Ladies and gentlemen, thanks for standing by and welcome to the MediaAlpha Third Quarter 2020 Earnings Call. At this time, all participants are in listen-only mode. After the speaker's 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, Denise Garcia, Investor Relations. Thank you. Please go ahead.

Thank you, operator. Our discussion today will include forward-looking statements about our outlook for future financial results, including our financial guidance for full year 2020, which are based on assumptions, forecasts, expectations, and information currently available to management. These forward-looking statements are subject to risks and uncertainties that could cause future results or events to differ materially from today's guidance. Please refer to the earnings release we filed with the SEC on Form 8-K and the shareholder letter we posted to the Investor Relations section of our website today, for a fuller explanation of those risks and uncertainties and the limits applicable to forward-looking statements. MediaAlpha will routinely post information that may be important to investors on our IR website, investors.mediaalpha.com. And we'll use this website address as a means of disclosing material information to the public in a broad non-exclusionary manner for the purposes of the SEC's regulation fair disclosure. In addition, we will be referring to certain actual and projected financial metrics of MediaAlpha, which are non-GAAP financial metric measures. These metrics include adjusted EBITDA contribution and contribution margin, and we present them in order to supplement your understanding and assessment of our financial performance. Non-GAAP measures should not be considered a substitute for or superior to financial measures calculated in accordance with GAAP. The most directly comparable GAAP measures, as well as reconciliations of non-GAAP measures to those GAAP measures are available in our third quarter earnings release. As a reminder, we published a shareholder letter on our IR website that we will refer to during this Q&A session. Now, I'll turn the call over to Steve.

Thanks, Denise. Hi, everyone. Welcome to our first earnings call as a public company. Before we open the call to questions, I want to recap some important concepts we discussed during our IPO process. I'll start with the enormity of our market opportunity. Insurance carrier spend and digital distribution is projected to increase from $4 billion in 2019 to $16 billion by 2025. We believe we're still in the early stages of the $2 trillion insurance industry shift to a digital direct-to-consumer distribution model. We've built the leading technology platform to connect insurance consumers with insurance carriers at or near the point of purchase. Our transparent data science-based approach has enabled us to achieve tremendous scale, one that is now two to three times larger than other insurance customer acquisition marketplaces. Our platform is unique in its ability to serve insurance carriers' needs holistically, whether they are looking to acquire new customers or generate revenue from their non-converting shoppers by intelligently referring these consumers to other insurance carriers and distributors. As a company, transparency underlies and inspires everything we do; from our product development, to how we work with our partners, to how we treat our team members. Our company was self-funded until our IPO; we believe in growing profitably and the importance of stewardship. Most of all, the only scorecard that has ever mattered to us is one that measures the enduring value we have created for our partners. We're pleased with our third quarter performance, and we anticipate a strong record-breaking fourth quarter. With that said, I'm looking forward to discussing our most recent results with you. So we'll open the call to questions now.

Our first question comes from Doug Ayman with JP Morgan. Your line is open.

Thank you for taking the questions. I have one for Steve and one for Tigran. First, Steve, in the shareholder letter, you mentioned that spending through your ten largest carrier partners increased 95% year-over-year in Q3. Can you explain what's driving the momentum with some of the bigger carriers? Also, could you share how discussions are progressing with carriers who aren't currently on your platform? Tigran, regarding the Q4 guidance, it suggests a slowdown in growth compared to the approximately 40% transaction value growth in the first nine months of the year. You indicated strong health seasonality due to annual enrollment; could you discuss the factors influencing growth in Q4? Thank you.

Hey, Doug. Thanks. So to your first question about the increasing trend from our Top 10 insurance carriers. Now, keep in mind that Top 10 is as of right now, and so it was growth from some who are new to the Top 10. And so here is what I'll tell you, what we're discovering is that when these large insurance companies, the traditional ones, that typically had relied on agents and offline channels to sell their policies; when they make a transition to online, direct-to-consumer, they tend to do so and spend rapidly to increase their investments there. And so, I think the high growth rates that you saw from the Top 10 partners as of Q3 of this year reflect outsized growth rates from some of the large traditional insurance carriers, most notably in the P&C space, who rapidly increased their investment in our ecosystem in 2020. In terms of insurance carriers who are not on our platform; what I'll tell you is that we're always looking to add new carriers to our platform, both on the demand and the supply side. We did, I mean in Q3, add a top carrier who had never advertised in this channel before. But really, the growth for us is coming from expanding existing partnerships. We work with all of the top insurance carriers already, both as demand partners and many as supply partners; and so for us it's about the day-to-day account management and the day-to-day consultative work that we do with each of those insurance carriers to ensure that all of their spend and investments are measured as granularly and efficiently as possible. While there are some new carriers that will be coming into the platform, our focus really is on growing the existing partnerships that we already have, just because we've already worked with so many of the major carriers across all of the insurance verticals already.

