MediaAlpha, Inc. Q2 FY2021 Earnings Call

Good day and thank you for standing by. Welcome to the MediaAlpha Second Quarter 2021 Earnings Conference 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 the conference is being recorded. I would like to hand the conference over to your speaker today, Mr. Denise Garcia, Investor Relations. Please, go ahead.

Thank you, Sarah. Our discussion today will include forward-looking statements about our outlook for future financial results, including our financial guidance for the third 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 address as a means of disclosing material information to the public in a broad non-exclusionary manner for 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 a substitute 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 second quarter earnings release. As a reminder, we published a shareholder letter on our IR website that we'll refer to during this Q&A session. Now, I'll turn the call over to Steve for a few introductory remarks before opening the call to your questions. Go ahead, Steve.

Thanks, Denise. Hi, everyone. We're pleased to report yet another strong quarter. Our top line transaction value in the second quarter of 2021 was $256.5 million, an increase of 46% year-over-year. We continue to focus on executing against a large market opportunity and increasing our share of wallet with some of the largest advertisers in the world. Our performance was driven by strength across all of our insurance verticals, as carriers continue to move more of their customer acquisition investments online. As the largest digital customer acquisition platform in the insurance industry, we have an unmatched level of scale. That scale, combined with our data science capabilities, enables us to innovate and drive significant business value for our partners, which in turn drives our market share growth as measured by transaction value. As we continue to deepen our relationships with our carrier partners through an increasing number of technology integrations, we unlock opportunities for long-term growth, including, as outlined in our shareholder letter, a $1 billion-plus incremental market opportunity in our efforts to work with major insurance carriers and supply partners. We have a tremendous runway for growth, as we barely scratched the surface of our potential and areas of innovation, and I look forward to sharing more on our progress. With that, we'll open it up to your questions.

First question comes from the line of Cory Carpenter from JPMorgan. Your line is open.

Hi, guys. Thanks for the question. I had two, probably both for you Steve. First, just hoping you could expand a bit on the comments in the letter you made around the changes you're seeing in P&C carrier spend and how that's informing your second half guidance. And then, second, just hoping for an update on MediaAlpha for Agents. Thanks.

Thanks, Cory. I'd like to start by saying that it's still very early to determine the impact of the profitability concerns we're noticing in the industry on our business. From an industry perspective, it's unclear if this is affecting just a few carriers that may need some minor adjustments as driving behavior normalizes, or if this indicates the beginning of a broader market trend. The feedback we've received from carriers has been mixed. A few have slowed their investment growth, while the majority are actually increasing their budgets and plan to maintain a strong growth posture for the rest of the year. We highlighted this in our shareholder letter to educate our investors about the cyclicality in the industry, as we previously did regarding seasonality, and to be transparent about the early profitability signals we've received from some carrier partners. I want to reaffirm that we’ve been in this space for nearly 11 years and have grown and gained market share through various market cycles in the past, and we anticipate doing so again. Our confidence stems from the ongoing shift to online direct distribution and the measurable nature of customer acquisition investments in our ecosystem. This leads us to believe that if there is a reduction in customer acquisition spending, our channel will likely be one of the last to be affected. Additionally, the diverse mix of demand and supply partners in our ecosystem today is greater than it was in previous cycles. Regarding your second question about agents, we are continuing to invest in product innovation and building a strong agent team. As we mentioned before, we do not expect a significant contribution from this business segment for the rest of the year. Our main focus is on establishing a solid foundation for this part of our business to contribute materially to our growth in 2022.

Thank you. I appreciate it.

To address your first question, this is Tigran. I'd like to elaborate on the diversity point that Steve mentioned. In Q2 of 2021, we are seeing increased diversity on both the demand and supply sides of the ecosystem. On the demand side, two customers together accounted for 28% of our revenue, compared to a year ago when a single customer made up that same percentage. Similarly, on the supply side, no single supplier contributed more than 10% of our revenue, while a year prior, two suppliers accounted for approximately 23%. It's encouraging to observe this diversity and mix on both sides of the marketplace.

Okay. Thank you.

Thanks, Cory.

Your next question comes from the line of Michael Graham from Canaccord. Your line is open.

Thank you for taking my question. It was great to see all the information in the shareholder letter about the shift of demand partners to also becoming supply partners. I find that exciting. I have two questions regarding this. First, you mentioned that 35 carriers have completed the data integration needed to become supply partners. What do you believe the roadmap looks like for getting the remaining carriers on board? Secondly, you noted that some of these carriers were able to offset as much as 30% of their expenses by becoming supply partners. I am curious about the typical time frame for a carrier to become a supply partner for the first time. How long does it usually take for them to ramp up to that level?

