EverQuote, Inc. Q3 FY2021 Earnings Call

Good day and thank you for standing by. Welcome to the EverQuote Third Quarter 2021 Earnings Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. Please be advised that today’s conference is being recorded. I would now like to hand the conference over to your speaker today, Brinlea Johnson of The Blueshirt Group. Please go ahead.

Thank you. Good afternoon. And welcome to EverQuote’s third quarter 2021 earnings call. We will be discussing the results announcing our press release issued today after the market close. With me on the call this afternoon is Jayme Mendal, EverQuote’s Chief Executive Officer; and John Wagner, Chief Financial Officer of EverQuote. During the call, we will make statements related to our business that may be considered forward-looking statements under federal securities law, including statements concerning our financial guidance for the fourth quarter and full year 2021, our growth strategy and our plans to execute on it, key initiatives including our direct-to-consumer agency, our investments in the business, the growth levers we expect to drive our business, the impact of COVID on our business and the insurance industry, our ability to maintain existing and acquire new customers, our recent and planned acquisitions and interest or ability to acquire other companies, our goals for integrations and other statements regarding our plans and prospects. Forward-looking statements may be identified with words and phrases such as we expect, we believe, we intend, we anticipate, we plan, may, upcoming and similar words and phrases. These statements reflect our views only as of today and should not be considered our views as of any subsequent date. We specifically disclaim any obligation to update or revise these forward-looking statements except as required by law. Forward-looking statements are not promises or guarantees of future performance and are subject to a variety of risks and uncertainties that could cause the actual results to differ materially from our expectations. For a discussion of material risks and other important factors that could affect our actual results, please refer to those contained under the heading Risk Factors in our most recent quarterly report on Form 10-Q and our annual report on Form 10-K, which is on file with the Securities and Exchange Commission and available on the Investor Relations section of our website at investor.everquote.com and on the SEC’s website at sec.gov. Finally, during the course of today’s call, we refer to certain non-GAAP financial measures, which we believe are helpful to investors. A reconciliation of GAAP to non-GAAP measures is included in the press release issued after the close of the market today, which is available on the Investor Relations section of our website at investors.everquote.com. And with that, I will turn it over to Jayme.

