MediaAlpha, Inc. Q1 FY2022 Earnings Call

Good afternoon. My name is Emma and I will be your conference operator today. At this time I would like to welcome everyone to the MediaAlpha Q1 2022 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. Thank you. Denise Garcia, head of investor relations. You may begin your conference.

Thank you, everyone. After the market closed today MediaAlpha issued a press release and shareholder letter announcing results for the first quarter ended March 31, 2022. These documents are available in the investors section of our website and we will be referring to them in our discussion today. Our discussion today will include forward-looking statements about our business and our outlook for future financial results, including our financial guidance for the second quarter of 2022 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 those reflected in those statements. Please refer to the company’s SEC filings including its annual report on Form 10-K and its quarterly reports on Form 10-Q for a fuller explanation of those risks and uncertainties and the limits applicable to forward-looking statements. These forward-looking statements are based on assumptions as of today, May 5, 2022, and the company undertakes no obligation to revise or update them. In addition, on today’s call, we will be referring to certain actual and projected financial metrics of MediaAlpha that are presented on a non-GAAP basis. 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 a substitute for or superior to financial measures calculated in accordance with GAAP. Reconciliations of these non-GAAP measures to the most directly comparable GAAP measures are included in our press release and shareholder letter issued today. Finally, I’d like to remind everyone that this call is being recorded and will be made available for replay via a link on the investors section of the company’s website at investors.mediaalpha.com. Now I’ll turn the call over to Steve and Pat for a few introductory remarks before opening the call to your questions.

Thanks, Denise. Hi, everyone. Welcome to our first quarter 2022 earnings call. I’d like to kick things off with a few key takeaways from our shareholder letter. In the quarter, we generated $239 million in transaction value and $7.1 million in adjusted EBITDA, both of which were in line with our expectations. We continue to face significant headwinds in our P&C insurance vertical due to the decreased marketing spend by auto insurance carriers as they work through inflation-related underwriting profitability issues. While the near-term timing of the market recovery remains difficult to predict, we remain confident in the unmatched ability of our marketplace to support the auto insurance industry’s return to a growth focus as carriers' profitability improves. We had another strong quarter in our health insurance vertical with year-over-year transaction value growth of 20%. We continue to see outstanding long-term opportunities in this vertical, particularly in Medicare. There are over 10,000 Americans becoming Medicare eligible every day, and this new cohort is shopping online and opting for privately administered Medicare Advantage plans at a higher rate than their older counterparts. As a result, Medicare Advantage enrollments are expected to surpass 37 million in 2026, up from 24 million in 2020. As health insurance carriers increasingly look to acquire these Medicare customers directly, we’re excited to help our partners capture a growing share of this $1 trillion market opportunity. Lastly, we’re excited to announce that we closed our acquisition of CHT on April 1. With CHT, we’re now better able to leverage social media channels to help meet the growing call demand from health insurance carriers. And we’re excited to have the CHT team on board. With that, I’ll turn the call over to Pat to say a few words before we open the call to your questions.

Thank you, Steve. I’ll now touch on a few more items before opening up the call to questions. In March, we announced our first ever share repurchase plan which commenced in mid-April following a cooling off period. In terms of our capital priorities, our first priority is to reinvest in the business to capture the massive opportunity created by the insurance industry’s transition to online policy sales. Second, we will continue to pursue M&A to grow our marketplaces and capabilities. The CHT transaction which closed on April 1 and will begin contributing to our business in the second quarter was a great example of such a transaction. Third, we will use excess cash to repurchase shares on an opportunistic basis. Turning to the quarter, we exceeded the midpoint of our guidance range across all of our Q1 guidance metrics. Then looking forward, our second quarter guidance reflects continued quick volume growth in our P&C insurance vertical, offset by the carrier spend declines Steve mentioned in his remarks, which are manifesting in lower prices. Outside of P&C, we expect ongoing momentum in our health insurance vertical, including results from CHT, although I will highlight that we had unusually high volume in last year’s second quarter due to the extended open enrollment period in 2021. Given the continued constraints in P&C marketing budgets, we are planning a more measured rate of investment in headcount and other OpEx for the balance of 2022, and we expect overhead, excluding stock-based compensation in Q2 to be $1 to $2 million below Q1 levels due largely to lower professional fees. As we look forward, while we don’t know exactly when the carriers will complete their rate actions and realize improved profitability, we know they will; and when they do, we expect to see pricing increase as carriers look to drive growth and volume increases. Consumers shop more in response to higher premiums, and with our transparent and flexible platform, we are ready to capitalize. With that operator, we are ready for the first question.

Your first question today comes from Andrew Kligerman with Credit Suisse. Your line is now open.

Good evening. I’d like to discuss your perspective on the decline in transaction value in the second quarter guidance as mentioned in your letter, which is attributed to reduced spending due to seasonality. Could you provide some insights into why this is occurring? I sense that pricing at some companies is nearing an equilibrium level and some states are becoming more appealing. So why is there still a decrease in the second quarter? Additionally, do you anticipate a significant increase in the third quarter regarding property and casualty shopping?

