Greetings. Thank you for standing by, and welcome to the MediaAlpha Q1 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, Denise Garcia, Investor Relations. 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 the second quarter and the full year 2021, 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 use this website 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 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 as substitutes for or superior to financial measures calculated in accordance with GAAP. The most directly comparable GAAP measures, as well as reconciliations of the non-GAAP measures to those GAAP measures, are available in our first-quarter earnings release. As a reminder, we've published a shareholder letter on our IR website, and we'll refer to that during this Q&A session. Now, I'll turn the call over to Steve.

OK. Thanks, Denise. Hi, everyone. We're pleased to report yet another record-breaking quarter. Our top-line transaction value in the first quarter of 2021 was $262.5 million, an increase of 58% year over year and above the high end of our guidance range. Our outstanding performance was driven by the continued strength of our P&C vertical, where we saw 74% year-over-year growth, as well as excellent momentum in our health insurance vertical, which achieved 51% year-over-year growth. As we discussed in our shareholder letter, our industry-leading scale, growth rate, and operating leverage are unmistakable signs that our model is working. Our scale advantages are enabling us to offer increasing efficiencies to our partners, both through superior economics and data science. Moreover, we continue to see greenfield opportunities ahead of us. In 2020, a year when we saw the effects of COVID-19 accelerate the insurance sector's adoption of online distribution channels, the insurance industry still spent only 21% of its marketing dollars online as compared with 65% for marketers across all industries. We're pleased with how well we're positioned to capture this market opportunity and look forward to strong continued growth in 2021 in our core insurance markets as reflected in our increased full-year guidance. With that, we'll open it up to your questions.

And your first question comes from the line of Cory Carpenter with J.P. Morgan. Please go ahead.

Hi, thanks. Thanks for the questions. Maybe, Steve, just to start off. Could you talk about what you're seeing with carrier spend? Clearly, it remained strong in the quarter. But just what you're seeing as the economy opens, miles driven starts to normalize. And maybe in particular, what's giving you the confidence to raise the guidance at this point in the year? And then I have a follow-up for Tigran as well, but I'll stop there.

Yes. Cory, in terms of the carrier spend in the P&C space, particularly with auto insurance carriers, we still continue to see the same things that we talked about in our last call, which is that employment numbers are up, everyone knows that. Miles driven is up, but not to the extent that you would expect based on employment numbers. Importantly, commuting miles still aren't back. From what we're seeing and hearing from our insurance partners, our insurance carrier partners, is that they expect things to remain at these levels and have above-normal loss ratios. In the second half of this year, you start to see some diverging opinions on whether or not the commuting miles will come back and frequency will revert back to normal. I think Adam had a great report about this where he makes a strong case that commuting miles will stay below historical levels, and hence, frequency will be below historical levels due to changing expectations of workplace. Others talk more about things getting back to normal. Where I stand on this, less as an insurance industry person and more as a CEO, I certainly think that our driving behavior is going to continue changing, and the expectations of working from our offices are altering. So my bet is that commuting miles will stay down and that profitability will remain high. Hence, the soft market will continue certainly through the end of this year and into next year. But that's our view on it, and that's what we're hearing from our insurance carrier partners as well.

That's helpful. And then just for Tigran, it looks like you're expecting more of the business to shift to the private marketplace. Could you maybe just help us with what's driving that and maybe how you think about the mix longer term? Thank you.

Sure, Cory. That's a great question. We do see some of our larger partners going direct via the private platform deployment with select key advertisers. That's really a validation of what our platform was built to enable in the first place. I would point to Q1 performance, which came in at the top end of the range on transaction value. While you see the GAAP revenue number flow down at a net rate for some of that increased transaction value via private platform, you see contribution dollars increasing and keeping pace with that transaction value growth. From a longer-term perspective, it can be hard to gauge exactly where this will move, but we believe there's an equilibrium point here. As new partners ramp up and take advantage of the demand-side dynamics at play here with continued soft market in P&C and increased carrier demand for consumer referrals, we're going to see open marketplace transactions increase. You see that with a statistic we made available in the shareholder letter where the cohort of supply partners that are smaller but meaningful in the open marketplace are growing nicely year over year at a clip of 51%, with an actual number of partners increasing as well.

Great. Thank you.