Thank you, Brinlea, and thank you everyone for joining us today. On October 18th, we announced preliminary results for our third quarter and addressed current challenges in the auto insurance market. Several key carrier customers experienced higher than expected claims losses resulting in a sudden pullback in our marketing spend in the second half of the quarter, as they attempted to restore their target levels of profitability. Based on carrier feedback, higher than expected claims losses were primarily attributable to a higher loss severity or cost per claim driven by two factors. First, vehicle replacement value and cost of vehicle repair rose significantly, stemming from supply chain and labor shortages. Second, liability or medical costs increased due to a larger than expected number of accidents with serious injuries or fatalities, as well as overall medical inflation. In addition, claims associated with extreme weather including Hurricane Ida placed further strains on carrier profitability. We believe these industry dynamics are isolated to our auto insurance vertical, temporary in nature, and will correct in the coming quarters, as carriers adjust their pricing to a new underwriting environment before restoring higher levels of customer acquisition spend. During our decade serving auto carriers, we have seen similar challenges from which EverQuote has reaccelerated growth following a period of pricing correction by the carriers. In an effort to align our cost structure to the current auto insurance environment, we implemented an approximate 10% structural reduction in non-marketing operating expenses excluding non-cash items. As part of reducing operating expenses, we did an extensive review of our business, resulting in making organizational changes to consolidate leadership and streamline decision-making, which we believe will better position EverQuote for strong growth when the auto insurance industry rebounds. We remain steadfast in building toward our long-term vision of becoming the largest online source of insurance policies by using data and technology to make insurance simpler, more affordable, and personalized. At the beginning of 2021, I outlined four levers of our growth strategy, including: number one, attracting more shoppers; number two, growing insurance provider coverage and budget; number three, optimizing and deepening consumer-provider engagement; and number four, expanding non-auto verticals. Here’s an update on progress in the context of these growth levers. During the quarter, we reported strong traffic growth as we successfully attracted more consumers to our marketplace, resulting in a reacceleration of quote request growth to 21% year-over-year. This quarter, we closed our previously announced acquisition of PolicyFuel and we are pleased with the early performance and how the team has integrated into our broader direct-to-consumer agency operations. The acquisition of PolicyFuel is consistent with the strategy we first announced last year to begin building a multi-vertical tech- and data-enabled DTC agency platform, which enables EverQuote to capture a larger portion of the economic value of each transaction while giving us a path to directly access the lion’s share of the $150 billion addressable market. And at the same time, it brings us closer to our customers, enabling us to develop more seamless buying experiences and deeper relationships with consumers. In addition to our successful integration of PolicyFuel, we continued making foundational investments in our Health and Medicare DTC agency platform in Q3. We grew the team, improved many business processes, and built new technology to support a steep ramp in Health and Medicare Asian capacity in advance of the annual and open enrollment periods in Q4. We now have approximately three times the number of agents in our Health and Medicare DTC agency compared to last year and we remain confident that we will deliver strong Q4 performance in our health insurance vertical and further solidify this foundational pillar of future growth. On the provider side of the marketplace, our diversified distribution model benefited us in the third quarter. As carriers moved to quickly reduce their direct marketing expenses in response to higher than expected claims losses, our third-party local agent demand and DTC agency operations have experienced significantly less impact from the current headwinds in the auto insurance markets. As we continue to build EverQuote, we are guided by serving customers on both sides of our marketplace, consumers seeking a more streamlined shopping experience with personalized coverage options and insurance providers seeking more profitable policies in the age of digital insurance shopping. We are executing on our strategy and we are increasingly well-positioned to deliver on our customer promises. We believe EverQuote occupies a unique position in the industry as the only player at scale with marketplace and agency operations across major personal lines of insurance. We have assembled a distinctive combination of data, technology, and operational assets that can be leveraged to generate advantages in areas like bidding for traffic, expanding customer lifetime value via multi-line customer relationships, and designing innovative experiences to own and manage customers’ insurance lives in ways that do not exist today. While the current auto insurance market dynamic presents a temporary setback, it is indeed temporary. I truly believe EverQuote will be better positioned than ever before to emerge as a powerful player in the $150 billion insurance distribution market. Now, I will turn the call over to John to provide more details on our financial results.

