscription sales, combined with strong new Paid Subscriber performance, as we continued to focus on adding new Paid Subscribers and those subscribers purchased high-value subscriptions over time.
The Transactions
The Transactions were consummated onJuly 21, 2021 . The Transactions were accounted for akin to a reverse recapitalization, with no goodwill or other intangible assets recorded, in accordance withU.S. GAAP. The Transactions had several significant impacts on our reported financial position and results, as a consequence of reverse capitalization treatment. These impacts include the net cash proceeds from the Transactions of$113.6 million . This cash amount includes: (a) the reclassification of ADAC's Trust Account of$414.6 million to cash and cash equivalents that became available at the time of the Transactions; (b) proceeds of$150.0 million from the issuance and sale of MarketWise Class A common stock in the PIPE investment; (c) payment of $48.8 million in non-recurring transaction costs; (d) settlement of$14.5 million in deferred underwriters' discount; and (e) the payment of$387.7 million to redeeming shareholders of ADAC. See also Note 1, Organization - Reverse Recapitalization withAscendant Digital Acquisition Corp. , to our audited consolidated financial statements for the year endedDecember 31, 2022 in our Annual Report. Warrant Exchange OnSeptember 19, 2022 , we completed an exchange offer relating to our outstanding Public Warrants and Private Placement Warrants, whereby the holders of the warrants were offered 0.1925 shares of our Class A common stock for each outstanding warrant tendered (the "Warrant Exchange Offer"). In connection with the 46
-------------------------------------------------------------------------------- closing of the Warrant Exchange Offer, we issued a total of 5,725,681 shares of common stock in exchange for 29,743,932 warrants. Pursuant to an amendment to the warrant agreement authorized in connection with the Warrant Exchange Offer, onSeptember 30, 2022 , the 1,236,061 outstanding warrants that were not tendered in the exchange were converted into 214,058 shares of common stock. As a result of these transactions, there were no warrants outstanding as ofDecember 31, 2022 .
Key Factors Affecting Our Performance
We believe that our growth and future success are dependent upon several factors, including those below and those noted in the "Risk Factors" section in this report. The key factors below represent significant business opportunities as well as challenges that we must successfully address in order to continue our growth and improve our financial results. Growing our subscriber base with compelling unit economics. We are highly focused on continuing to acquire new subscribers to support our long-term growth. Our marketing spend is a large driver of new subscriber growth. At the heart of our marketing strategy is our compelling unit economics that combine long-term subscriber relationships, highly scalable content delivery, cost-effective customer acquisition, and high-margin conversions. Our Paid Subscribers as ofDecember 31, 2022 generated average customer lifetime Billings of approximately$1,815 , resulting in a LTV/CAC ratio of approximately 2.0x. On average, over the past three years, it has taken approximately 0.6 to 1.5 years for a Paid Subscriber's cumulative net revenue to exceed the total cost of acquiring that subscriber (which includes fixed costs, such as marketing salaries). For more information on our LTV/CAC ratio and the components of this ratio, see "-Definitions of Metrics." We adjust our marketing spend to drive efficient and profitable customer acquisition. We can adjust our marketing spend in near real-time, and we monitor costs per acquisition relative to the cart value of the initial subscription. We seek and typically achieve 90-day payback periods to cover this variable component of the direct marketing spend. As ofDecember 31, 2022 , our paid subscriber base was 841 thousand, down 130 thousand, or 13.4% as compared to 972 thousand atDecember 31, 2021 . Our base is comprised of subscribers obtained through both direct-to-paid acquisition and free-to-paid conversions. Since 2019, direct-to-paid acquisition has accounted for approximately two-thirds of our annual Paid Subscriber acquisition, and is largely driven by display ads and targeted email campaigns. Our free subscription products also serve as a significant source of new Paid Subscribers, accounting for approximately one-third of our annual Paid Subscriber acquisition. Our free-to-paid conversion rate reflects the rate at which Free Subscribers purchase paid subscription products. Our average annual free-to-paid conversion rate was approximately 1% to 2% between 2020 and 2022. Over that same three-year period, our cumulative free-to-paid conversion rate was 4%. Retaining and expanding relationships with existing subscribers. We believe that we have a significant opportunity to expand our relationships with our large base of Free and Paid Subscribers. Thanks to the quality of our products, we believe our customers will continue their relationship with us and extend and increase their subscriptions over time. As we deepen our engagement with our subscribers, our customers tend to purchase more and higher-value products. Our ARPU (as defined below) as ofDecember 31, 2022 was$519 , which decreased 30.1% from$742 as ofDecember 31, 2021 . For more information on ARPU, see "Key Business Metrics - Average Revenue Per User." Conversion rates are important to our business because they are an indicator of how engaged and how well we are connecting with our subscribers. The time it takes our customers to move from our free products to our 47 --------------------------------------------------------------------------------
lower-priced paid subscriptions and eventually to high-end products and membership "bundled" offerings impacts our growth in net revenue, Billings, and ARPU.
Our high-value composition rate reflects the rate at which Paid Subscribers that have purchased less than$600 of our products over their lifetime convert into subscribers that have purchased more than$600 . We believe our high-value composition rate reflects our ability to retain existing subscribers through renewals and our ability to expand our relationship with them when those subscribers purchase higher-value subscriptions. Our ultra high-value composition rate reflects the rate at which high value Paid Subscribers that have purchased more than$600 of our products over their lifetime convert into subscribers that have purchased more than$5,000 . We believe our ultra high-value composition rate reflects our ability to successfully build lifetime relationships with our subscribers, often across multiple products and brands. As ofDecember 31, 2022 , our high-value composition rate and ultra high-value composition rate were 44% and 38%, respectively.
Definitions of Metrics
Throughout this discussion and analysis, a number of our financial and operating metrics are referenced which we do not consider to be key business metrics, but which we review to monitor performance, and which we believe may be useful to investors. These are: Annual free-to-paid conversion rate: We calculate our free-to-paid conversion rate as the number of Free Subscribers who purchased a subscription during the period divided by the average number of Free Subscribers during the period. We believe our free-to-paid conversion rate is an indicator of the type of Free Subscribers that we are signing up and the quality of our content and marketing efforts. Investors should consider free-to-paid conversion rate as one of the factors in evaluating our ability to maintain a robust pipeline for new customer acquisition. Cumulative free-to-paid conversion rate: We calculate our cumulative free-to-paid conversion rate as the number of Free Subscribers who purchased a subscription during the trailing three-year period divided by the average number of Free Subscribers during the trailing three-year period. High-value composition rate: Our high-value composition rate reflects the number of Paid Subscribers who have purchased >$600 in aggregate over their lifetime as of a particular point in time divided by the total number of Paid Subscribers as of that same point in time. Landing Page Visits: The cumulative number of visits to our standalone web pages created specifically for each marketing campaign. We believe landing page visits are a measure of customer engagement. LTV/CAC ratio: We calculate LTV/CAC ratio as LTV divided by CAC. We use LTV/CAC ratio because it is a standard metric for subscription-based businesses, and we believe that an LTV/CAC ratio above 3x is considered to be indicative of strong profitability and marketing efficiency. We believe that an increasing LTV per subscriber reflects our existing subscribers recognizing our value proposition, which will expand their relationship with us across our platform over time, either through a combination of additional product purchases or by joining our membership offerings. Investors should consider this metric when evaluating our ability to achieve a return on our marketing investment. Lifetime value ("LTV") represents the average margin on average customer lifetime Billings (that is, the estimated cumulative spend across a customer's lifetime). Customer acquisition cost ("CAC") is defined as direct marketing spend, plus external revenue share expense, plus retention and renewal expenses, plus copywriting and marketing salaries, plus telesales salaries and commissions, plus customer service commissions. Net revenue retention: Net revenue retention is defined as Billings from all prior period cohorts in the current period, divided by all Billings from the prior period. We believe that a high net revenue retention rate is a measure of customer retention and an indicator of the engagement of our subscribers with our products. Investors should consider net revenue retention as an ongoing measure when evaluating our subscribers' interest in continuing to subscribe to our products and spending more with us over time. 48 -------------------------------------------------------------------------------- Ultra high-value composition rate: Our ultra high-value composition rate reflects the number of Paid Subscribers who have purchased >$5,000 in aggregate over their lifetime as of a particular point in time divided by the number of high-value subscribers as of that same point in time. We believe our ultra high-value composition rate reflects our ability to successfully build lifetime relationships with our subscribers, often across multiple products and brands. Investors should consider ultra high-value composition rate as a factor in evaluating our ability to retain and expand our relationship with our subscribers. Key Business Metrics We review the following key business metrics to measure our performance, identify trends, formulate financial projections, and make strategic decisions. We are not aware of any uniform standards for calculating these key metrics, which may hinder comparability with other companies who may calculate similarly titled metrics in a different way. Year Ended December 31, 2022 2021 2020 Free Subscribers 15,702,545 13,699,910 9,529,622 Paid Subscribers 841,277 971,534 856,826 ARPU$ 519 $ 742 $ 759 Billings (in thousands)$ 459,487 $ 729,893 548,835 Free Subscribers. Free Subscribers are defined as unique subscribers who have subscribed to one of our free investment publications via a valid email address and continue to remain directly opted in, excluding any Paid Subscribers who also have free subscriptions. Free subscriptions are often daily publications that include some commentary about the stock market, investing ideas, or other specialized topics. Included within our free publications are advertisements and editorial support for our current marketing campaigns. While subscribed to our publications, Free Subscribers learn about our editors and analysts, get to know our products and services, and learn more about ways we can help them be better investors.