And your next question comes from the line of Frank Morgan with RBC Capital Markets.

Actually, Tigran, I'll stay on that point. That was one of my questions. Looking at those that are open market transactions greater than $1 million in transaction value. How long does it really take to see those grow? And is there a size where those eventually tap out?

No. I think you see those partners grow with market demand. We've seen those partners grow sequentially quarter over quarter from the Q1 2020 cohort. Some of those partners are better at scaling than others. Those that achieve significant scale may choose to go direct with some carriers. But we don't really see that happening unless it's a partner of massive scale.

Got you. And just sort of an accounting question, I noticed a fairly noticeable sequential drop in cash, and it looks like there was a fairly big reduction in payables. Anything about that that you would call out? Is that anything unusual or just kind of normal seasonal patterns for working capital management?

It's really normal seasonal patterns, so driven by the timing of when we release our supplier payments. You can see some lumpiness in that outflow from quarter to quarter. On a normalized basis, nothing's really changed in our working capital cycle; it’s just the effect of timing of when we released the large supplier payments. We see about a $34 million outflow there in Q1. The offset is a good collection cycle on the receivables side. Note that Q4 is a seasonal kind of peak for us. So you build up some receivables there and start to collect on them in future quarters. Nothing for me to call out; nothing of concern. They're very much normal cycle Q1 trends.

Got you. And I know we just had another year of good, solid growth on the health insurance side of the business. But I just want to confirm. Should we expect that business to slow down over the next couple of quarters given the normal seasonal pattern of that business before we get back to a year-end AEP? Or do you have any observations about how the OEP went?

Frank, we had a strong—

Yes—sorry. Let me make a comment about just—we did have a strong OEP. We saw greater spending from health insurance carriers during the special enrollment period as well. A lot of our insurance carrier partners in the under-65 health space were up, two to three times from past years, or past outside of open enrollment periods. We feel good about the upcoming open enrollment period. But I'll let Tigran answer the rest of your question.

Yeah. As Steve hit it on the head, with great open enrollment, we've seen nice performance through the extended special enrollment period, but seasonal trends will take hold in Q2 and Q3 before you see again that spike in Q4.

Your next question comes from the line of Daniel Grosslight with Citi. Please go ahead.

Hi, guys. Thanks for taking the question. I'll focus on the shift from open to private, more on a segment basis. If I look at the conversion values, that's revenue divided by transaction value, it looks like the greatest delta this quarter on a sequential basis was in P&C, then followed by health. I was wondering if there was anything specific to call out in P&C as we think about this shift from open market to private market and what that will mean for conversion rates going forward.

Daniel, I'll take that first. I don't think there's anything specific to call out with respect to P&C. The dynamics at play are that we had rapid growth in the P&C vertical partly due to the acceleration of the direct-to-consumer adoption by insurance carriers during last year, during COVID. With the influx of demand, I think our existing supply partners benefited from that and scaled nicely. As supply partners scale, our partnership can be flexible enough to shift to a model where, if they choose, they can deploy or start working directly with insurance carriers through a private marketplace they set up. The natural gating factor there is that insurance carriers are only willing to work directly with larger supply partners. More supply partners qualified and met that threshold for some of the insurance carriers to work directly together. As Tigran pointed out, the influx in demand attracts new supply partners, and we're seeing nice growth within our open exchange of smaller supply partners, and we expect them to continue to grow nicely. Keep in mind, some of the biggest partners that we have right now were small partners two or three years ago. This, in part, in enabling our partners to grow and scale, is really part of our model. We're happy to be able to continue to work with them under our private marketplace model, which is designed for partners who have been successful within our ecosystem.

Got it. All right. That makes sense. And then just looking at the guidance, it seems like the assumption is you'll continue to see a shift to private for Q2, and then you'll see the influx of these smaller and medium-sized partners come online in Q3 and Q4. Am I interpreting that correctly?

Dan, that's right. That's also impacted by seasonality and can have a little bit of an impact on the optics there of the flow-through. But by and large, you got it right.

Got it. Okay. That makes sense. And then in the health segment, can you remind us—sorry, go ahead.

