Earnings Call Transcript - EVER Q1 2023

Operator, Operator

Good afternoon, and thank you for joining the EverQuote First Quarter 2023 Earnings Call. My name is Kate, and I will be the moderator for today's call. All lines will be muted during the presentation portion of the call with an opportunity for questions and answers at the end. I would now like to pass the call over to our host, Brinlea Johnson of The Blueshirt Group. You may proceed.

Brinlea Johnson, Moderator

Thank you. Good afternoon and welcome to EverQuote's first quarter 2023 earnings call. We'll be discussing the results announced in our press release issued today after the market closed. 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 laws, including statements concerning our financial guidance for the second quarter 2023, our growth strategy, and our plans to execute on our growth strategy, key initiatives including our direct-to-consumer agency, our investments in the business, the growth levers we expect to drive our business, our ability to maintain existing and acquire new customers, our expectations regarding recovery of the auto insurance industry, 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 cause our actual results to differ materially from our expectations, please refer to those contained under the heading Risk Factors in our most recent quarterly report on Form 10-Q, our annual report on Form 10-K that 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'll 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 we issued after the close of market today, which is available on the Investor Relations section of our website at investors.everquote.com. And with that, I'll turn it over to Jayme.

Jayme Mendal, CEO

Thank you, Brinlea, and thank you all for joining us today. EverQuote exceeded expectations across our three primary financial KPIs in the first quarter. We produced revenue of $109.2 million, a variable marketing margin (VMM) of $35.6 million, and adjusted EBITDA of $5.4 million. We achieved a strong VMM as a percentage of revenue of 32.6% and an adjusted EBITDA margin of 4.9%, both representing levels that we last achieved before the auto insurance industry downturn. Our progress in Q1 was broad-based, and as the industry normalizes, we will be well-positioned to grow the business significantly and profitably. As has occurred several times in the current period of auto insurance market instability, our growing momentum in Q1 was met with strong industry headwinds. Entering Q2, a major carrier partner significantly reduced its customer acquisition budgets due to their unexpectedly challenged underwriting results. We are also seeing targeted reductions in marketing subsidies for captive agents, which could impact our local agent demand for the remainder of this year. Based on the persistent uncertainty in the auto insurance carrier market, we have decided to withdraw our previously provided full-year 2023 guidance. While we maintain conviction in an auto insurance recovery driving significant growth for EverQuote, the exact timing remains difficult to predict. Focusing on what we can control, we continue to drive efficiency throughout our operations while accelerating diversification into stable parts of the business. Highlights from Q1 include strong performance in our local agent network with continued resilience through record levels of local agent budget. We continue to have a commanding leadership position in this market, suggesting EverQuote maintains the highest market share and performance in the industry. In our Direct-to-Consumer agency, we had a strong open enrollment period with health and Medicare generating historically high levels of profitability and cash efficiency. Our Property and Casualty (P&C) lines continue to make considerable progress expanding our product offerings and increasing the rate at which we bundle auto policies with homeowners and other ancillary products. Our Direct-to-Consumer agency now represents 50 carriers across our combined P&C and Health and Medicare offerings. As we continue to expand our carrier product coverage, we are building the foundation of our One-Stop insurance shop. With the auto insurance carriers continuing to adjust rates within the changing loss environment, we began shifting more resources into non-auto verticals late in 2022. In Q1, we returned to revenue growth in our home vertical and expect to continue that trend as carrier budgets and agent demand shifts from auto into homeowners’ products. In Q2, we are replicating the playbook used to reignite growth in the home vertical to our life, health, and Medicare marketplaces. We are moving aggressively to restore growth in these non-auto verticals over the balance of the year after a period of contraction following a reduction in DTC Medicare agent headcount as part of our broader expense management efforts. Progress in agent channels and non-auto verticals enable EverQuote to diversify further from the auto carrier direct channel. Additionally, we continue to drive efficiency throughout the business. We achieved a near record high VMM margin in Q1 as we rolled out new bidding technology that leverages machine learning to optimize bids at more granular levels than ever before, enabling our traffic operations to benefit from greater ad spend efficiency. We also produced a return to pre-downturn levels of adjusted EBITDA, well ahead of a full auto insurance recovery, thanks to continued discipline in the management of our operating expenses. We remain steadfast in our belief that we can create an industry-defining company as we continue working to redefine the over $170 billion insurance distribution and advertising market for the digital age. We have assembled a one-of-a-kind combination of insurance distribution assets, which provides consumers access to a comprehensive set of insurance products across major personal lines, resulting in each consumer being more likely to find the right products for them, delivered in their preferred manner. We will focus increasingly on leveraging these assets to build a differentiated insurance shopping destination for consumers through which they can access the industry's widest set of insurance products across major personalized lines, receive personalized recommendations on the right products for them, and easily access advice from knowledgeable experts as needed. EverQuote’s long-term value continues to compound as we amass more insurance distribution data, which we are using increasingly to deploy machine learning and artificial intelligence across aspects of our business ranging from traffic bidding to experience personalization to product recommendations. With our deep roots in data and technology, we believe we will lead the insurance industry in the adoption of AI technology as it proliferates. As AI applications become more accessible, EverQuote is embracing its potential quickly, finding use cases where it can drive meaningfully greater productivity and/or enable entirely new products, services, or ways of doing things. Our mission is to make it easy for customers to protect life's most important assets, their families, health, property, and future. Our vision is to become the largest online source of insurance policies by using data, technology, and knowledgeable advisors to make insurance simpler, more affordable, and personalized. While we have much work left to do and require a period of industry stabilization to fully realize that vision, we continue to drive operational excellence in this difficult time. We believe that EverQuote is the only company with the assets, team, and conviction to deliver the insurance shopping experience that the industry's carriers, agents, and consumers ultimately need to bring the full potential of the digital age to insurance buying and selling. Our incredible team remains passionate about achieving our vision, which we believe, when realized, will deliver compelling value for our consumers, insurance provider partners, and shareholders. Now, I'll turn it over to John to discuss our financial results.