Free Subscribers increased by 2.0 million, or 14.6%, to 15.7 million at
Free Subscribers increased by 4.2 million, or 43.8%, to 13.7 million as of
Paid Subscribers. We define Paid Subscribers as the total number of unique subscribers with at least one paid subscription at the end of the period. We view the number of Paid Subscribers at the end of a given period as a key indicator of the attractiveness of our products and services, as well as the efficacy of our marketing in converting Free Subscribers to Paid Subscribers and generating direct-to-paid Paid Subscribers. We seek to grow our Paid Subscriber base through performance marketing directly to prospective and existing subscribers across a variety of media, channels, and platforms. Total Paid Subscribers decreased by 130 thousand, or 13.4%, to 841 thousand as ofDecember 31, 2022 as compared to 972 thousand atDecember 31, 2021 , We believe the volatility across asset classes, high-inflation environment, and fears of recession have left prospective and existing subscribers hesitant to purchase or upgrade as they assess the latest economic data and theFederal Reserve's potential next steps. These trends, which began in first quarter 2022, have continued to slow our new subscriber acquisition through fourth quarter 2022. The decreases from these factors were partially offset by the addition of approximately 16 thousand paid subscribers that joined our list with theButtonwood Publishing transaction in third quarter 2022. Total Paid Subscribers increased by 115 thousand, or 13.4%, to 972 thousand as ofDecember 31, 2021 as compared to 857 thousand as ofDecember 31, 2020 , driven by successful marketing efforts and rich content which drove free-to-paid conversions as well as direct-to-paid acquisition. Per-unit subscriber acquisition costs were favorable at the beginning of the year which, when combined with our compelling content, led to 49 -------------------------------------------------------------------------------- unprecedented new subscriber acquisition in first quarter 2021. The travel and leisure boom, where Americans made up for the inability to travel during the pandemic, began in mid-second quarter 2021 and continued through the end of third quarter. During this time, the travel and hospitality industries significantly increased their usage of digital mediums to market their products. With per-unit subscriber acquisition costs rising during this time, we reduced our marketing spend on new customer acquisition, and continued to emphasize marketing higher value content to our existing subscriber base. Costs finally began to improve toward the end of the year and we accelerated our spend to acquire new subscribers. We will continue to focus on our break-even metrics and adjust our direct marketing spend accordingly, as we have done for the past twenty plus years. Subscriber count churn has ranged from approximately 1.8% to 2.7% per month between 2020 and 2022. While churn jumped in first quarter 2022 due to the outsized impact of our largest ever new subscriber cohort a year earlier, it returned to historical levels for the balance of the year. Almost all of the subscribers who churned in 2022 did so having owned only one entry level publication. This is evidenced by the fact that their ARPU approximately matched the subscription price of our entry level publications. We believe our net revenue retention rate, which has averaged over 80% from 2020 to 2022, is a more meaningful gauge of subscriber satisfaction. Average Revenue Per User. We calculate ARPU as the trailing four quarters of net Billings divided by the average number of quarterly total Paid Subscribers over that period. We believe ARPU is a key indicator of how successful we are in attracting subscribers to higher-value content. We believe that our high ARPU is indicative of the trust we build with our subscribers and of the value they see in our products and services. ARPU decreased by$223 , or 30.1%, to$519 as ofDecember 31, 2022 as compared to$742 as ofDecember 31, 2021 . The year-over-year decrease was driven by a 37% decrease in trailing four quarter Billings, while trailing four quarter average Paid Subscribers only decreased by 10%. The decrease in trailing four quarter Billings is due in part to the volatility across asset classes, high-inflation environment, and fears of recession that have persisted since first quarter 2022, which we believe has left prospective and existing subscribers hesitant to purchase or upgrade as they assess the latest economic data and theFederal Reserve's potential next steps. Most of our new subscribers join us via entry level publications, which are generally at lower price points, and thus are initially dilutive to ARPU. ARPU decreased by$17 , or 2.2%, to$742 as ofDecember 31, 2021 as compared to$759 as ofDecember 31, 2020 . The modest year-over-year decrease was driven by a 36% increase in trailing four quarter Paid Subscribers in 2021, which slightly outpaced the increase in trailing four quarter Billings of 33% in 2021. While they have declined somewhat recently, our ARPUs remain high relative to other subscription businesses, and we attribute this to the quality of our content and effective sales and marketing efforts regarding higher value content, bundled subscriptions and membership subscriptions. These subscriptions have compelling economics that allow us to recoup our initial marketing spend made to acquire these subscribers. Specifically, our payback period was estimated at 1.5 years, 0.9 years, and 0.6 years for the years endedDecember 31, 2022 , 2021 and 2020, respectively. We have experienced an increase in the 2022 payback period primarily due to a combination of increased customer acquisition costs and the hesitancy of these subscribers to make additional purchases. The payback period reached the low side of the historical range in 2020 as a result of expanded conversion rates and, to a far lesser degree, decreasing costs for media spend as demand dropped as a result of the pandemic. We have seen the costs for media spend revert back to higher rates in 2021 which continued through 2022. Billings. Billings represents amounts invoiced to customers. We measure and monitor our Billings because it provides insight into trends in cash generation from our marketing campaigns. We generally bill our subscribers at the time of sale and receive full cash payment up front, and defer and recognize a portion of the related revenue ratably over time for term and membership subscriptions. For certain subscriptions, we may invoice our Paid Subscribers at the beginning of the term, in annual or monthly installments, and, from time to time, in multi-year installments. Only amounts invoiced to a Paid Subscriber in a given period are included in Billings. While we believe that Billings provides valuable insight into the cash that will be generated from sales of our subscriptions, this metric may vary from period to period for a number of reasons and, therefore, Billings 50 --------------------------------------------------------------------------------
has a number of limitations as a quarter-over-quarter or year-over-year comparative measure. These reasons include, but are not limited to, the following: (i) a variety of contractual terms could result in some periods having a higher proportion of annual or membership subscriptions than other periods; (ii) fluctuations in payment terms may affect the Billings recognized in a particular period; and (iii) the timing of large campaigns may vary significantly from period to period.
Billings decreased by$270.4 million , or 37.0%, to$459.5 million in 2022 as compared to$729.9 million in 2021. We believe the decrease is due in large part to reduced engagement of prospective and existing subscribers. This began in the second half of 2021 as consumers prioritized travel and leisure in lieu of spending time focusing on their investments. 2022 brought additional challenges with uncertainty stemming from external factors such as 40-year high inflation, volatility across asset classes, federal reserve tightening, and the war inUkraine , which we believe further contributed to prospective and existing subscribers delaying their purchases. Approximately 36% of our Billings this year came from membership subscriptions, 63% from term subscriptions, and 1% from other Billings as compared to 42% from membership subscriptions, 57% from term subscriptions, and 1% from other Billings in 2021. Billings increased by$181.1 million , or 33.0%, to$729.9 million in 2021 as compared to$548.8 million in 2020. Again, this was driven by strong membership, high-value, and ultra high-value subscription sales as well as the success of significant marketing efforts, particularly in second half of 2020.
