NerdWallet IPO Filing: High Margins & Increased Marketing Spend

NerdWallet's Public Offering Filing

NerdWallet submitted its initial filing for an initial public offering (IPO) at the end of the previous week. A detailed analysis of the S-1 filing was postponed until today due to the timing of the submission.

The timing of the NerdWallet IPO is noteworthy. The company offers recommendations for financial products to both individual consumers and small-to-medium-sized businesses (SMBs). This places it within the competitive landscape of fintech startups.

The Power of Content

Because NerdWallet fundamentally leverages content to drive its business, it presents an opportunity to discuss the inherent value of well-crafted written material.

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NerdWallet is opting for a conventional IPO structure, which involves raising new capital through the public offering. According to the filing, approximately $29.0 million of the net proceeds will be allocated to repaying outstanding debt related to promissory notes.

The remaining funds will be used for the ongoing operations and expansion of the company, described by legal counsel as “general corporate purposes,” encompassing working capital, operational costs, and capital expenditures.

Investor Liquidity

This IPO represents a liquidity event for several investment firms. These include Institutional Venture Partners (IVP), holding 17.5% of Class A stock prior to the public offering, RRE Ventures (with 6.5% of pre-IPO shares), and iGlobe Partners (owning 6.0%). Further details regarding the company’s private funding rounds can be found on Crunchbase.

Key Areas of Investigation

Our analysis will focus on several critical areas. We aim to understand the impact of the COVID-19 pandemic on NerdWallet’s growth trajectory.

We will also examine the company’s revenue expansion rate in 2021, its historical profitability, and recent trends in that regard.

Finally, we will investigate how NerdWallet maintains user trust, particularly through the lens of editorial independence. Does this approach seem viable? Let's begin.

NerdWallet and the Impact of COVID-19

While the COVID-19 pandemic presented challenges for NerdWallet, the company’s flexible cost structure prevented a severe impact on its core operations.

In 2019, NerdWallet reported revenues of $228.3 million. This figure experienced only a slight increase, reaching $245.3 million in 2020. Such a growth rate of approximately 7.5% can be problematic for a company supported by venture capital.

Growth has since accelerated. NerdWallet’s revenues for the first half of 2021 reached $181.6 million, compared to $137.3 million during the same period in 2020. This represents a growth rate exceeding 32%, a significant improvement over the 2020 performance.

The slower growth experienced by NerdWallet in 2020 was, in part, a consequence of the pandemic. The company itself detailed the effects of COVID-19 on specific areas of its business:

Credit card revenues are a crucial component of NerdWallet’s overall financial performance. Before delving into the specifics of revenue streams, it’s important to understand the company’s underlying business models.

Establishing Credibility in Financial Guidance

A significant challenge in navigating financial advice stems from inherent biases – for instance, the commission structures that may incentivize advisors to favor certain products like annuities. This potential for conflicted interests creates a climate of distrust, a void that NerdWallet aims to fill by providing demonstrably reliable guidance.

The company’s strategy for achieving this trustworthiness centers around what it describes as an “Independent, Unbiased Editorial Team.”

How is this editorial function integrated within the broader NerdWallet organization? The company asserts a commitment to prioritizing user interests, stating that it has previously, and may continue to, decline revenue opportunities that do not align with the well-being of its platform and its users, even if it impacts short-term gains.

Furthermore, NerdWallet contends that it publishes “editorial content on topics that do not generate revenue” and that its “editorial team maintains editorial independence from our business teams.”

This structure enables NerdWallet to deliver content concerning its primary market – financial products for consumers and small to medium-sized businesses (SMBs) – from an objective perspective.

While this approach appears commendable, a point of concern arises from the company’s classification of its “100+ person” editorial group as a sales and marketing expense (detailed on page F-13 of its S-1 filing). A more appropriate categorization would be within the cost of revenue, though such a change could negatively affect gross margins.

Consequently, the company’s purportedly unbiased content creation team is positioned within its Sales & Marketing (S&M) department. Having previously managed an editorially independent team within a for-profit environment, this arrangement raises concerns, as the fundamental priorities of sales and marketing professionals often differ from those of journalists.

Despite this, NerdWallet articulates a clear approach to generating recommendations. We can now proceed to examine the company’s revenue streams.