Sorry, Dan, let me just jump in. I want to ensure that this is the reason we focus on transaction value, right, because we love working with our partners. As they scale and shift to a private marketplace model, that's by design. We're not, at any given time in the near term, overly concerned about the mix of private versus open, and that's why we focus on transaction value and the next line down in terms of overall contribution. I just wanted to clarify that as Tigran pointed out, over the long-term, we do expect some equilibrium point as new partners come in. There’s a natural check to the private marketplace model because of the demand side and their willingness to work with numerous partners directly, and that being limited. In the near term, the shifts we expect to see really highlight why we focus on transaction value above all.

Yes. That makes sense. Okay. And can you remind us on the health segment, what percent of transaction value is from the IFP or under 65 versus Medicare?

Under 65 is roughly 40% to 50% of the transaction value.

Okay. And is that more weighted this year because of the SAP, and do you expect that to trend down in 2022?

That's right. We see accelerating growth in Medicare as others have seen. Naturally, I think you'll see a mix shift toward Medicare.

Got it. Okay. And then one last one for me. Any update on the agent strategy and uptake you're seeing there?

Yes. As we mentioned last quarter, Dan, we continue to focus on product innovation there. We're very happy with some of the test results that we've had from product innovations that we've been putting out to the marketplace. We are seeing more of, because we're engaged in discussions with agent-based carriers about how best to start working with their agents and help them with their marketing efforts, that we are seeing an increasing trend toward these carriers starting to centralize some of the agent marketing support. This is what people sometimes refer to as co-op dollars or allowances to manage some agents, which are essentially marketing dollars that they're providing to agents. Typically, insurance companies have worked with these agents to give them some co-marketing dollars that they can use to buy leads, calls, or engage in other marketing efforts. What we're starting to see in this marketplace is that these carriers are beginning to centralize that support for their agents. There's some real benefits from centralizing this, as you can use technology based on data science and programmatic technologies to purchase more intelligently. You can solve the feedback loop problem at the carrier end on a centralized basis, which has been one of the persistent issues with media being purchased by agents, as they never know exactly what's working and what isn't. If you've heard our calls and us talking about it, you know how fundamental this is to our business model and the efficiency of it. If we see the trend of agency-based carriers beginning to centralize their efforts in helping their agents acquire customers, we see this as a good trend and one where the marketplace is starting to come to us. We're happy to see that trend, and we'll keep you updated on that. Our focus remains on innovating on the product side and the platform side. You'll see us toward the end of this year ramping up the recruitment of the sales team and reaching out to agents more aggressively during that time.

Got it. Appreciate the color. Thanks, guys.

Sure.

Your next question comes from the line of Michael Graham with Canaccord. Go ahead.

Yes. Thanks. Two questions, please. One is you mentioned in the shareholder letter something that I think we're all pretty aware of, which is that the insurance industry only spends a little over 20% of its ads on digital channels versus 65% overall. Can you just comment on whether you see this evolving to getting up to parity with the overall advertising market in a straight line? Or do you see natural areas where there could be an inflection point? The other question is if you could please give us a little color on some of the GAAP charges this quarter. It looks like there were some impacts to GAAP EPS. Just wondered if you could discuss that?

Hey, Michael, great question. In terms of whether that 21% is going to become 65%, I think it's more likely that it gets pretty close. One reason I say that is when you look at insurtech companies, which are natively digital, you see their marketing and customer acquisition spend not anywhere close to 21%. They're certainly investing at higher levels. That suggests that five or six years from now, more carriers will allocate those levels of spending to digital marketing. In terms of how smooth that transition will be, within the P&C space, it might be a little lumpy since there are large advertisers in the space. As they ramp up investment, you might see spikes as some carriers begin to increase their investment in direct-to-consumer. Otherwise, I don't have any information indicating it won't be steady growth year over year.

Thanks. Any comments on the charges to GAAP EPS?

Yes. Thanks, Michael. As you know, we completed our first follow-on offering in the quarter, incurring roughly $2.8 million of expenses related to professional services and executing that offering. Taking the net income number for the quarter of $0.2 million, adding that back gets us to about $3 million of net income or EPS of $0.05. Thus, it's primarily driven by those one-time charges related to the execution of that offering in Q1.

That's helpful. Thank you both very much.

Thanks, Michael.

And that concludes our questions for today's call. Thank you for your participation. You may now disconnect.