Components of
Net Revenue
We generate net revenue primarily from services provided in delivering term and membership subscription-based financial research, publications, and SaaS offerings to individual subscribers through our online platforms, advertising arrangements, print products, events, and revenue share agreements. Net revenue is recognized ratably over the duration of the subscriptions, in an amount that reflects the consideration we expect to be entitled to in exchange for those services. In addition to term subscriptions, we offer membership subscriptions where we receive a large upfront payment when the subscriber enters into the contract, and for which we will receive a lower annual maintenance fee thereafter. Subscribers are typically billed in advance of the subscriptions. Much of our net revenue is generated from subscriptions entered into during previous periods. Consequently, any decreases in new subscriptions or renewals in any one period may not be immediately reflected as a decrease in net revenue for that period, but could negatively affect our net revenue in future quarters. This also makes it difficult for us to rapidly increase our net revenue through the sale of additional subscriptions in any period, as net revenue is recognized over the term of the subscription agreement. We expect subscription net revenue to continue to increase as we have experienced sales growth in membership and multi-year contracts in recent periods. We earn net revenue from the sale of advertising placements on our websites and from the sale of print products and events. We also recognize net revenue through revenue share agreements where we earn a commission for successful sales by other parties generated through the use of our customer list. We expect advertising and other net revenue to increase in absolute dollars as our business grows.
Employee Compensation Costs
Employee compensation costs, or payroll and payroll-related costs, include salaries, bonuses, benefits, and stock-based compensation for employees classified within cost of revenue, sales and marketing, and general and administrative, and also includes sales commissions for sales and marketing employees.
During the year endedDecember 31, 2022 we recorded stock-based compensation related to our 2021 Incentive Award Plan and our ESPP. During the year endedDecember 31, 2021 we recorded stock-based compensation 51 --------------------------------------------------------------------------------
related to our 2021 Incentive Award Plan and our Class
We recognized stock-based compensation expenses related to our 2021 Incentive Award Plan and our ESPP of$9.0 million and$4.9 million for the years endedDecember 31, 2022 and 2021, respectively. Stock-based compensation expense during 2021 is primarily related to the ClassB Units . Prior to the Transactions, the ClassB Units were classified as liabilities as opposed to equity and remeasured to fair value at the end of each reporting period, with the change in fair value being charged to stock-based compensation expense. Because the ClassB Units were classified as liabilities on our consolidated balance sheet prior to the Transactions, all profits distributions made to the holders of the ClassB Units were considered to be stock-based compensation expenses. We recognized stock-based compensation expenses related to the ClassB Units of$1,058.4 million and$553.6 million for the year endedDecember 31, 2021 and 2020, respectively. Upon completion of the Transactions, all ClassB Units fully vested as of the transaction date, and the original operating agreement was terminated and replaced by a new operating agreement consistent with the Company's Up-C structure. This new operating agreement does not contain the put and call options that existed under the previous operating agreement, and the Common Units are treated as common equity under the new operating agreement and do not generate stock-based compensation expense. Therefore, the ClassB Units liability was reclassified to equity as of the transaction date and stock-based compensation expense associated with the ClassB Units ceased after the transaction date.
Total stock-based compensation expenses include profits distributions to holders
of Class
As a result of the Transactions, in which all ClassB Units were converted into Common Units, we no longer recognize stock-based compensation expenses related to the ClassB Units for periods after the consummation of the Transactions. While going forward we do not expect to incur the levels of stock-based compensation expense we have historically as a result the liability-award classification of the ClassB Units , we will continue to incur stock-based compensation expense in the ordinary course of business.
See also Note 11 - Stock-Based Compensation to our consolidated financial statements included elsewhere in this Form 10-K.
The total amount of stock-based compensation expense included within each of the
respective line items in the consolidated statement of operations is as follows:
(In thousands) Year Ended December 31, 2022
2022 2021 2020
Cost of revenue $ 1,972 $ 171,804 $ 102,736
Sales and marketing 2,209 48,098 10,567
General and administrative 4,864 843,449 440,297
Total stock based-compensation expense
$ 553,600 Cost of Revenue Cost of revenue consists primarily of payroll and payroll-related costs associated with producing and publishingMarketWise's content, hosting fees, customer service, credit card processing fees, product costs, and allocated overhead. Cost of revenue is exclusive of depreciation and amortization, which is shown as a separate line item. Within cost of revenue are stock-based compensation expenses related to the 2021 Incentive Award Plan and the ESPP of$2.0 million and$1.3 million for the years endedDecember 31, 2022 and 2021, respectively. Cost of revenue also includes stock-based compensation expenses related to the Class B units of$170.5 million and$102.7 million for the years endedDecember 31, 2021 and 2020, respectively, which include profits distributions to holders of ClassB Units of$22.8 million and$14.7 million , respectively. 52 -------------------------------------------------------------------------------- Our cost of revenue is comprised of both variable expenses and fixed costs. In addition, the level and timing of our variable compensation may not match the pattern of how net revenue is recognized over the subscription term. Therefore, we expect that our cost of revenue will fluctuate as a percentage of net revenue in the future. Sales and Marketing Sales and marketing expenses consist primarily of payroll and related costs, amortization of deferred contract acquisition costs, agency costs, advertising campaigns, and branding initiatives. Sales and marketing expenses are exclusive of depreciation and amortization shown as a separate line item. Within sales and marketing are stock-based compensation expenses related to the 2021 Incentive Award Plan and the ESPP of$2.2 million and$1.7 million for the years endedDecember 31, 2022 and 2021, respectively. Sales and marketing also includes stock-based compensation expenses related to the Class B units of$46.4 million and$10.6 million for the years endedDecember 31, 2021 and 2020, respectively, which include profits distributions to holders of ClassB Units of$3.8 million and$2.8 million , respectively. Sales and marketing continues to be one of our largest operating expenses. In periods of time when unit subscriber acquisition costs are lower, we would expect that our sales and marketing expense would increase as we seek to add significant numbers of new subscribers. However, because we incur sales and marketing expenses up front when we launch campaigns to drive sales, while we recognize net revenue ratably over the underlying subscription term, we expect that our sales and marketing expense will fluctuate as a percentage of our net revenue over the long term. Sales and marketing expenses may fluctuate further as a result of acquisitions, joint ventures, cost reduction initiatives, or other strategic transactions.
Research and Development
Research and development expenses consist primarily of payroll and related costs, technical services, software expenses, and hosting expenses. Research and development expenses are exclusive of depreciation and amortization shown as a separate line item. We expect that our research and development expense will increase in absolute dollars as our business grows, including as a result of new acquisitions, joint ventures, and other strategic transactions, particularly as we incur additional costs related to continued investments in our platform.
General and Administrative
General and administrative expenses consist primarily of payroll and related costs associated with our finance, legal, information technology, human resources, executive, and administrative personnel, legal fees, corporate insurance, office expenses, professional fees, and travel and entertainment costs.