Yeah. Thanks for that question, Michael. I wish I could give you a clear answer on this one. I mean, the reality is that insurance companies tend to act very thoughtfully and deliberately when they're adopting new programs like this. Like extending the partnership and not just becoming a buyer or an advertiser demand partner in an ecosystem, but also becoming an intelligent seller or a supply partner in our ecosystem. And so, the 35 partners that we have, or 35-plus insurance carriers that we work with in this capacity, they're at different levels of adoption. And as we've mentioned in the past, I believe, right, the easier parts are in getting these carriers to serve comparison listings, when they don't have a policy to sell to a consumer. Now, the justifiable concern that insurance companies typically have is that if they want to expand beyond this type of an implementation, right, which is really required to achieve that metric, that benchmark metric that you mentioned, the ability to offset 25%, 30%, 35% of your customer acquisition costs through an intelligent program like this. The potential for losing policy sales by showing comparison options to insurance shoppers on their site has to be addressed and that's really where our data science capabilities come in. The data science is what enables us to work with insurance carriers to help identify those shoppers who are non-converting or have a very, very low likelihood of converting into a policy. And so it's really about bringing the data science capabilities to bear to help address the concerns that carriers have about adopting this program in full and displaying it on their quote pages, they show their rate to insurance shoppers, but then also intelligently in certain cases also show comparison listings, because the data science tells them that that consumer is really just not going to buy a policy from them at that time. And so in terms of the adoption to get to that level, I'll put out a number and say that it takes two to three years in our partnerships with insurance carriers to really get to that level. But as I started off, very hard to predict because insurance companies, if we've learned anything about them, is that they tend to move at their own pace.

Yeah. Thanks for that. I appreciate the detail around that feature, I think it's really helpful.

Sure. Thanks, Michael.

Your next question comes from the line of Meyer Shields from KBW. Your line is open.

Thanks. When we reflect on the insurance industry, there was a notable rise in claims frequency in 2015 and 2016, and many companies were slow to acknowledge that. From your viewpoint, do you have any insights into how aware the companies that are increasing their spending are regarding the potential worsening frequency, ongoing severity, or other issues that might be causing some companies to pull back?

That's a great question. I think all carriers are aware of the situation. The increase in driving and the rise in accidents and severity are not new developments. Everyone anticipated these trends. The key issue is whether the situation is aligning with the forecasts made by major insurance companies three to six months ago. In our conversations with various property and casualty insurance carriers, the feedback has been mixed. Some carriers, as reported in the news, are facing conditions that differ from their predictions, which is forcing them to adjust their rates and increase prices. However, we receive substantial feedback from our insurance partners indicating they are closely monitoring these trends. They recognize the uncertainty since the economy has never recovered from a pandemic-related shutdown like COVID-19. Thus, it's challenging to accurately predict how driving patterns will change. Overall, many of our carriers suggest that the situation is not deviating significantly from their expectations, and this perspective seems to encourage them to pursue growth for the rest of the year.

Thank you for that information. I have a second question regarding the third quarter. With the concerns surrounding the Delta variant, is it affecting other segments, particularly travel?

I believe the travel business is on a positive trajectory, although it has not yet returned to pre-pandemic levels. This growth is still hindered by the slow recovery of international and business travel, which are critical high-margin segments for the industry. Feedback from CMOs of various travel companies indicates that their marketing strategies will remain conservative until these areas improve. Additionally, the emergence of the Delta variant adds uncertainty, making it challenging to forecast the pace of recovery in our travel business. Nonetheless, we are confident in our positioning and our dedicated team, and we will be prepared for the market's resurgence.

Okay, perfect. Thank you so much.

Thanks, Meyer.

Our last question comes from the line of Daniel Grosslight from Citi. Your line is open.

Hi, guys, and thanks for taking the question. We continue to see a movement to the private market. I think at this point last year, around 30% of transaction value was in the private market and this year it's around 41%. Just curious if we should think about that private market as growing in total share of transaction value, I know 4Q is probably more weighted towards health, which is more open market. But just going forward, is the trend towards more private market transaction? And as smaller supply partners come online, are they increasingly going to the private market? Or are they sticking with open market?

Hey, Daniel, it's Steve. I’ll start with your question. You pointed out some important aspects. We anticipate more growth in our ecosystem from smaller or newer supply and demand partners, particularly traditional agency writers who are beginning to focus on direct customer acquisition. However, the private marketplace product, which we refer to as the seller exchange product, isn’t really designed for these smaller or newer partners. It is better suited for larger supply partners who want to collaborate directly with their biggest demand partners. This is why we don't emphasize this metric much—large supply partners can start working directly with one or two major insurance carriers, which significantly affects the metrics in any particular month or quarter. Additionally, our supply partnership team is always working on establishing new partnerships. If we form a large supply partnership that fits well with the seller exchange product, we aim to service that partner effectively without considering the transaction value to revenue mix or the open exchange to seller exchange mix. This is why we focus on transaction value rather than worrying about this mix. However, to address your question, we still believe that the equilibrium point is somewhere below our current level, but we could see fluctuations in the near term.

Okay. That's helpful. And as I look at your guidance for what's implied for 4Q, it's a pretty big step up in both transaction value and revenue in a sequential basis from 3Q. Is that mostly due to AEP for Medicare? Or are there other things that are driving that sequential increase in 4Q?

Daniel, I think you've got that story right, which is, in Q4, right, we expect a seasonal mix shift with the growth of the health and Medicare business due to OEP and AEP that's concentrated in Q4 really over a couple of months. And those verticals tend to be higher open marketplace transaction value because our owned and operated websites are a larger component of the mix. And so it's really the seasonality pattern that we expect from here out that's driving that step-up that you're seeing in terms of transaction value, revenue and revenue as a percentage of transaction value. Because O&O is a component there, it tends to be higher margin as well from a contribution perspective. So that trend really flows down through from transaction value revenue contribution into EBITDA. We saw this last year as well, right in Q4. The impact was a little more muted because if you remember, we had outsized investment allocations in Q4 last year in P&C. We don't have visibility yet into those types of allocations of budget. So, what's reflected today is a return to that normalized seasonality pattern that we'd expect from Q3 to Q4.

Very helpful. Thanks guys.

Thanks, Daniel.

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