Hey, Andrew, this is Steve. Thanks for your question. Yes. I would say that I don’t know that the industry has reached the point. I think what you’re seeing is that there’s been a prolonged inflationary environment, and you’re seeing continued elevation of claims costs. And for some carriers, this is leading them to take higher rate increases than they originally planned. It’s a dynamic environment. I think in any underwriting cycle, like this, you are going to see different timing and magnitude of rate taking between different carriers. And so I think you are seeing some early positive signals from carriers who took additional or more rate early on in the cycle. But then on the other hand, you’re hearing from some carriers that the rates that they initially took or planned on taking weren’t sufficient, and that higher rate taking is needed. So I think the overall underwriting environment remains fairly uncertain and dynamic. But we do share an overall outlook that we’ll start to see improvement in the second half of this year. However, our assessment now is that that will likely take longer than most had originally anticipated.

I see, Steve. So if I understand what you just said, maybe in the second half, you’ll see improvement, but not the kind of growth you really need to get into a good profitable mode. That might take a little longer, right?

I think that’s right. And I think it will take longer than some of the original expectations that you heard in the marketplace.

Got it. And then just one other follow-up on expenses. I was reviewing the financials. You mentioned that equity-based compensation is expected to be around $13.8 million in the quarter compared to $10.6 million year-over-year. I noted that G&A was approximately $17.1 million in the quarter versus $15.7 million in the same quarter last year. My question is, can you help me understand this growth in expenses, given the challenging environment for increasing transaction value? Perhaps you could explain a bit about these expenses and the reasons behind their increase?

Yes. And, Andrew, this is Pat. Are you talking about quarter-over-quarter or year-over-year numbers?

Yes, I'm referring to year-over-year.

Yes. Regarding expenses, it's important to remember that we have always operated as a lean company. When we went public in late 2020, we had fewer than 100 employees. Since then, we've invested over $10 million to develop the necessary infrastructure for being a public company over the last five to six quarters. Last year, we also focused on hiring to facilitate business growth and establish a solid foundation for future success. You could see both of these trends reflected in the increase in overhead costs over the last year. The first quarter of this year marked a peak for us, particularly in non-people-related expenses, as we incurred significant professional fees to manage our initial year of Sarbanes-Oxley compliance and processes new to us as a public entity. We anticipate that these costs will decrease in the second quarter as we realign our business. Moving forward, we're implementing a more cautious approach to increasing headcount. While we won't provide exact guidance on that, I expect very minimal growth in this area due to the challenging market conditions in property and casualty, where we believe we are adequately staffed to support growth. However, we will consider adding personnel when we identify opportunities that can generate revenue quickly.

Very helpful. Thanks, Steve and Pat.

Thank you.

Your next question comes from the line of Daniel Grosslight with Citi. Your line is now open.

Hi, guys. Thanks for taking the questions. I want to focus on the health segment for a little bit. It seems like that is holding up nicely indeed. So you did pretty well this ATP. I want to try to square that with some of the commentary from the e-brokers, which again has been pretty difficult in terms of their investment in marketing this year ahead of this year’s ATP, which will happen in the fourth quarter. In fact, a quote was on their call this morning saying they’re going to cut expenses, $200 million most of which will be a cut to marketing this year. So I was wondering if you can help square the strength that you’re seeing in the health segment with some of the pullback that the e-brokers are taking this year and maybe help frame what percent of transaction value in health, particularly on the Medicare side, is coming directly from the carriers themselves versus the e-brokers. That’d be very helpful. Thank you.

Got it. Yes. I’ll just answer that first question quickly. We’re fairly well diversified between brokers and carriers in the Medicare space and healthcare overall. I think with regard to the meaningful question about the broker channel, how to reconcile what you’re hearing on that side with our performance, I think you need to look under the covers because it’s not really one story. To get a full picture, it requires parsing through different segments of their marketing channels that have worked well for them and happened. Certainly, I think the sector as a whole is reevaluating different marketing channels and the effectiveness, assessing the expected lifetime value of channel A versus channel B and taking a far more closer look than they did before so that they can match customer acquisition cost with expected lifetime value more accurately. We welcome that because as a transparent programmatic marketplace, that’s exactly what our platform and marketplace were designed to optimize. Even getting more specific, what you’re hearing is that the online enrollment channels from these brokers have actually performed very well as they take a closer look. So what you’ll see on our end is that with the broker segment, the amount of clicks that the broker segment has been buying has actually been up fairly strong year-over-year. As you know, our marketplace works for both quick calls as well as leads, but clicks is really one area of focus for us. So with regard to the brokers’ focus on what channels are working very well and what kind of aren’t working as well, I think early on that’s played into our favor in getting them to, in aggregate, increase their level of investment with us, while they might be pulling back in other channels and really taking a closer look at their marketing spend.