Within cost of revenue are stock-based compensation expenses related to the 2021
Incentive Award Plan and the ESPP of
Cost of revenue also includes stock-based compensation expenses related to the Class B units of$841.5 million and$440.3 million for the years endedDecember 31, 2021 and 2020, respectively, which include profits distributions to holders of ClassB Units of$96.8 million and$60.8 million , respectively. We expect to continue to incur additional general and administrative expenses as a result of operating as a public company, including costs to comply with the rules and regulations applicable to companies listed on a national securities exchange, costs related to compliance and reporting obligations pursuant to the rules and regulations of theSEC , and increased expenses for insurance, investor relations, and professional services. General and administrative expenses may fluctuate further as a result of acquisitions, joint ventures, cost reduction initiatives or other strategic transactions we undertake in the future. 53 --------------------------------------------------------------------------------
Depreciation and Amortization
Depreciation and amortization expenses consist of amortization of trade names, customer relationship intangibles, and software development costs, as well as depreciation on other property and equipment such as leasehold improvements, furniture and fixtures, and computer equipment. We expect depreciation and amortization expenses to increase on an absolute dollar basis as our business grows, including as a result of new acquisitions, joint ventures, and other strategic transactions, but to remain generally consistent as a percentage of total net revenue. Related Party Expense Related party expenses primarily consist of expenses for certain corporate functions performed by a related party for certain historic periods, as well as board of director compensation and revenue share expenses. We have built our own corporate infrastructure and do not expect non-revenue share expenses from this related party in the future. Other Income (Expense), Net
Other income, net primarily consists of the net gains on our embedded derivative instruments and on sales of cryptocurrencies.
Interest (Expense) Income, Net
Interest (expense) income, net primarily consists of interest income from our money market accounts, as well as interest expense on outstanding borrowings under the 2021 Credit Facility. See "-Liquidity and Capital Resources-Credit Facilities."
Net Income (Loss) Attributable to Noncontrolling Interests
The Transactions occurred onJuly 21, 2021 . As a result, net income (loss) for the year endedDecember 31, 2021 was attributed to the pre-Transactions period fromJanuary 1, 2021 throughJuly 21, 2021 and to the post-Transactions period fromJuly 22, 2021 throughDecember 31, 2021 . Net income (loss) in the pre-Transactions period was attributable to consolidatedMarketWise, LLC and its respective noncontrolling interests and in the post-Transactions period was attributable to consolidatedMarketWise, Inc. and its respective noncontrolling interests. •Net income for the year endedDecember 31, 2022 was fully in the post-Transactions period and therefore attributable to consolidatedMarketWise, Inc. and its respective noncontrolling interests. As ofDecember 31, 2022 ,MarketWise, Inc.'s controlling interest inMarketWise, LLC was 9.1% and the noncontrolling interest was 90.9%. For the year endedDecember 31, 2022 net income attributable to controlling interests included a$14.9 million gain on warrant liabilities and a$1.5 million tax provision, both of which are 100% attributable to the controlling interest. •Net loss for year endedDecember 31, 2021 was attributed to the pre-Transactions period fromJanuary 1, 2021 throughJuly 21, 2021 and to the post-Transactions period fromJuly 22, 2021 throughDecember 31, 2021 . Immediately following the Transactions,MarketWise, Inc.'s controlling interest inMarketWise, LLC was 7.9% and its noncontrolling interest was 92.1%. For the post-Transactions period, net income attributable to controlling interests included a$15.7 million gain on warrant liabilities and a$2.4 million tax provision, both of which are 100% attributable to the controlling interest. 54 --------------------------------------------------------------------------------
Results of Operations
The following table sets forth our results of operations for the periods presented:
(In thousands)
Year Ended
2022 2021 2020
Net revenue $ 510,040 $ 547,899 $ 360,793
Related party revenue 2,363 1,284 3,386
Total net revenue 512,403 549,183 364,179
Operating expenses:
Cost of revenue(1)(2) 62,697 239,251 154,605
Sales and marketing(1)(2) 235,326 296,934 214,257
General and administrative(1)(2) 114,810 960,183 526,561
Research and development(1)(2) 8,817 7,487 4,770
Depreciation and amortization 3,091 2,676 2,553
Related party expense 379 10,245 122
Total operating expenses 425,120 1,516,776 902,868
Income (loss) from operations 87,283 (967,593) (538,689)
Other income (expense), net 15,672 16,178 (2,879)
Interest (expense) income, net (295) (110) 477
Income (loss) before income taxes 102,660 (951,525) (541,091)
Income tax expense 1,490 2,358 -
Net income (loss) 101,170 (953,883) (541,091)
Net income (loss) attributable to noncontrolling interests 83,180 59,426 (2,718)
Net income (loss) attributable to MarketWise, Inc. $ 17,990 __________________
(1)Included within cost of revenue, sales and marketing, and general and administrative expenses are stock-based compensation expenses as follows:
(In thousands) Year Ended December 31, 2021
2021 2020 2019
Cost of revenue $ 1,972 $ 171,804 $ 102,736
Sales and marketing 2,209 48,098 10,567
General and administrative 4,864 843,449 440,297
Total stock based-compensation expense
(2)Cost of revenue, sales and marketing, general and administrative, and research and development expenses are exclusive of depreciation and amortization shown as a separate line item.
55
--------------------------------------------------------------------------------The following table sets forth our consolidated statements of operations data expressed as a percentage of net revenue for the periods indicated:
Year Ended
2022 2021 2020
Net revenue 100.0 % 100.0 % 100.0 %
Operating expenses:
Cost of revenue(1) 12.2 % 43.6 % 42.5 %
Sales and marketing(1) 45.9 % 54.1 % 58.8 %
General and administrative(1) 22.4 % 174.8 % 144.6 %
Research and development(1) 1.7 % 1.4 % 1.3 %
Depreciation and amortization 0.6 % 0.5 % 0.7 %
Related party expense 0.1 % 1.9 % - %
Total operating expenses 83.0 % 276.2 % 247.9 %
Income (loss) from operations 17.0 % (176.2) % (147.9) %
Other income (expense), net 3.1 % 2.9 % (0.8) %
Interest (expense) income, net (0.1) % 0.0 % 0.1 %
Income (loss) before income taxes 20.0 % (173.3) % (148.6) %
Income tax expense 0.3 % 0.4 % - %
Net income (loss) 19.7 % (173.7) % (148.6) %
Net income (loss) attributable to noncontrolling
interests 16.2 % 10.8 % (0.7) %
Net income (loss) attributable to MarketWise, Inc. 3.5 % (184.5) % (147.8) %
__________________
(1)Cost of revenue, sales and marketing, general and administrative, and research and development expenses are exclusive of depreciation and amortization shown as a separate line item.
Comparison of Years Ended
Net Revenue
(In thousands) Year Ended December 31,
2022 2021 $ Change % Change
Net revenue $ 512,403 $ 549,183 $ (36,780) (6.7) %
Net revenue decreased by $36.8 million , or 6.7%, from $549.2 million for the
year ended December 31, 2021 to $512.4 million for the year ended December 31,
2022 . The decrease in net revenue was primarily driven by a $38.1 million
decrease in term subscription revenue and a $1.8 million decrease in
non-subscription revenue, partially offset by a $3.1 million increase in
membership subscription revenue. Revenue from Buttonwood Publishing , the
business we acquired in August 2022 , was $2.0 million for the year ended
December 31, 2022 .
Term subscription revenue decreased during the year ended December 31, 2022
primarily due to lower Billings as compared to the 2021 period - our highest
Billings in company history - which was driven by reduced engagement of
prospective and existing subscribers in the 2022 period. Membership subscription
revenue for the year ended December 31, 2022 benefited from the recognition of
the deferred revenue we recorded in prior years. Membership subscription
revenue, which is initially deferred and recognized over a five-year period,
increased as a result of higher volume of membership subscriptions in current
and prior years, which continued to benefit us for the year ended December 31,
2022 .
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Operating Expenses
(In thousands) Year Ended December 31,
2022 2021 $ Change % Change
Operating expenses:
Cost of revenue $ 62,697 $ 239,251 $ (176,554) (73.8) %
Sales and marketing 235,326 296,934 (61,608) (20.7) %
General and administrative 114,810 960,183 (845,373) (88.0) %
Research and development 8,817 7,487 1,330 17.8 %
Depreciation and amortization 3,091 2,676 415 15.5 %
Related party expenses 379 10,245 (9,866) (96.3) %
Total operating expenses $ 425,120 $ 1,516,776 $ (1,091,656) (72.0) %
Cost of Revenue
Cost of revenue decreased by $176.6 million , or 73.8%, from $239.3 million for
the year ended December 31, 2021 to $62.7 million for the year ended
December 31, 2022 , primarily driven by a $170.5 million decrease in stock-based
compensation expense related to holders of Class B Units , a $5.7 million
decrease in credit card fees, a $1.9 million decrease in freelance editorial
expense, and a $1.5 million decrease in outsourced customer service. This was
partially offset a $2.6 million increase in salaries, taxes and benefits, and a
$0.7 million increase in stock-based compensation expense related to awards
under the 2021 Incentive Award Plan.