John Wagner, CFO

Thank you, Jayme, and good afternoon, everyone. I'll start by discussing our financial results for the first quarter and then provide guidance for the second quarter and context for our decision to withdraw guidance for the full year of 2023. Our total revenue for the first quarter of $109.2 million represented a decline of 1% year-over-year but exceeded our guidance range for Q1 provided last quarter. Revenue from our auto insurance vertical increased 2% year-over-year to $89.7 million in Q1, a sequential improvement of 33% over Q4 of 2022. This improvement was due to a combination of Q1 being a seasonally stronger quarter within our auto insurance vertical and the resurgence of demand within the quarter from our largest carrier customer, following the initial improvement in their claims losses. Coupled with consistent performance from our local agent network at nearly 40% of total revenue, we achieved a record level of auto insurance revenue. Revenue from our other insurance verticals, which includes home and renters, life and health insurance, decreased 15% year-over-year to $19.5 million for the first quarter and represented 18% of total revenue. The decline in revenue was attributable to our planned moderation in our Direct-to-Consumer agency, with an emphasis on optimizing unit economics and cash efficiency, offset by double-digit growth in our home insurance vertical. Variable marketing margin or VMM, defined as revenue less advertising expense, was $35.6 million for the first quarter, bringing our guidance range provided last quarter to fruition. Despite lower monetization, variable marketing margin as a percentage of revenue was a near-record 32.6% for the quarter. Our investments in bidding technology led to a higher margin operating point as we drove down traffic costs and increased consumer traffic volumes by 21% year-over-year. Though most carriers continue to limit their spending on new consumer acquisition as they work to raise policy pricing to cover rising claims losses, consumers are reacting to those price increases by shopping more aggressively. Turning to our bottom line, GAAP net loss was $2.5 million in the first quarter. Adjusted EBITDA was positive $5.4 million in the first quarter. This result was above our guidance range for Q1 provided last quarter and reflects a return to pre-auto insurance downturn levels based on stronger auto insurance performance, demonstrating that as auto insurance industry conditions improve, our marketplace has the potential to deliver expanding profitability. Operating cash flow was a use of cash of $1.2 million for the first quarter, a significant year-over-year and sequential improvement reflecting the cash flow contribution from greater positive adjusted EBITDA. We ended the quarter with cash and cash equivalents on the balance sheet of $28.8 million and no debt outstanding on our $45 million debt facility. Turning to our outlook, including an update on market conditions within the auto insurance industry. As anticipated, we witnessed improved demand in our auto insurance vertical in Q1, driven by a very strong return of our largest carrier customer as they experienced improved financial performance, which resulted in an increased focus on growing their new consumer acquisition. However, a carrier suffered an abrupt increase in claims and a decrease in profitability in March caused by a combination of one-time factors and more persistent claims-related expenses. This resulted in a significant reduction in their demand entering Q2, dropping to trough levels of Q4 2022. Outside of this, other major carriers, which took more decisive rate action earlier in the downturn, are continuing to experience low levels of profitability and are aggressively increasing rates in order to achieve rate adequacy. Although a third-party agent network has been resilient, the prolonged nature of this downturn has resulted in some reductions of carrier support for their captive agents, and we anticipate the possibility of further reductions, which may impact our local agent business during the second half of this year. Ultimately, we remain confident that auto insurance premium increases will improve financial performance for auto insurance carriers and consequently will increase their demand for new consumer acquisition. But the timing of this improvement continues to be delayed, impacting our guidance for Q2 and our decision to withdraw guidance for the full year. For Q2, we expect revenue to be between $70 million and $75 million, a year-over-year decrease of 29% at the midpoint. We expect VMM in the quarter to be between $23 million and $26 million, a year-over-year decrease of 26% at the midpoint, and we expect adjusted EBITDA to be between negative $4 million and negative $1 million. In summary, we delivered results better than our guidance for the first quarter and are executing well while judiciously managing expenses. Though we recognize the higher level of uncertainty in the near term, we have conviction that we will directly and significantly benefit from the eventual normalization of auto insurance carrier demand.