Okay, that's great. That's helpful. Any thoughts on just Q4 guide; some of the puts and takes, and any seasonality dynamics perhaps?

Yes, Doug. I think you hit it on that seasonality. So, as a reminder, Q4 tends to be a seasonally weaker period in P&C. And so you do see Q4 come down from Q3 a little bit in the P&C vertical, and we have seen through November, a strong open enrollment period in both Medicare and Health; so that's driving the guidance in Q4. Another note is, in our other verticals last year, obviously that was pre-COVID, travel would be considered on the top line. In others this year, obviously that vertical is a big challenge.

And just following up there, how do you think about travel coming back? In 2021, are you starting to see any pickup in that vertical?

Doug, it's Steve. We're not. I mean, we're seeing some increases in air travel, and that's something that we monitor, the GSA stats. It hasn't translated into a big increase in terms of advertising spend from travel companies that we work with. For us right now, it's hard to predict when that market will come back; but we feel that we're well positioned for when the market does return.

Okay, great. Thank you, both.

Our next question comes from Michael Zaremski with Credit Suisse. Your line is open.

Good evening. My first question is about your comments regarding a top carrier that has never advertised in your ecosystem. Should we consider this carrier differently compared to some of the others on your platform, given its more niche client base? Specifically, should we anticipate that its spending might be relatively smaller due to this niche focus? I'm curious because it seems to be a significant carrier.

Hey, Mike. I don't think so. I believe it's still early stages. What I can tell you is that when we start working with new carriers in our ecosystem or with carriers who have been with us for years and begin to transition to focus more on direct-to-consumer and invest more in our ecosystem, that growth curve typically takes one to two years to develop. The carrier you mentioned has a lot of direct experience, so they may progress through that learning or adoption curve more quickly than some of the traditional agency riders who have made that transition over the past two years. However, right now, it's too early to determine what that adoption curve will look like.

Okay, that's helpful. Just switching gears to the contribution margin; you pointed out that there was a partner that I think might have had a one-time negative influence. I just want to make sure I'm interpreting that correctly, or are there any other secular trends on the contribution margin we should be thinking about?

Mike, this is Steven, let me take that. Just the first step, on the contribution margin. That's a partner that commenced their relationship with us early; we had signed a long-term deal earlier in 2020 that contemplated the economic relationship starting on October 1; they wanted to start early but had really through the transition period a fee to pay to the prior platform provider. And so to be a good partner there, we took on that business but took no margin in Q3; really a one-time temporary issue where you see revenue in Q3, but no contribution from that partner.

And Tigran, did you call out the impact to quantify it for us? Is that what we should think about?

Yes. On a pro forma basis, that partner would have added a little over 1%, right, one percentage point to the contribution margin; so that would have been a little over 15% in Q3, had we taken our revenue share, our contractual revenue share, which commenced on October 1.

Okay. Other than that, are there any additional trends we should consider for the coming years?

No.

Lastly, if we can revisit travel; I understand the outlook may seem uncertain due to the pandemic. However, should we anticipate that travel is likely to return at some point, considering it's the main factor behind nearly a $10 million year-over-year decline in revenues in the other segment?

Yes, Mike. I think you can assume that it will come back but it's really hard to say what the timing will be. On this one, I mean, we study the industry, we're looking at what's going on; but to be honest with you, with the uncertainty around what happened this year, and now looking into next, I would say that I feel comfortable saying your guess is as good as mine, in terms of what the timing would be.

Okay, understood. Thank you very much.

Our next question comes from Daniel Grossman with Citi. Your line is open.

Hi, guys. Thanks for taking the question, and congrats on a good quarter out of the gate. I want to focus a little bit on the Medicare AEP period that just ended. Anything that was different this year versus last year? Obviously, everything has kind of moved online now, so just curious, if you've seen anything different from a demand partner perspective or the amount of customer referrals coming through clicks, calls, or leads; any trends that were different this year versus previous years?