Approximately $22.8 million of the decrease in Class B stock-based compensation
expense was due to distributions, and $147.7 million of the decrease was related
to the change in fair value and the accelerated vesting of the Class B units,
both of which were related to the Transactions.
Sales and Marketing
Sales and marketing expense decreased by$61.6 million , or 20.7%, from$296.9 million for the year endedDecember 31, 2021 to$235.3 million for the year endedDecember 31, 2022 , primarily driven by a$46.4 million decrease in stock-based compensation expense related to holders of ClassB Units , and a$46.0 million decrease in marketing as we have reduced our marketing spend as part of our cost reduction initiatives and due to higher per unit subscriber acquisition costs resulting from higher post-COVID increases in demand for display advertising. This was partially offset by a$26.0 million increase in amortization of deferred contract acquisition costs, and a$4.6 million increase in salaries, taxes and benefits. Approximately$3.8 million of the decrease in Class B stock-based compensation expense was due to distributions, and$42.6 million of the decrease was related to the change in fair value and the accelerated vesting of the Class B units, both of which were related to the Transactions.
General and Administrative
General and administrative expense decreased by$845.4 million , or 88.0%, from$960.2 million for the year endedDecember 31, 2021 to$114.8 million for the year endedDecember 31, 2022 , primarily driven by a$841.5 million decrease in stock-based compensation expense related to holders of ClassB Units , a$16.7 million decrease in incentive compensation and profits interest expenses, and a$3.8 million decrease related to sales tax. This was partially offset by a$9.4 million increase in severance expense, a$4.0 million increase in professional fees primarily due to higher fees related to the warrant exchange transaction and fees capitalized related to the Transactions in third quarter 2021, a$2.9 million increase in stock-based compensation related to awards under the 2021 Incentive Award Plan and the ESPP, a$2.9 million increase in software expense, and a$1.5 million increase in insurance expense. 57 -------------------------------------------------------------------------------- Approximately$96.8 million of the decrease in Class B stock-based compensation expense was due to distributions, and$744.7 million of the decrease was related to the change in fair value and the accelerated vesting of the Class B units, both of which were related to the Transactions.
Related Party Expense
Related party expense decreased by$9.9 million from$10.2 million for the year endedDecember 31, 2021 to$0.4 million for the year endedDecember 31, 2022 , driven by a discretionary, one-time, non-employee bonus payment of$10.0 million to the Company's founder, who is a Class B common stockholder, inJuly 2021 .
Comparison of the Years Ended
Net Revenue
(In thousands) Year Ended December 31,
2021 2020 $ Change % Change
Net revenue $ 549,183 $ 364,179 $ 185,004 50.8 %
Net revenue increased by $185.0 million , or 50.8%, from $364.2 million for the
year ended December 31, 2020 to $549.2 million for the year ended December 31,
2021 . The increase in net revenue was primarily driven by a $129.9 million
increase in term subscription revenue and a $57.7 million increase in membership
subscription revenue, partially offset by a $2.6 million decrease in
non-subscription revenue. Revenue from Chaikin Analytics, the business we
acquired in January 2021 , was $7.5 million for the year ended December 31, 2021 .
Both term and membership subscription revenue benefited from a significant
increase in Paid Subscribers. Term subscription revenue increased as a result of
a significant increase in marketing efforts. Membership subscription revenue,
which is initially deferred and recognized over a five-year period, increased as
a result of higher volume of membership subscriptions in current and prior
years, which continued to benefit us in 2021.
Operating Expenses
(In thousands) Year Ended December 31,
2021 2020 $ Change % Change
Operating expenses:
Cost of revenue $ 239,251 $ 154,605 $ 84,646 54.7 %
Sales and marketing 296,934 214,257 82,677 38.6 %
General and administrative 960,183 526,561 433,622 82.3 %
Research and development 7,487 4,770 2,717 57.0 %
Depreciation and amortization 2,676 2,553 123 4.8 %
Related party expenses 10,245 122 10,123 8297.5 %
Total operating expenses $ 1,516,776 $ 902,868 $ 613,908 68.0 %
Cost of Revenue
Cost of revenue increased by $84.6 million , or 54.7%, from $154.6 million for
the year ended December 31, 2020 to $239.3 million for the year ended
December 31, 2021 , primarily driven by a $67.8 million increase in stock-based
compensation expense related to holders of Class B units, a $6.2 million
increase in payroll and payroll-related costs due to higher headcount, a $4.9
million increase in credit card fees due to higher sales volume, and a $1.3
million increase in stock-based compensation expense related to newly issued
awards under the 2021 Incentive Award Plan.
58
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Approximately $8.0 million of the increase in Class B stock-based compensation
expense was due to higher distributions, and $59.8 million of the increase was
related to the change in fair value of the Class B units and the accelerated
vesting of the Class B units, both of which were related to the Transactions.
Sales and Marketing
Sales and marketing expense increased by$82.7 million , or 38.6%, from$214.3 million for the year endedDecember 31, 2020 to$296.9 million for the year endedDecember 31, 2021 , primarily driven by a$41.3 million increase in amortization of deferred contract acquisition costs, a$35.9 million increase in Class B stock-based compensation expense, a$7.2 million increase in payroll and payroll-related costs driven by increased headcount, and a$1.7 million increase in stock based compensation expense related to newly issued awards under the 2021 Inventive Award Plans. This was partially offset by a$4.5 million decrease in marketing and lead-generation expenses as we have reduced our marketing costs due to higher per unit advertising cost resulting from higher post-COVID demand for display advertising that emerged in the second quarter of the year. Approximately$1.0 million of the increase in Class B stock-based compensation expense was due to higher distributions, and$34.8 million of the increase was related to the change in fair value and the accelerated vesting of the Class B units, all of which were related to the Transactions.
General and Administrative
General and administrative expense increased by$433.6 million , or 82.3%, from$526.6 million for the year endedDecember 31, 2020 to$960.2 million for the year endedDecember 31, 2021 , primarily driven by a$401.2 million increase in Class B stock-based compensation expense, a$7.1 million increase in incentive compensation and profits interests expenses, a$7.6 million increase in payroll and payroll-related costs due to increased headcount to support operations, a$4.7 million increase in software expenses, a$3.2 million increase in accounting, legal and consulting fees related to public company readiness efforts, a$2.0 million increase in stock-based compensation expense related to newly issued awards under the 2021 Incentive Award Plan, and a$1.2 million increase in donations. Approximately$36.0 million of the increase in Class B stock-based compensation expense was due to higher distributions, and$365.2 million of the increase was related to the change in fair value and the accelerated vesting of the Class B units, all of which were related to the Transactions.
Related Party Expense
Related party expense increased by$10.1 million from$0.1 million for the year endedDecember 31, 2020 to$10.2 million for the year endedDecember 31, 2021 , driven by a discretionary, one-time, non-employee bonus payment of$10.0 million to the Company's founder, who is a Class B common stockholder, inJuly 2021 . Non-GAAP Financial Measures In addition to our results determined in accordance with GAAP, we believe that the below non-GAAP financial measures are useful in evaluating our ability to generate cash. We use the below non-GAAP financial measures, collectively, to evaluate our ongoing operations and for internal planning and forecasting purposes. We believe that non-GAAP financial information, when taken collectively, may be helpful to investors because it provides consistency and comparability with past financial performance, and assists in comparisons with other companies, some of which use similar non-GAAP financial information to supplement their GAAP results. This non-GAAP financial information is presented for supplemental informational purposes only and should not be considered a substitute for financial information presented in accordance with GAAP, and may be different from similarly titled non-GAAP measures used by other companies. A reconciliation is provided below for each non-GAAP financial measure to the most directly comparable financial measure stated in accordance with GAAP. Investors are 59
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encouraged to review the related GAAP financial measures and the reconciliations
of these non-GAAP financial measures to their most directly comparable GAAP
financial measures.