Operator, Operator

Thank you. We will now begin the question and answer session. Our first question will be from the line of Ralph Schackart with William Blair. Your line is now open.

Ralph Schackart, Analyst

Good afternoon. Thanks for taking the question. Just in terms of large carrier that was a market earlier in Q1 and then out in March, any sort of thoughts on when that carrier could return and/or conversations that you carried out, it's a pretty dynamic situation. And then may just a follow-up with the other carriers that I know are still low profitability? How the conversations are sort of progressing or trending with those carriers? And then I have a follow-up.

Jayme Mendal, CEO

Sure. Hey, Ralph. The large carrier that pulled back, we don't have a firm commitment on what this re-engagement path looks like. They have pointed us to the data that's available. We ought to continue to watch how their combined ratio trends. They have a sort of publicly known and understood target that they are managing the business to. As they are able to manage down to their combined ratio target, we do expect them to reactivate spend. As they are able to take rate in specific states, we expect it to occur state-by-state. The signal that they've given us is they're reviewing things month-to-month. I think based on looking at their numbers and speaking with them, we probably don't expect any significant movement inside the quarter, but we are hopeful that come Q3, they will have largely gotten their combined ratio in line for the first part of the year, which would bring them back to a more normalized state for the better part of the year. With respect to other carriers, we continue to get a consistent message that the back part of the year is when we would expect to see some re-engagement. We know there are carriers that are benefiting from burning in previous rate increases, and it now seems that everyone's adjusting their 2023 rate increase plans upwards, with good receptivity from states, even states like California. One large carrier announced they got a 19-point rate increase from California, which is a significant step in the right direction. We are beginning to see some of these other carriers get their combined ratios more in line or at least trending in the right direction or with line of sight to get their combined ratios in line by the middle of the year. We would expect that they'll slowly start to step back in on a state-by-state and segment-by-segment basis.

Ralph Schackart, Analyst

Great. Thanks. And just a quick follow-up. On the local agents, have you seen that that business impacted in Q1 or Q2? Or is that just something that you're bracing for potentially to happen in the second half of this year? Thank you.

Jayme Mendal, CEO

Yeah. So, the carriers have been removing subsidy dollars - they provide some marketing subsidy dollars to agents. They have been removing them state-by-state, segment-by-segment over the course of this year. We have seen some impact, but we've been able to grow through it. We exited Q1 with record levels of agent budgets. They likely would have been higher without the withdrawal of some of those support dollars. But we continue to make good progress. What we expect for the balance of the year is that carriers – these same carriers will continue to remove additional subsidy dollars in states where they are not profitable. Those subsidy dollars will return to the marketplace as the carriers are able to get rates. We do expect it will be hard to continue growing the budget for the balance of the year. But we maintain a really good position in that market. We have a dominant market share, and we provide the highest performance of any of the competitors that are sending volume into that channel. We feel good about continuing to build that channel over the longer term.

Ralph Schackart, Analyst

Okay. Great. Thanks, Jayme. Appreciated.

Cory Carpenter, Analyst

Hey, thanks for the question. Just on the health business, could you just talk about any impacts from some of the proposed policy changes we’re seeing in Medicare Advantage? Whether those could impact the negative side or potentially even positively if it hurts competitors more? And then, you did guide to back to negative EBITDA in Q2. So just curious on the cost side, it sounded like your focus is on reallocating resources. But just how you feel about your expense base maintaining it where it is or maybe if you feel like you need to make further cuts going forward? Thank you.