Thank you, Jayme, and good afternoon, everyone. I will start by discussing our financial results for the third quarter and conclude with guidance for the fourth quarter and our updated guidance for the full year. Our revenue for the quarter was $107.6 million, an increase of 20% year-over-year. Revenue in our auto insurance vertical increased to $89.7 million, a growth rate of 20% year-over-year. Revenue from our other insurance verticals, which includes home and renters, life, health, and commercial insurance, increased to $17.9 million, a growth rate of 18% year-over-year representing 17% of revenue within the quarter. Our revenue growth in the third quarter was driven by a 21% increase in the volume of quote requests in our marketplace, offset by a 1% year-over-year reduction in revenue per quote request. As Jayme outlined, the performance of our auto insurance vertical in the third quarter was impacted by some carriers reducing their marketing spend in an effort to manage their profitability targets given a sudden spike in their claims losses. Though increases in claims frequency were largely anticipated by carriers as miles driven have continued to approach pre-pandemic levels, claims severity was significantly greater than expected. This led certain carriers to abruptly and dramatically reduce their advertising spend in our marketplace late in the quarter, in a manner that we had not anticipated. This pullback in demand directly impacted our marketplace monetization through lower revenue per quote request. We believe these higher claims losses will continue to impact carriers’ profitability in the near term, which in turn impacts their willingness to spend on marketing and new consumer acquisition. Having begun in Q3, the full extent of reduced carrier spend will impact us in Q4 and it is likely to take multiple quarters for auto insurance carriers to fully re-price their insurance book of business to current trends and for their marketing spend to completely recover. That said, our marketplace remains healthy; an increasing auto insurance rate environment will likely drive more consumer shopping over the same period. We expect continued growth in quote requests in Q4 at rates similar to those that we achieved in Q3 on a year-over-year basis, while reduced demand as a result of insurance industry factors will cause both sequential and year-over-year reductions in revenue per quote request. In Q3, we delivered variable marketing margin, or VMM, which we define as revenue less advertising expense of $32.4 million, an increase of 10% year-over-year. As a percentage of revenue, third quarter VMM was 30%, down from 33% in Q3 of last year. Though partially offset by lower advertising cost per quote request, VMM was directly impacted by the decline in marketplace monetization and carrier demand. As we look forward to Q4, we expect the dynamics of the auto insurance market will continue to put pressure on VMM within our auto insurance vertical. But as our advertising cost structure is highly variable, we will seek to calibrate our advertising spend to optimize VMM in absolute dollars. Apart from our auto insurance vertical, we expect VMM to benefit from strong revenue growth within our health direct-to-consumer agency during the annual health open enrollment period in Q4. This is expected to drive an improvement in VMM operating point for the business overall in Q4 versus Q3, despite the downward pressure in the auto insurance vertical. Our DTC agency within our health, life, and auto insurance verticals operates with a considerably higher revenue per quote request and VMM, which demonstrates the financial benefit of guiding our marketplace consumers through the complete insurance coverage journey through to purchase. The changing dynamics within our business, namely higher engagement, higher take rate, and higher lifetime value within our DTC agency are not consistently captured within a traditional marketplace volume metric like quote requests, and we intend to review how we may evolve our quarterly metrics to better capture our new initiatives in 2022. As Jayme mentioned, we implemented an approximate 10% structural reduction in cash non-marketing expenses in an effort to realign our cost structure and streamline and focus our organization. As this action took place in Q4, the cost reductions will partially impact Q4 with the full reductions captured in expense run rate entering 2022. We believe this will position us to continue to target operating at positive adjusted EBITDA for as long as carrier demand remains constrained and will allow us to quickly return to higher levels of profitability when the auto insurance carriers return to their normal pattern of acquiring consumers through digital channels. Turning to profitability, GAAP net loss increased to $5.3 million or a loss of $0.18 per share based on 29.3 million weighted average shares outstanding. GAAP net loss included a tax benefit of $2.5 million from a one-time partial release of our NOL valuation allowance associated with the PolicyFuel acquisition. We delivered adjusted EBITDA of $2.7 million or 2.5% of revenue for the third quarter. Lower VMM from our auto insurance vertical and higher expenses associated with the closing of the PolicyFuel acquisition earlier than planned within the quarter both impacted adjusted EBITDA this quarter. Positive operating cash flow of $2.8 million within the quarter tracked closely to adjusted EBITDA and resulted in $41.8 million of cash and cash equivalents on the balance sheet at the end of the quarter, net of the $16 million in cash paid at the closing of the PolicyFuel acquisition. Historically, cash flow from operations has tracked closely to adjusted EBITDA as it did in Q3. As we anticipate policy sales commissions to contribute more significantly to Q4 revenue, we also expect that operating cash flow will trail adjusted EBITDA in Q4, as we collect most policy sales commissions over the expected lifetime of the policy sold, which stretches into future periods. On August 16th, we announced that we closed the acquisition of PolicyFuel. We have been pleased with the integration and ramp so far and now expect PolicyFuel to perform above our previously stated expectations for Q4. Similar to our non-auto insurance verticals and our health and life DTC agency, we expect PolicyFuel’s policy sales-as-a-service business model will not be significantly impacted by carrier marketing reductions and will provide us with revenue diversity during a challenging period for our auto insurance marketplace. Turning to guidance, our Q4 guidance is significantly impacted by industry factors affecting our auto insurance vertical in the near term. For the quarter, we expect revenue to be between $93.5 million and $98.5 million, variable marketing margin to be between $30.5 million and $33.5 million, and adjusted EBITDA to be between negative $1.5 million and positive $1.5 million. Consequently, we are lowering our full year 2021 guidance for revenue, VMM, and adjusted EBITDA as follows; we expect revenue to be between $410 million and $415 million, a year-over-year increase of 19% at the midpoint and a decrease from our prior guidance of between $440 million and $446 million. We expect variable marketing margin to be between $127 million and $130 million, a year-over-year increase of 18% at the midpoint and a decrease from our prior guidance of between $138 million and $141 million. And we expect adjusted EBITDA of between $12.5 million and $15.5 million, a year-over-year decrease of 24% at the midpoint and a decrease from our prior guidance of between $23 million and $26 million. In summary, though we foresee near-term headwinds, we remain confident in our ability to manage our business during this period and to return to performance consistent with our long-term model of high growth and increasing profitability as industry demand normalizes. Looking beyond the temporary conditions driving auto insurance industry demand, we believe our direct-to-consumer agency is poised for breakout performance in Q4, validating our strategy. Jayme and I look forward to answering your questions.