(In thousands) Year Ended December 31,
2022 2021 2020
Adjusted CFFO $ 59,324 $ 197,081 $ 134,273
Adjusted CFFO Margin 12.9 % 27.0 % 24.5 %
Adjusted CFFO / Adjusted CFFO Margin
In addition to our results determined in accordance with GAAP, we disclose the non-GAAP financial measure Adjusted CFFO. We define Adjusted CFFO as cash flow from operations plus profits distributions that were recorded as stock-based compensation expense from the ClassB Units , plus or minus any non-recurring items. Profits distributions to Class B unitholders included amounts attributable to the Class B unitholders' potential tax liability with respect to the ClassB Units (i.e., there was no tax withholding, and the full amount of allocable profit was distributed, subject to the terms of theExisting LLC Agreement). We define Adjusted CFFO Margin as Adjusted CFFO as a percentage of Billings.
We believe that Adjusted CFFO and Adjusted CFFO Margin are useful indicators that provide information to management and investors about our ability to generate cash, to facilitate comparison of our results to those of peer companies over multiple periods, and for internal planning and forecasting purposes.
We have presented Adjusted CFFO because we believe it provides investors with greater comparability of our ability to generate cash without the effects of stock-based compensation expense related to holders of ClassB Units that will not continue following the consummation of the Transactions, in which all ClassB Units were converted into Common Units. Following the consummation of the Transactions, we will make certain tax distributions to the MarketWise Members in amounts sufficient to pay individual income taxes on their respective allocation of the profits ofMarketWise, LLC at then prevailing individual income tax rates. These distributions will not be recorded onMarketWise, Inc.'s income statement, and will be reflected onMarketWise, Inc.'s cash flow statement as cash used in financing activities. The cash used to make these distributions will not be available to us for use in the business. Adjusted CFFO and Adjusted CFFO Margin have limitations as analytical tools, and should not be considered in isolation or as substitutes for analysis of other GAAP financial measures, such as cash flow from operations or operating cash flow margin. Some of the limitations of using Adjusted CFFO and Adjusted CFFO Margin are that these metrics may be calculated differently by other companies in our industry. We expect Adjusted CFFO and Adjusted CFFO Margin to fluctuate in future periods as we invest in our business to execute our growth strategy. These activities, along with any non-recurring items as described above, may result in fluctuations in Adjusted CFFO and Adjusted CFFO Margin in future periods.
The following table provides a reconciliation of net cash provided by operating activities, the most directly comparable financial measure calculated in accordance with GAAP, to Adjusted CFFO for each of the periods presented:
(In thousands) Year Ended December 31, % change
2022 2021 2020 2022 vs 2021 2021 vs 2020
Net cash provided by operating activities
$ 55,875 (24.0) % 13.9 % Profits distributions to Class B unitholders included in stock-based compensation expense - 123,449 78,398 (100.0) % 57.5 % Non-recurring expenses 10,950 10,000 - 9.5 % 100.0 % Adjusted CFFO$ 59,324 $ 197,081 $ 134,273 (69.9) % 46.8 % 60
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The following table provides the calculation of net cash provided by operating
activities margin as a percentage of total net revenue, the most directly
comparable financial measure in accordance with GAAP, and Adjusted CFFO Margin
for each of the periods presented:
(In thousands) Year Ended December 31, % change
2022 2021 2020 2022 vs 2021 2021 vs 2020
Net cash provided by operating
activities $ 48,374 $ 63,632 $ 55,875 (24.0) % 13.9 %
Total net revenue 512,403 549,183 364,179 (6.7) % 50.8 %
Net cash provided by operating
activities margin 9.4 % 11.6 % 15.3 %
Adjusted CFFO $ 59,324 $ 197,081 $ 134,273 (69.9) % 46.8 %
Billings 459,487 729,893 548,835 (37.0) % 33.0 %
Adjusted CFFO Margin 12.9 % 27.0 % 24.5 %
Adjusted CFFO decreased by $137.8 million , or 69.9%, from $197.1 million for the
year ended December 31, 2021 to $59.3 million for the year ended December 31,
2022 , primarily driven by a decrease of $270.4 million in Billings. Adjusted
CFFO this year was impacted by net changes in working capital, excluding changes
in deferred revenue and changes in deferred contract acquisition costs, which
decreased cash by $6.3 million , largely due to a decrease in trade and other
payables this year. The difference between Adjusted CFFO and CFFO in the year
ended December 31, 2022 is $11.0 million , which are one-time costs related to
severance payments and professional fees related to our warrant exchange
transaction. The difference between Adjusted CFFO and CFFO in the year ended
December 31, 2021 is related to stock-based compensation expense associated with
$123.4 million of profits distributions to the original Class B unitholders, and
a discretionary, one-time, lifetime-award, non-employee bonus payment of $10.0
million .
Adjusted CFFO increased by $62.8 million , or 46.8%, from $134.3 million for the
year ended December 31, 2020 to $197.1 million for the December 31, 2021 ,
primarily driven by an increase of $181.1 million in Billings at an Adjusted
CFFO Margin of 27.0%.
The Effect of the COVID-19 Pandemic
The COVID-19 pandemic has had a significant impact on worldwide activity, the global supply chain, financial markets, trading activities, and consumer behavior, and the expected duration of these impacts remain uncertain.
We have continued to operate our business without much disruption during the pandemic, and we required our employees to work remotely in response to stay-at-home orders imposed by theU.S. and local governments inMarch 2020 . While COVID-19 has impacted the sales and profitability of many companies' businesses over this period, it had not negatively impacted our net revenues during its peak periods. However, as the effect of COVID-19 has declined, we have seen a decline in consumer engagement as compared to the peak COVID-19 period, which we believe has had an effect of reducing our revenues and profitability. While it is not possible at this time to estimate the impact, if any, that COVID-19 will have on our business longer term, the continued spread of COVID-19 and the measures taken by governments, businesses, and other organizations in response to COVID-19 could adversely impact our business, financial condition, and our results of operations. For more information, see the "Risk Factors" and "Cautionary Note Regarding Forward-Looking Statements" sections in this report. 61
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Liquidity and Capital Resources
General
As ofDecember 31, 2022 , our principal sources of liquidity were cash and cash equivalents of$158.6 million . Cash and cash equivalents are comprised of bank deposits, money market funds, and certificates of deposit. We have financed our operations primarily through cash received from operations, and our sources of liquidity have enabled us to make continued investments in supporting the growth of our business. Our 2021 Credit Facility (as defined and further discussed below) can be used to finance permitted acquisitions, for working capital and general corporate purposes. We expect that our operating cash flows, in addition to cash on hand, will enable us to continue to make investments in the future. We expect our operating cash flows to further improve as we increase our operational efficiency and experience economies of scale. We believe that our existing cash and cash equivalents and cash flow from operations will be sufficient to support working capital and capital expenditure requirements for at least the next 12 months. Our future capital requirements will depend on many factors, including our subscription growth rate, subscription renewal activity, including the timing and the amount of cash received from subscribers, the pace of expansion of sales and marketing activities, the timing and extent of spending to support development efforts, the introduction of new and enhanced products, and the level of costs to operate as a public company. We may, in the future, enter into arrangements to acquire or invest in complementary businesses, products, and technologies. We may be required to seek additional equity or debt financing. In the event that we require additional financing, we may not be able to raise such financing on terms acceptable to us or at all. If we are unable to raise additional capital or generate cash flows necessary to expand our operations and invest in continued innovation, we may not be able to compete successfully, which would harm our business, operations, and financial condition. A substantial source of our cash is from our deferred revenue, which is included in the liabilities section of our consolidated balance sheets. Deferred revenue consists of the unearned portion of customer Billings, which is recognized as net revenue in accordance with our revenue recognition policy. As ofDecember 31, 2022 , we had deferred revenue of$663.5 million , of which$315.2 million was recorded as a current liability and is expected to be recognized as net revenue over the next 12 months, provided all other revenue recognition criteria have been met. As a result of the Transactions, we have incurred and expect that we will incur public company expenses related to our operations, plus payment obligations under the Tax Receivable Agreement, which we expect to be significant.MarketWise, Inc. intends to causeMarketWise, LLC to make distributions toMarketWise, Inc. in an amount sufficient to allowMarketWise, Inc. to pay its tax obligations and operating expenses, including distributions to fund any payments due under the Tax Receivable Agreement. IfMarketWise, LLC does not have sufficient cash to fund distributions toMarketWise, Inc. in amounts sufficient to coverMarketWise, Inc.'s obligations under the Tax Receivable Agreement, it may have to borrow funds, which could materially adversely affect its liquidity and financial condition and subject it to various restrictions imposed by any such lenders. To the extent thatMarketWise, Inc. is unable to make timely payments under the Tax Receivable Agreement for any reason, the unpaid amounts will be deferred and will accrue interest until paid. For additional information regarding the Tax Receivable Agreement, see the section entitled " Management's Discussion and Analysis of Financial Condition and Results of Operations-Liquidity and Capital Resources-Tax Receivable Agreement" in the Annual Report. Furthermore, to the extent we have taxable income, we will make distributions to the MarketWise Members in amounts sufficient for the MarketWise Members to pay taxes due on their share ofMarketWise income at prevailing individual income tax rates. Such amounts will be reflected inMarketWise, Inc.'s statement of cash flows as cash used in financing activities, and so will not decrease the amount of cash from operations or net income reflected inMarketWise, Inc.'s financial statements. However, such distributions will decrease the amount of cash available to us for use in our business.