NerdWallet's Revenue Streams Explained

The following details how NerdWallet generates its income, as articulated by the company itself.

This aligns with expectations, leaving little additional commentary necessary. However, the composition of the revenue described above has shifted over time, varying in its specific categories.

Three primary revenue streams are currently utilized. The initial two are readily understandable, while the third requires further clarification. According to NerdWallet, the increase in “other” revenue is largely due to increased revenue from small and medium-sized businesses (SMBs) following the acquisition of Fundera.

The impact of the pandemic is evident in the data presented. Specifically, credit card revenue experienced slow growth, influenced by stricter lending criteria, while mortgage revenue significantly increased alongside the rapid expansion of the U.S. housing market.

From this analysis, it’s clear that NerdWallet is capable of producing substantial revenue across diverse market conditions. However, its revenue distribution is intrinsically linked to the broader consumer credit landscape.

Breakdown of Revenue Types

NerdWallet’s income is derived from several sources. These include advertising, commissions, and revenue from its SMB segment.

• Advertising: Revenue generated from advertisements displayed on the platform.
• Commissions: Fees earned through partnerships when users select and apply for financial products.
• SMB Revenue: Income from services offered to small and medium-sized businesses, particularly following the Fundera acquisition.

The company’s financial performance is demonstrably affected by macroeconomic factors. Changes in the credit market and housing sector directly influence its revenue streams.

Profitability Analysis of NerdWallet

We have previously examined NerdWallet’s historical expansion, its competitive positioning within the financial advice sector, and the evolution of its revenue streams. Now, let's consolidate these observations and analyze the company’s profitability.

Consider the following data point, which initially struck me as quite surprising:

The net loss reported for the first half of 2021 is indeed noteworthy.

Despite a consistent history of profitability, NerdWallet is currently experiencing substantial deficits. A review of its recent cost structure reveals a significant increase in sales and marketing expenses. While some of the year-over-year gains may be attributed to a slowdown in marketing activities during 2020 due to the pandemic, the overall trend is still significant.

Here is how NerdWallet addresses this situation in its own reporting:

Within this statement, two key points are particularly interesting.

Firstly, the company is investing heavily in brand marketing, a strategy typically employed to build long-term revenue stability rather than focusing solely on immediate growth. This indicates a commitment to establishing lasting brand value.

Secondly, the company is also increasing spending on initiatives designed for near-term growth, specifically performance marketing. Furthermore, personnel-related costs, driven by efforts to expand and engage a larger user base, have increased by approximately $12 million. It is likely that a portion of this investment was directed towards expanding the editorial team.

Consequently, NerdWallet has achieved record levels of website traffic. It’s important to note that “approximately 73% of all traffic to NerdWallet came organically through direct or unpaid channels” during the 12-month period ending June 30, 2021, as illustrated below:

These are promising results, aren't they?

Not entirely. The increased traffic is not translating into user acquisition at the anticipated rate. NerdWallet concluded 2019 with 5.5 million Registered Users. This number increased to 8 million by the end of 2020, representing a strong growth rate. However, by June 30, 2021, the figure had only grown by 1 million, reaching 9 million. This represents a slower pace of growth, both in percentage terms and absolute numbers.

In summary, the company’s profitability has declined as its expenditures have risen. The most substantial increase in spending is in sales and marketing, fueled by both long-term investments and short-term initiatives. While the company has reported positive business outcomes, including a resurgence in revenue growth, not all indicators are entirely favorable. To put it simply, the overall picture is mixed.

The Rationale Behind Significant Expenditure

Given NerdWallet’s ambition to establish a strong foundation during its initial public quarters, the level of spending appears justifiable.

However, this strategy has resulted not only in increased net losses, but also a shift towards negative adjusted EBITDA in 2021.

Furthermore, the company experienced its first instances of negative operating and free cash flow.

Previously, NerdWallet had consistently reported positive results in all these areas throughout 2019 and 2020, including the first half of 2020.

The trend of declining profitability coinciding with revenue growth is characteristic of many 2021 IPOs.

This situation, albeit indirectly, underscores the importance of impartial reporting, which is a positive development.

It is acknowledged that this viewpoint is presented with a degree of personal bias.