Your first response is from Michael Graham of Canaccord. Please proceed.

Thanks a lot. Hey, guys and thanks for all the other information and the color. I just wanted to ask a little bit more about the potential duration of some of the softness in auto? I remember at the time of your IPO you were just sort of coming off of a flat year with similar circumstances, claims going up and margins compressing and I believe it took a couple of quarters after that at that time? Just wondering if you could maybe put a little more color around sort of the timing you expect to see unfold here and maybe if I could just add on to that you have got sort of a standard growth ambition of around 20% per year. Just wondering how you are thinking about that as we finish up this year and head into next?

Hey, Mike. Thanks for the question. This is Jayme. So we have a couple of data points to draw on in terms of the expectations around timing and duration, obviously, we don’t have perfect information. But the first thing we can draw on is historical experience. I think you are right, it was around 2016 into 2017 last time we experienced something like this and then the second data point is just the feedback we are getting from carriers. And so the playbook that they deploy is to draw down marketing spend to solve for two things really, the first is in-period profitability, the in-quarter or in-year profitability, and the second is to stop acquiring policyholders they now know to be unprofitable. Step two, to address that second piece is the carriers will re-file their rates with the state departments of insurance and that’s a process that will take several months. And then once they feel good about the rates, they will reengage and resume to sort of normalized levels of marketing spend. So that’s what we saw in the previous time we went through this. That’s what you can expect to see happen this time; that’s the guidance we have been given by carriers. In terms of how long we expect it to persist? The best information we have right now suggests that we will find a trough. We will find a bottom in Q4, likely see a step-up in Q1 and then somewhat gradual recovery over the course of next year. I think different carriers were affected in different ways and will respond with different approaches or at least levels of speed. That’s been our experience. So we would expect to see somewhat of a phased-in approach over the course of next year, ultimately having us exit next year back to normalized levels of spend.

And then, Michael, I would just add to that with regard to the second part of your question, that also implies that we would exit next year back on our long-term growth model, right? Our long-term growth model is still an appropriate, long-term growth model to use, obviously, what we are seeing in this next number of quarters is something that is tied to the industry and tied to some of the macro trends for the industry. But we are confident that we will emerge into 2023 back on our long-term model of growth and profitability growth.

Okay. Sounds good. Thanks, Jayme. Thanks, John.

Thanks, Mike.

Thank you. Your next response is from Ralph Schackart with William Blair. Please go ahead.

Good afternoon. Thanks for taking the question. I guess, Jayme, kind of circling back off of Michael’s question. I know you have seen these changes before particularly at the IPO and then you did correct. But I guess what similarities we are seeing today versus the last cycle, which a big last cycle related to more technology in cars and pushing up claims costs, but then you also have some added cross currents here with supply chain issues, and then, I guess, people go back to watch and just love your perspective on some compare contrast?

Thank you, Ralph. There are several unique factors at play this time around that set it apart from previous situations. One notable difference is that the carriers have gained additional experience, which positions them better to respond swiftly, having learned lessons from past events. Additionally, the underlying drivers have changed. Currently, we are seeing miles driven return to nearly pre-COVID levels, reaching about 96% of what they were in 2019, which is leading to an increase in accident frequency. Carriers largely anticipated this trend, so it may not be a surprise in the context of expectations. However, another factor is the rise in the severity of accidents, which was not entirely expected. There are more serious incidents and higher bodily injury costs associated with them. Furthermore, we are facing supply chain and labor shortages, driving up the costs of vehicle repairs and replacements. On top of this, Hurricane Ida impacted areas such as Atlanta and Louisiana, and its subsequent flooding in parts of the Northeastern United States was unforeseen. We are experiencing increased frequency, higher severity, and catastrophic events all happening concurrently, some of which were not anticipated, creating a sudden shock to the system. However, I believe the carriers are more prepared this time, as they have a better understanding of the protocols. They will go through the necessary motions and we anticipate that they will eventually return to a state similar to where we started once rates normalize.