Tax Receivable Agreement
62
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Receivable Agreement. However, MarketWise, LLC's ability to make such
distributions to MarketWise, Inc. may be subject to various limitations and
restrictions, such as restrictions on distributions under contracts or
agreements to which MarketWise, LLC is then a party, including debt agreements,
or any applicable law, or that would have the effect of rendering MarketWise,
LLC insolvent. If MarketWise, LLC does not have sufficient cash to fund
distributions to MarketWise, Inc. in amounts sufficient to cover MarketWise,
Inc.'s obligations under the Tax Receivable Agreement, it may have to borrow
funds, which could materially adversely affect its liquidity and financial
condition and subject it to various restrictions imposed by any such lenders. To
the extent that MarketWise, Inc. is unable to make timely payments under the Tax
Receivable Agreement for any reason, the unpaid amounts will be deferred and
will accrue interest until paid. MarketWise, Inc.'s failure to make any payment
required under the Tax Receivable Agreement (including any accrued and unpaid
interest) within 90 calendar days of the date on which the payment is required
to be made will constitute a material breach of a material obligation under the
Tax Receivable Agreement, which will terminate the Tax Receivable Agreement and
accelerate future payments thereunder, unless the applicable payment is not made
because (i) MarketWise, LLC is prohibited from making such payment under the
terms of the Tax Receivable Agreement or the terms governing certain of its
indebtedness or (ii) MarketWise, LLC does not have, and despite using
commercially reasonable efforts cannot obtain, sufficient funds to make such
payment. See "Certain Relationships and Related Party Transactions-Tax
Receivable Agreement" and "Certain Relationships and Related Party
Transactions-MarketWise Operating Agreement" for additional information. Any
payments made by MarketWise, Inc. to the MarketWise Members under the Tax
Receivable Agreement will not be available for reinvestment in the business and
will generally reduce the amount of cash that might have otherwise been
available to MarketWise, Inc. and its subsidiaries.
The Tax Receivable Agreement provides that if (i) MarketWise, Inc. materially
breaches any of its material obligations under the Tax Receivable Agreement,
(ii) certain mergers, asset sales, other forms of business combinations, or
other changes of control were to occur, or (iii) MarketWise, Inc. elects an
early termination of the Tax Receivable Agreement, then MarketWise, Inc.'s
future obligations, or its successor's future obligations, under the Tax
Receivable Agreement to make payments thereunder would accelerate and become due
and payable, based on certain assumptions, including an assumption that
MarketWise, Inc. would have sufficient taxable income to fully utilize all
potential future tax benefits that are subject to the Tax Receivable Agreement,
and an assumption that, as of the effective date of the acceleration, any
MarketWise Member that has Common Units not yet exchanged shall be deemed to
have exchanged such Common Units on such date, even if MarketWise, Inc. does not
receive the corresponding tax benefits until a later date when the Common Units
are actually exchanged. As a result of the foregoing, MarketWise, Inc. would be
required to make an immediate cash payment equal to the estimated present value
of the anticipated future tax benefits that are the subject of the Tax
Receivable Agreement, based on certain assumptions, which payment may be made
significantly in advance of the actual realization, if any, of those future tax
benefits and, therefore, MarketWise, Inc. could be required to make payments
under the Tax Receivable Agreement that are greater than the specified
percentage of the actual tax benefits it ultimately realizes.
Share Repurchase Program
As previously disclosed in our Annual Report, onNovember 4, 2021 , our Board of Directors authorized the repurchase of up to$35.0 million in aggregate of shares of the Company's Class A common stock, with the authorization to expire onNovember 3, 2023 . During the year endedDecember 31, 2022 , we repurchased 2,484,717 shares totaling$13.1 million in the aggregate, including fees and commissions. Since the inception of the program we have repurchased 2,984,987 total shares. For each share of Class A common stock the Company repurchases under the share repurchase program,MarketWise, LLC , the Company's direct subsidiary, will redeem one common unit ofMarketWise, LLC held by the Company, decreasing the percentage ownership ofMarketWise, LLC by the Company and relatively increasing the ownership by the other unitholders.
Credit Facilities
On
63
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Credit Facility to be increased or new term commitments to be established by up
to $65 million . The existing lenders under the 2021 Credit Facility are
entitled, but not obligated, to provide such incremental commitments. The 2021
Credit Facility has a term of three years, maturing on October 29, 2024 .
The 2021 Credit Facility is guaranteed by MarketWise, LLC's direct and indirect
material U.S. subsidiaries, subject to customary exceptions (the "Guarantors"),
pursuant to a guaranty by the Guarantors in favor of HSBC Bank USA, National
Association , as agent (the "Guaranty"). Borrowings under the 2021 Credit
Facility are secured by a first-priority lien on substantially all of the assets
of MarketWise, LLC and the Guarantors, subject to customary exceptions.
Borrowings will bear interest at a floating rate depending on
The Loan and Security Agreement contains customary affirmative and negative covenants for transactions of this type, and contains financial maintenance covenants that requireMarketWise, LLC to maintain an Interest Coverage Ratio and Net Leverage Ratio (both as defined in the Loan and Security Agreement), and provides for a number of customary events of default, which could result in the acceleration of obligations and the termination of lending commitments under the Loan and Security Agreement. As ofDecember 31, 2022 , we were in compliance with these covenants. Cash Flows The following table presents a summary of our consolidated cash flows provided by (used in) operating, investing, and financing activities for the periods indicated: (In thousands) Year Ended December 31, 2022 2021 2020
Net cash provided by operating activities
(13,238) (8,311) (9,649)
Net cash used in financing activities (16,192) (30,678) (103,369) Operating Activities For the year endedDecember 31, 2022 , net cash provided by operating activities was$48.4 million , primarily due to net income of$101.2 million adjusted for net non-cash items which reduced cash by$0.1 million , and net changes in our operating assets and liabilities which reduced cash by$52.9 million , largely due to timing differences in the net receipt of cash. The non-cash items include a change in fair value of derivative liabilities of$15.7 million , which was partially offset by stock-based compensation expense and deferred income taxes of$9.0 million and$1.5 million , respectively. The changes in operating assets and liabilities were primarily driven by a decrease in deferred revenue, which reduced cash by$52.0 million due to our overall decrease in sales, a decrease in trade and other payables, which decreased cash by$4.0 million , a decrease in other current and long-term liabilities, which decreased cash by$3.8 million , partially offset by a decrease in accounts receivable due to our overall decrease in sales, which increased cash by$3.8 million , and a net increase due to deferred contract acquisition costs of$5.5 million . For the year endedDecember 31, 2021 , net cash provided by operating activities was$63.6 million , primarily due to net loss of$953.9 million adjusted for non-cash charges of$927.8 million and a contribution to cash resulting from net changes in our operating assets and liabilities of$89.8 million . The non-cash adjustments primarily related to stock-based compensation expenses of$939.0 million , which was driven by the increase in fair value as a result of a higher probability assigned to the market approach due to the signing of a letter of intent with ADAC duringDecember 2020 , and the granting and vesting of certain ClassB Units . The changes in operating assets and liabilities were primarily driven by an increase in deferred revenue of$175.6 million due to our overall increase in sales, and an increase in accrued expenses of$14.2 million , partially offset by a net increase in deferred contract acquisition costs of$95.8 million . 64
-------------------------------------------------------------------------------- For the year endedDecember 31, 2020 , net cash provided by operating activities was$55.9 million , primarily due to net loss of$541.1 million and non-cash charges of$483.4 million , and partially offset by net changes in our operating assets and liabilities of$113.6 million . The non-cash adjustments primarily related to stock-based compensation income of$475.2 million , which was driven by the decrease in fair value of the ClassB Units . The changes in operating assets and liabilities were primarily driven by an increase in deferred revenue of$178.8 million due to our overall increase in sales, partially offset by a net increase in deferred contract acquisition costs of$64.9 million .