I would say there was nothing specific to call out, right. I think that the demand was strong, and so we've had very strong AEP performance. But it was in the form of just increased demand, increased adoption of direct-to-consumer; some of our partners now starting to support an online-only experience which then precipitates a heavier investment in online customer acquisition, the growing adoption of Medicare advantage among new entrants into the Medicare pool. So, all of those are trends and secular trends and demographic trends that we've seen for a while. All of these factors, and just a continuation of those trends, we believe contributed to a strong AEP for us; not any one thing that we're seeing in this period that we really hadn't anticipated.

Got you. Okay, that makes sense. Can you share any updates on your progress in selling leads to traditional agents through the agency channel? Are you hiring sales people to support that area?

Yes, we are making good progress. We launched this initiative in Q3, and the hiring is going very well. We have a great team ramping up, many of whom are based in Arizona. This requires a different team to engage with agents rather than insurance carriers, which is what our team is usually accustomed to. We are pleased with how that team is developing and we are starting to generate revenue from this business. However, our primary focus right now is on building that organization and understanding the needs and feedback of our early adopters, the agencies we are collaborating with. We are encouraged to see that there is potential for innovation and disruption in this space. Many aspects like transparency, granularity, and control that we have introduced into our ecosystem are currently lacking here. While we will need to tackle these challenges in various ways, we see numerous opportunities ahead. We are happy with the progress we've made so far, and we expect to see strong growth from this business in the future.

Got you. And last one, maybe for Tigran; it looks like transaction expenses were double of what you were expecting from the flashed numbers in the IPO perspective. Just curious, what caused that to double? And how we should think about that for the rest of the year?

Okay, Dan. So those are one-time IPO-related transaction expenses that when we were formulating the flash range were reflected as balance sheet items; and on closing, we determined that some of those needed to be expensed as one-time, not recurring items. You can expect to see a similar number in Q4, the monthly close of the IPO. And then, obviously, going forward beyond that you expect to see that normalize and adjustments to EBITDA not to reflect these one-time transaction items.

Got it. All right. Thanks, guys.

Our next question comes from Michael Graham with Canaccord. Your line is open.

Hey, sorry, I was on mute. Hey guys, thanks for taking the question. My first question is just on, wondering if you can comment on the dynamic of demand partners turning into supply partners as well on your platform? And are most of the carriers that you're working with taking advantage of that opportunity? And is converting more of those folks into that dynamic would be an opportunity for you?

Hey Michael, it's Steve. Yes, absolutely. We work with over 35 insurance carriers as both demand partners and supply partners. We're pleased with the recent progress in expanding those partnerships and establishing new ones. There is a development and relationship cycle with these supply partnerships; generally, carriers start cautiously and then expand, which can take two to three years to fully develop. We're encouraged by the willingness of these insurance carriers to grow their partnerships, largely due to the competitive nature of the marketplace for customer acquisition. This approach helps reduce customer acquisition costs, and as these costs rise with the increased competition in the stock market, especially in the property and casualty space, we're seeing more interest in the program. There's not only a push to adopt it but also to deepen existing relationships that have been in place for one to two years or longer.

Thank you for that. I wanted to ask a broader question regarding the growing prominence of direct-to-consumer models, particularly in the auto insurance sector. It seems we might witness consumers changing their policies more often. If you consider shopping and comparing options, do you believe that's accurate? Additionally, would you view more transactions as a positive outcome for your platform? I'm curious if you anticipate any long-term challenges where the lifetime value of customers for carriers could be impacted by this trend, as they might lose customers more frequently. How do you see the relationship between increased transaction volumes and the possibility of lower customer lifetime values evolving?

Yes, that's a good question, Michael. It's hard to say. What we're noticing is that non-standard drivers have been more willing to switch policies for some time now. Now, standard drivers are also becoming more open to switching and comparing policies due to the ease of doing so. As for how this will affect the expected lifetime value of these consumers, it's also difficult to determine. Increased switching and comparison could potentially lower that value a bit, but I have confidence that the insurance carriers we partner with can quickly adapt and accurately assess the expected lifetime value of these consumers.

Yes. Okay, thanks a lot.

And ultimately for us, that's what's important, right, that they factor that in or accurately be able to evaluate the expected LTV.

Yes. Okay. Thank you, Steve. I appreciate it.

There are no further questions at this time. This concludes today's conference call. You may now disconnect.