That’s helpful perspective. Just maybe one more clarifying question, I guess, just in terms of what’s driving the claims severity, maybe if you could flesh that out a little bit. Is that something that has, I guess, continued through, I guess, Q4 or what would sort of, I guess, slow down or mirror so to speak or neutralize the severity part of what’s going on?

The two main factors driving the increase in claims severity are more serious accidents leading to higher bodily injury expenses and healthcare costs, along with supply chain and labor shortages. When carriers respond to these issues, they have two options. One is to resolve them internally, as you are suggesting. The second option is to adjust pricing to align with the new normal, which appears to be the route they are taking, indicating a recognition of the new reality and adjusting prices accordingly. Over time, we might see improvements in supply chain and labor shortages, which could eventually lead to a period where carriers enjoy higher profitability. However, currently, they seem primarily focused on correcting pricing in response to this new normal.

Okay. That’s helpful. Thank you, Jayme.

Thank you. Your next response is from Jed Kelly of Oppenheimer. Please go ahead.

Great. Thanks for taking my question. Just on the marketing recovery, we still see a lot of insurance TV commercials. So when the carriers are bringing back their marketing spend, how does it work with the branded channels like television relative to the affiliate marketplaces like yourself?

Hi, Jed. I'll answer that. We believe all marketing expenses for the carriers will be impacted. There are differences in commitments and lead times for certain types of spending. We noticed this change as soon as the carriers did, particularly when they chose to adjust their models to achieve profitability goals. This change feels sudden for us. Over time, as some commitments to mass media begin to phase out, we expect other advertising channels to experience reductions, which may provide us with some advantages going into 2022 regarding carrier demand. The carriers tend to respond more quickly in a marketplace like ours. In the medium term, our marketplace allows carriers to allocate their spending in a more targeted way that can be clearly measured. As they recalibrate their marketing and acquisition strategies, we may see an increase in spend towards us, especially as our performance justifies it. Thus, you will notice the impact, Jed, but we'll be the first to experience it, even though we may perform better in the medium term.

And then you mentioned next year getting back your growth targets, would that be 20% growth or would that actually be a higher level of growth, call it, you would actually think compounding the 20% growth relative to 2019? How should we think about that growth rate next year?

We will certainly provide guidance next quarter and share more insights about what 2022 will look like. We are aware that the demand for care is expected to last for multiple quarters. We have confidence in returning to a long-term growth trajectory after 2022. However, we are not making any specific comments about our current position relative to 2022. We do believe that we will return to our long-term profile. If you look at how the company might progress, you can refer back to periods like 2018, when we successfully grew consumer volumes after a slowdown. That may provide some context, but for now, we are committed to our long-term model, which remains the right approach for us, and we expect to be back on track once the issues related to carrier demand and profitability are resolved.

Sorry, one more question from me. How does this make you rethink your direct-to-consumer initiative? It seems that if you can get more agents and increase commissions, that part of the business could become much less cyclical.

Yeah. It’s a good question, Jed. So one of the interesting observations we have had through this period has been that, while the sort of carrier direct business was affected suddenly and substantially, our agency distribution was largely unaffected and that’s both, our third-party through marketplace, our third-party agents, as well as the direct-to-consumer agency. And so to your point, I think, certainly, it instills high confidence that we are heading down the right path and I think emboldens us to consider how we can be a bit more aggressive in moving faster down that path as we go. I will pause there. Did I answer your question?

Thanks. Yeah. Thank you.

Your next response is from Cory Carpenter with JPMorgan. Please go ahead.

Hey. Thanks for the questions. Just curious how broad-based the cuts were in your network versus isolated to a certain type of carriers, maybe you are kind of giving out any notable difference in cuts from traditional agency for direct-to-consumer carriers, insured techs? And then, as a second question is with PolicyFuel, you mentioned it’s running ahead of expectations. So I am hoping you could talk to what’s working well and somewhat early lessons learned from the integration? Thanks.