Investing Activities
For the year endedDecember 31, 2022 , net cash used in investing activities was$13.2 million , primarily driven by the payment of$12.8 million related to theButtonwood Publishing acquisition. For the year endedDecember 31, 2021 , net cash used in investing activities was$8.3 million , primarily driven by the payment of$7.1 million related to the acquisition of Chaikin, and$0.9 million to acquire intangible assets. For the year endedDecember 31, 2020 , net cash used in investing activities was$9.6 million , primarily driven by the payment of$9.2 million to acquire the noncontrolling interest of TradeSmith, and$0.3 million for property and equipment.
Financing Activities
For the year ended
For the year endedDecember 31, 2021 , net cash used in financing activities was$30.7 million , primarily due to$135.5 million in distributions to members and$5.5 million in distributions to noncontrolling interests, which is offset by a$113.6 million inflow from proceeds from the Transactions. For the year endedDecember 31, 2020 , net cash used in financing activities was$103.4 million , primarily due to$101.8 million in distributions to members,$5.4 million repayment of borrowings under the 2013 Credit Facility, and$0.5 million in distributions to noncontrolling interests.
Critical Accounting Estimates
Our consolidated financial statements have been prepared in accordance with GAAP. The preparation of these consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, costs, and expenses, and related disclosures. On an ongoing basis, management evaluates its estimates and assumptions. Our actual results may differ from these estimates under different assumptions or conditions. Management believes that, of our significant accounting policies, which are described in Note 2 to our consolidated financial statements, the following accounting policies involve a greater degree of judgment and complexity. Accordingly, these are the policies management believes are the most critical to aid in fully understanding and evaluating our consolidated financial condition and results of operations. Revenue Recognition
We primarily earn revenue from services provided in delivering subscription-based financial research, publications, and SaaS offerings to individual subscribers through our online platforms using the five-step method described in Note 2 to our consolidated financial statements.
Subscription revenues are recognized evenly over the duration of the subscriptions, in an amount that reflects the consideration we expect to be entitled to in exchange for those services. Subscribers are typically billed in advance of the subscriptions. The key estimates related to our revenue recognition are related to our estimated
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--------------------------------------------------------------------------------customer lives for our membership subscriptions, determination of standalone selling prices, and the amortization period for our capitalized contract costs.
We also offer membership subscriptions where we receive an upfront payment upon entering into the contract and receive a lower amount annually thereafter. Certain upfront fees on membership subscriptions are paid in installments over a 12-month period and, from time to time, over multiple years. We recognize revenue related to membership subscriptions over the estimated customer lives, which is five years. Management has determined the estimated life of membership customers based on historic customer attrition rates. The estimated life of membership customers was five years for each of the years endedDecember 31, 2022 , 2021 and 2020. Our contracts with subscribers may include multiple performance obligations if subscription services are sold with other subscriptions, products, or events within one contract. For such contracts, we allocate net revenues to each performance obligation based on its relative standalone selling price. We generally determine standalone selling prices based on the prices charged to subscribers on a standalone basis. We capitalize incremental costs that are directly related to the acquisition or renewal of customer contracts, to the extent that the costs are expected to be recovered and if we expect the benefit of these costs to be longer than one year. We have elected to utilize the practical expedient and expense costs to obtain a contract with a subscriber when the expected benefit period is one year or less. Our capitalizable incremental costs include sales commissions to employees and fees paid to marketing vendors that are generally calculated as a percentage of the customer sale. We also capitalize revenue share fees that are payable to other companies, including related parties, who share their customer lists with us for each successful sale we make to a customer from their list. Capitalized costs are amortized on a straight-line basis over the shorter of the expected customer life and the expected benefit related directly to those costs, which is approximately four years. The amortization period for contract costs was approximately four years for each of the years endedDecember 31, 2022 , 2021 and 2020.
Transactions and Valuation of
When we acquire a business, we allocate the fair value of purchase consideration to the tangible assets acquired, liabilities assumed, and intangible assets acquired based on their estimated fair values as of the acquisition date. The excess of the fair value of purchase consideration over the fair values of these identifiable assets and liabilities is recorded as goodwill. Such valuations require management to make significant estimates and assumptions, especially with respect to intangible assets. Significant estimates in valuing assets acquired and liabilities assumed include, but are not limited to, future expected cash flows from acquired customers, trade names, acquired technology from a market participant perspective, and determining useful lives and discount rates. Management's estimates of fair value are based upon assumptions believed to be reasonable, but which are inherently uncertain and unpredictable and, as a result, actual results may differ from estimates. While management believes the assumptions and estimates it has made in the past have been appropriate, they are inherently uncertain and subject to refinement. During the measurement period, which is up to one year from the acquisition date, we may record adjustments to the assets acquired and liabilities assumed, with the corresponding offset to goodwill. Upon the conclusion of the measurement period, any subsequent adjustments are recorded to earnings. We did not have significant measurement period adjustments during the years endedDecember 31, 2022 , 2021 and 2020.
Stock-Based Compensation
Historically, we granted ClassB Units to certain key employees. Prior to the Transactions, the ClassB Units were classified as liabilities as opposed to equity and remeasured to fair value at the end of each reporting period, with the change in value being charged to stock-based compensation expense. Because the ClassB Units were classified as liabilities on our consolidated balance sheet, all profits distributions made to the holders of the ClassB Units were considered to be stock-based compensation expenses. Expense was recognized using the greater of the expenses as calculated based on (i) the legal vesting of the underlying units and (ii) a straight-line basis.
Because our Class
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Our board of managers considered, among other things, contemporaneous valuations
of our equity value prepared by an unrelated third-party valuation firm in
accordance with the guidance provided by the American Institute of Certified
Public Accountants Practice Guide , Valuation of Privately-Held-Company Equity
Securities Issued as Compensation. To estimate the fair value of the Class B
Units , a two-step valuation approach was used. First our equity value was
estimated using a market approach and a discounted cash flow approach by
projecting our net cash flows into the future and discounting these cash flows
to present value by applying a market discount rate. This calculated equity
value was then allocated to the common units outstanding using an option pricing
model by determining the distributions available to unit holders in a
hypothetical liquidation. Our board of managers exercised reasonable judgment
and considered several objective and subjective factors to determine the best
estimate of the fair value of our Class B Units , including:
•our historical and expected operating and financial performance;
•current business conditions;
•our stage of development and business strategy;
•macroeconomic conditions;
•our weighted average cost of capital;
•risk-free rates of return;
•the volatility of comparable publicly traded peer companies; and
•the lack of an active public market for our equity units.
Upon consummation of the Transactions, the vesting of all outstanding awards was accelerated and each ClassB Unit was exchanged for Common Units inMarketWise, LLC .
Recently Issued Accounting Pronouncements
See the section titled "Recently Issued and Adopted Accounting Pronouncements" in Note 2 of the notes to our consolidated financial statements included in this Report for more information.
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