MarketWise(MKTW) - 2024 Q1 - Quarterly Results

Shareholder Letter This letter details MarketWise's Q1 2024 financial performance, addresses operational challenges, outlines new growth strategies, and explains changes in compensation and capital allocation priorities Q1 2024 Financial Highlights MarketWise reported a decline in key financial metrics for the first quarter of 2024 compared to the same period in 2023 Q1 2024 Financial Performance | Metric | Q1 2024 | Q1 2023 | Change | | :--- | :--- | :--- | :--- | | GAAP Net Revenue | $109.0 million | $126.2 million | -13.6% | | Net Income | $22.7 million | $30.6 million | -25.8% | | Paid Subscribers | 683,000 | 777,000 | -12.1% | Addressing Recent Challenges The company is navigating the after-effects of the 'Covid bubble' and a significant operational crisis at Legacy Research Group, leading to major realignment and negative impact on billings Impact of the 'Covid Bubble' The company experienced a surge of new subscribers during 2020-2021 who did not convert into long-term customers, leading to disappointing results - The company experienced a surge of new subscribers during 2020-2021, described as "stimulus check-sporting speculators chasing momentum," who did not convert into long-term customers at expected rates, leading to disappointing results in 2022 and 2023[4][5] Operational Restructuring and Legacy Research Realignment The company implemented significant cost reductions and headcount cuts, while reorganizing Legacy Research Group due to ethical issues, impacting billings - Upon returning in October 2023, the CEO initiated cost-cutting measures, reducing G&A costs by about 15% YoY and decreasing headcount by over 20% (from 672 to 535) between September 2023 and April 2024[6][7] - The company had to wind down and reorganize its Legacy Research Group due to serious ethical departures, including an editor being paid to recommend low-quality stocks[8] - The realignment of Legacy Research led to a sharp decline in its billings, from $30 million in Q4 2023 to $16 million in Q1 2024, with further declines expected[9] - The company repurchased 7.2 million MarketWise LLC units for $10.8 million from two terminated senior managers of Legacy Research, acquiring the equity at a discount to market value[12] New Growth Initiatives MarketWise is focusing on re-launching proven brands like Brownstone Research and Wide Moat Research, emphasizing high-quality content and brand-building marketing to attract long-term subscribers - The company is re-launching Brownstone Research, with founder Jeff Brown returning to the company after leaving in early 2023 due to conflicts with previous management[19][20] - Wide Moat Research, founded by REIT expert Brad Thomas, is being relaunched with an expanded mandate to cover long-term investing across the entire financial landscape[20] - New and re-born franchises will be characterized by: ultra-high-quality content at premium rates, analysts with bona fide expertise, and marketing designed for brand value and immediate ROI[21][24] - Future marketing will focus more on branding and offering tools for specific investor types, capitalizing on the "democratization" of finance trend[28][29] Our New Compensation Structure The company has fundamentally restructured its compensation to eliminate incentives for inefficient marketing, aligning employee incentives with long-term shareholder value and profitable growth - The previous compensation structure, based on fixed-rate royalty payments on net Billings, incentivized maximizing marketing spending, even on unprofitable campaigns like selling $49 subscriptions that did not lead to long-term customers[30][31][33] - Senior operators will now be paid a salary with bonuses based on a formula rewarding a combination of revenue growth and operating margin, shifting the focus from 'growth at any cost'[36] - Across the company, bonus and incentive pay will be split 50/50 between cash and stock, with a four-year vesting schedule to promote long-term alignment[37] - All employees will receive an initial stock grant, with future grants contingent on the company increasing its per-share intrinsic value[39] Capital Allocation The company prioritizes share repurchases, plans to continue regular quarterly dividends, and may consider a special dividend, while earning interest on cash - The company has four main options for its cash: invest in its brands, repurchase shares, invest in other industries, or pay dividends[43] - Share buybacks are considered the best use of excess cash, but are not practical currently because the limited public float of A-shares would make a significant buyback 'tantamount to taking the company private'[44] - The company plans to continue paying its regular quarterly dividend and will evaluate a potential special dividend at the end of the year[46] Additional Performance Measures and Intrinsic Value The CEO advocates using non-GAAP 'Billings' to assess intrinsic value, distinguishing between lower-margin 'New Marketing Billings' and higher-margin 'Renewal Billings' to focus on long-term recurring revenue growth - The CEO uses a model based on 'Billings' (cash received from customers) rather than GAAP 'Revenue' to evaluate the business, due to the lag in revenue recognition for multi-year subscriptions[48][51] Billings Performance (in millions) | Billings Category (in millions) | 2022 | 2023 | TTM 3/31/24 | | :--- | :--- | :--- | :--- | | New "Marketing" Billings | $333.6 | $278.3 | $266.3 | | Net "Renewal" Billings | $120.3 | $96.8 | $89.1 | | Total Billings | $459.5 | $382.4 | $362.5 | - In the CEO's valuation model, high-margin 'Renewal Billings' are the most important factor and are assigned a higher multiple than 'Marketing Billings'[52][53] - Increasing Recurring and Membership Billings is identified as critical to increasing the company's overall intrinsic value, a goal now directly supported by the new compensation structure[55] Conclusion Despite recent difficulties and the effort to wind down Legacy Research, the CEO expresses strong confidence in the company's future, anticipating positive developments - The CEO reiterates confidence in the company's people, products, and processes, and is more certain of future success today than at the start of the year[56]