Sure. The industry effects are quite widespread, Cory. However, as I mentioned earlier, we are noticing that they are impacting us more directly with those carriers that are focused on direct-to-consumer and purchase referrals from us. This includes direct-to-consumer carriers and some of the more tech-oriented insurance companies, which seem to be responding more aggressively in our marketplace. Can you please provide the second part of your question, Cory?

PolicyFuel.

PolicyFuel. Yes. So we are a couple of months in now on PolicyFuel. Just to kind of reorient you to how it fits into the big picture. We first began down this direct-to-consumer agency path with the launch of our life insurance agency in early 2020, we accelerated down that path with the acquisition of Crosspointe in the health and Medicare space in the sort of mid-to-late 2020. And then we have accelerated once again with the acquisition of PolicyFuel and with the acquisition of PolicyFuel we now have this direct-to-consumer agency operating across all major persona lines of insurance. So we are excited to have closed the deal. The team is well-integrated and we are off to a good start. It’s still quite early, so there’s a lot of focus on the integration and ensuring we maintain the plan we laid out for the team. But all signs are positive so far and we are excited to have him on board.

Thank you.

Your next response is from Mayank Tandon of Needham. Please go ahead.

Good evening. This is Kyle Peterson speaking for Mayank. Thank you for taking my questions. I would like to discuss the emerging verticals. I've noticed that both the percentage of revenue and dollar amounts have changed sequentially. Are you experiencing similar challenges in areas like home and life as you have in auto? I would appreciate any additional insights on the emerging verticals.

No. The emerging verticals have not been impacted by the same industry dynamics affecting the auto market. We expect the non-auto verticals to gain momentum as we move into Q4. They did not contribute significantly to growth in Q3; instead, they maintained a similar pace to auto without surpassing it. As you may recall, we have invested significantly this year to prepare for the annual and open enrollment periods in health and Medicare. This included tripling the number of advisors in that segment and enhancing the necessary infrastructure and support teams. Although it is still early in the enrollment period as we go through Q4, the early indicators are positive, and we anticipate that this will serve as a significant driver for rekindling non-auto growth this quarter.

Okay. That’s helpful. And then, I guess, just maybe a follow-up on obviously some moving pieces between carrier demand, and then, obviously, there are some expense reductions rationalizations. But how should we think about, is there anything in that kind of 10%, call it, to kind of cash expenses that would impact like the pace of your ability to grow basically when the demand environment improves or how should we think about the puts and takes between some of these cost initiatives and kind of how you guys are prepared to reaccelerate growth as demand improves?

It's a great question. As we work on expense reduction, we are considering several factors. We are looking at different scenarios regarding how significant and prolonged the decline in the direct auto segment might be, and we're focused on managing expenses to maintain profitability during that time. However, if we set the direct auto business aside, we feel optimistic about our investments and are starting to see positive results. We've been discussing the verified partner network for consumer acquisition, and our new product launches there are beginning to show promise. Our direct-to-consumer agency strategy is gaining momentum, especially as we enter the open enrollment period and with the acquisition of PolicyFuel. The marketplace agency business is strong, and many investments are generating momentum, so we want to ensure we don't disrupt that progress in other areas. Overall, we've balanced our approach to expense reduction responsibly, considering the challenges in the auto segment without hindering our growth in other parts of the business, and we have made some organizational changes that should enhance our efficiency. I believe we are in a strong position despite current challenges, which we expect to be temporary. As conditions improve, we believe we will be well positioned to resume our previous growth trajectory.

Makes sense. Thanks guys.

Thanks, Kyle.

This now concludes the Q&A for our call. I will turn the call back over to Jayme Mendal, CEO.

Hey. Then thank you all for joining us today. The market presents near-term headwinds for our business but we are confident that these issues are temporary in nature and will correct as carriers adjust their pricing strategies to the new underwriting environment. As we mentioned, we are executing well against our strategy. We believe EverQuote will emerge from this period even better positioned to be a powerful player in the $150 billion insurance distribution market. Thank you all and have a great evening.

Thank you. This concludes today’s conference call. Thank you for participating. You may now disconnect.