Jayme Mendal, CEO

Sure. Thanks, Cory. With respect to the changes in Medicare Advantage regulation, just to put it into context, Medicare Advantage represents about 5% of the business, plus or minus a few points. I think what you're describing is the new CMS marketing rules. We've been preparing for those new rules to take effect since they were initially proposed in December of last year. Since they've been finalized, we have been working with our carriers to ensure we’re aligned, and we are ready to execute in compliance with the new requirements. We do not view them as having a big impact on our business. I think the rules tend to focus on unsolicited contacts of Medicare beneficiaries, and we don't engage in any unsolicited contacts. So, there's been some attention paid to the 48-hour waiting period. We don't believe that applies to consumer-initiated calls, which is the vast majority of our Medicare business. While the 48-hour rule may apply to the scheduling of personal marketing appointments, which traditional Medicare brokerage salespeople do, in-person marketing activities that we don’t engage in at EverQuote are unaffected. Nobody we've spoken to interprets the new rules as prohibiting a consumer from calling us to enroll in a Medicare plan. So, we'll continue to work with our carriers to interpret and comply with it. But today, we don't see these rules as having much of an impact on our business.

John Wagner, CFO

And Cory, it’s John here. I'll take the second part of that. With regard to operating expenses, I guess going back to the very beginning of the downturn, we were pretty quick to take action to make sure that we were resourcing the business correctly for the demand that we saw going forward, especially in the auto insurance vertical. We have continued to do that. You'll see the guidance we have provided for Q2 implies lower levels of operating expenses due to some steps that we've done internally already. I think you can expect that we will continue to tightly manage expenses. Even in the toughest parts of the downturn, we have always made a priority of managing the business for full-year adjusted EBITDA. That is something we feel strongly about when possible and would maintain that even regardless of demand conditions.

Cory Carpenter, Analyst

Okay. Thank you, guys.

Michael Graham, Analyst

Thank you. Maybe just to follow on that last question on sort of expense management. Is this a level – I am just trying to understand how you're thinking about profitability overall. I think it’s totally understandable to kind of pull the full-year guidance given the environment and what we heard from some of your peers. You have a slight EBITDA loss targeted for Q2, and just wondering how you're thinking about if the environment does not improve in the short term, how you're thinking about how much of a loss you'd be willing to incur on a quarterly basis? And just kind of a related question is, are there other major investment areas where you are not entertaining cutting back because they’re of central importance to the business?

Jayme Mendal, CEO

Sure. Thanks, Michael. We have guided to a slight adjusted EBITDA loss for Q2. We believe we could see a return to demand as we move through the year. However, we believe we've taken the steps around operating expenses that will keep that adjusted EBITDA loss modest in Q2 and possibly into Q3. We expect that in Q4, we could be influenced again by the health vertical and the annual enrollment period within Medicare. We're committed to full-year management as much as possible to a positive adjusted EBITDA. Much of our model is variable in nature. When we see reductions in costs, we not only observe reductions in advertising expenses but also see some semi-fixed costs, some of our technology costs that scale with revenue come down as well. Thus, we are comfortable that you're not going to see a dramatic difference in our adjusted EBITDA profile even if we envision a scenario where demand stays lower for longer.

John Wagner, CFO

With respect to the potential impact on investments, I think where we're focused right now is in parts of the business where we have stability, which will further diversify us from the direct carrier channel. We have shifted resources into non-auto vertical marketplaces. We've seen some great progress so far in homeowners, which was the first place that we redirected those resources. I look forward to a fast-following strategy with Life, Health, and Medicare marketplaces while continuing to invest in our agent channels. If there's a place that might be affected depending on how the auto recovery proceeds over the course of the year, it likely would come from incremental advisor headcount, which we have historically flexed as growth supports cash flow from the marketplace. That’s probably the one area of investment that we would take a look at first.

Michael Graham, Analyst

Alright. Sounds good. Thank you, guys.

Jed Kelly, Analyst

Hey, great. Thanks for taking my question. Since if I go back to some of your commentary, are you believing just given the carrier conversation and the time it takes for capacity rates to return that Q2 is likely the trough quarter for this year? Is that kind of where you think your internal projections are?

Jayme Mendal, CEO

We've been in the business of prediction a few times throughout this hard market cycle and we haven't gotten it right. So I'm probably not going to make another prediction. What we can tell you is, Q4 was definitely a relative trough, and the year began as we expected it would with one major carrier really leaning back in pretty aggressively. What’s happened subsequently is that loss ratios have remained elevated despite rate increases due to higher for longer inflation in areas affecting auto losses. They are continuing to see a longer time and cost to repair vehicles thanks to parts and labor, slightly higher injury severity, and higher than historical catastrophe losses in Q1. The response has been consistent across most carriers, with adjustments upward to plans for rate increases for the balance of the year. They will benefit from earning in previous rate increases and the states seem to be receptive. Thus, we have some comfort that things will continue to improve over the balance of the year. But can we put a stake in the ground and say, Q2 is very likely to be the trough? I believe there's too much uncertainty to make such a claim.

Jed Kelly, Analyst

Got it. And then, looking at your VMM margin guidance, it looks like it's near 34% based on my math, which would be kind of a thing as it's ever been? So, I mean, can you preserve margins, VMM margins into the mid-30s in this low demand environment? I mean, we're seeing one of your competitors doing the same thing and we expect your margins to hold at these levels until demand comes back.

Jayme Mendal, CEO

What we've reflected in Q2 guidance implies an improved VMM as a percentage of revenue. That does reflect what we are seeing. It reflects the very good VMM margins we achieved in Q1. I think much of that can be attributed to new bidding technology we've rolled out, as well as favorable advertising market conditions, enabling many more opportunities available in the landscape. We feel confident in maintaining those VMM levels.

Jed Kelly, Analyst

All right. Thank you.

Daniel Day, Analyst

Yeah, afternoon, guys. Thanks for taking the questions. Just first quick one for me. Can you remind us what percent of the business - percent of revenue from that agent channel that you talked about? I think you've said in the past just a reminder would be helpful.

Jayme Mendal, CEO

I'm sorry, Dan. Was it the agent channel?

Daniel Day, Analyst

Yeah, yeah, the agent channel as opposed to the direct carrier channel?

Jayme Mendal, CEO

Yeah, it hovers around 40% of revenue. That has been consistent through the downturn. It has been a very resilient channel for us.

Daniel Day, Analyst

Got it. Okay. Any comments you can provide us in terms of like traffic at a marketplace, quote requests? I realize the challenge in terms of monetizing them on the other side. But a lot of rate hikes are getting passed through. Wondering, just how robust the traffic has been to the marketplace in Q1 and into Q2?

Jayme Mendal, CEO

Traffic has definitely been a relative strength in the marketplace. In the first quarter, we grew quote request volume by more than 20%. A few factors have contributed to that; the first being the rate cycle. Consumers are seeing double-digit rate increases as the norm, which is driving elevated levels of shopping as people receive their renewal notices. At the same time, we've been rolling out our newest bidding technology, which is driving record levels of efficiency in our ad spend, and we believe it’s meaningfully contributing to our ability to capture market share and drive material growth during this period as well.

John Wagner, CFO

And Dan, I would just say that the effect of consumers out shopping is largely intuitive and aligns with what we expected. Industry research backs that consumers are shopping more as they receive policy premiums with double-digit increases. It's a very natural reaction for consumers.

Daniel Day, Analyst

Got it. And a quick one; last call you guys could shelf on place, you talked about the opportunities for accretive acquisitions. Just maybe remind us where you see the best opportunities there, whether this sort of re-deceleration and although this is either accelerated or delayed any conversations you're having on potential targets or ideas in terms of where to actually put that capital to work?

Jayme Mendal, CEO

We continue to see opportunities arise. The depressed auto market is actually accelerating the rate at which opportunities are presenting themselves. I would say it has neither accelerated nor decelerated our efforts. We continue to meet with companies in the space. Our view is, things that can meaningfully accelerate our progress against our strategies and make sense for us are potential areas we will consider. However, that's the extent of what we can share right now.

Daniel Day, Analyst

All right. Thanks, guys. Appreciate you taking the questions.

Jayme Mendal, CEO

Thank you all for joining us today. While it's unfortunate to experience another false start in the auto recovery and this extended period of uncertainty, we have high conviction that it's just a matter of time before we’ll stabilize, and carrier acquisition spend normalizes. Q1 provides just a glimpse of what even a partial recovery could start to look like. In the interim, the team is doing a remarkable job controlling the things we can control to ensure we emerge as a much stronger, more diversified business that includes improving unit economics and profitability in our marketplace and our DTC agency. We are accelerating our non-auto verticals, strengthening our advantage with local agents, and beginning to incorporate AI throughout the business. EverQuote’s future is bright. We have made significant progress towards building the digital insurance destination for the future, and we look forward to sharing updates in the quarters to come.

Operator, Operator

That concludes today’s call. Thank you for your participation. You may now disconnect your lines.