Got it. That’s helpful. And can you just confirm if CHT is included in your near 2Q guidance? And if so, how much? And for the full year, do you still anticipate revenue from CHT of around $25 million?

Yes, Dan. This is Pat. CHT is included in our Q2 guidance. The annual guidance is the same as what we gave last quarter at the time of signing, which was in excess of $25 million of total revenue and in excess of $5 million of adjusted EBITDA. We aren’t providing a breakout of what we expect CHT to produce in the quarter. The one thing I will say is that that business is very Medicare-centric, and the Medicare business tends to have a relatively pronounced peak in Q4. So the P&L profile of that business will be very back-loaded for us over the remaining three quarters.

I understood. Thanks for the color, guys.

Excellent. Thanks, Dan.

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

Thanks. Going back to the P&C vertical, if I can. How do we think about the line of sight that you have? In other words, are there signs of advance notice, or is it just if a company exercises that they really want to go in a particular state, they start bidding up for clicks? You’ll see it that way.

No. I think the way it works is because of the constant dialogue we have with our partners. We have weekly or at the very least biweekly calls with them and ample notice of what they’re seeing and when they expect to turn on certain states. It’s never as simple as, hey, all of a sudden, five states get turned on. I mean, we hear about it well beforehand.

Okay. That’s helpful. Eventually, if breaking down, I think in your opening comments, Steve, you talked about a lower price per click but an increase in the number of clicks. Can you provide more detail on that?

Yes. I think what it means is that we have a great base of supply partners. Companies like Zebra, as well as over 35 insurance carriers. I think that what it also means is that the shopping demand or consumer shopping today remains strong. As you know, what happens is when prices go up, consumers shop more as those rate changes take effect. It’s difficult to tie back specifically. Our volume increases year-over-year in Q1 to the rate taking that got kicked off in Q3 and Q4 of last year. However, what you will see is with the magnitude of the rate changes that are taking effect in this cycle, again, being higher than expected, I think what you’re going to see is that this will lead to a correspondingly stronger consumer demand for our shopping activity as those rate changes take effect. Usually, anything over 5% in terms of rate tends to stimulate shopping behavior from existing policyholders. Anything over 10%, then what you see is a nonlinear increase of shopping behavior. I think in this cycle, we’re seeing many carriers in many states taking rates well into the double digits.

Okay. Perfect. Thank you so much.

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

Thank you. Hey, guys. I just wanted to ask a couple of other players in the space perceive that we’re about two-thirds of the way through kind of the hard market in auto. Can you provide any comments on that? Additionally, I thought some of the discussion in your shareholder letter around some of the things that you do to differentiate your platform from some of the competitors was really insightful. I’m curious if you’ve had any early discussions with some of your demand partners about whether you can exit this current environment with more share, potentially highlighting the strengths of your offering.

Hey, Michael. Yes, I appreciate the question. I think from the beginning, it’s essential to understand how uncertain these types of underwriting cycles can be. And I think, with an appreciation of how this cycle's root causes still lay within what was an unprecedented event, I think we’ve been hesitant to really put a number on where we are or what inning we’re in for the arc to the rate taking cycle. What you’ve seen over the last couple of months, again, some carriers, very smart carriers, are figuring out that they need to take more rate as inflationary pressures persist. I think that goes to this, and I think what we’re seeing is some conflicting signs coming out, which is far more like a typical rate-taking cycle or a hard market cycle where some carriers are taking rate earlier, some carriers are taking more rate than others, and in the end, they end up overshooting or undershooting. You have carriers layering in and achieving rate adequacy at different times. I think that’s what you’re seeing in this marketplace. And to think that this market cycle is two-thirds or more of the way through might be putting too much credence on some of the really positive news you’re hearing.

Well, you kind of maybe it’s better to ask that follow-up now. I’d love to get your thoughts on the sort of competitive advantage market share questions. So sorry to interrupt, but just drilling into that a little bit. When we look at your Q2 guidance, should we interpret that as like what we’ve seen so far in April, kind of on a run rate basis? Or is that more because I know you mentioned that March was kind of okay but April looked a little bit worse in the letter. Should we think about it that way or is it more based on the visibility in terms of discussions? I’m just trying to get a feel for how conservative or not that sort of Q2 guidance might be.

Yes. And, Michael, it’s Pat. What I would say is, I think we outlined in the letter and in Steve’s remarks that Q1 was relatively stable, but in late March, business took a step down. That trend has been pretty consistent to the present. We’ve gotten some good news from some carriers, and we’ve gotten some not-so-good news from others. We incorporated all of our best knowledge as of last night into the guidance numbers that we put out. I’m not going to tell you exactly what we’ve got in there for volume and price, but I will tell you that we’re assuming that the balance of the quarter doesn’t look all that different from what we’ve seen thus far.

Thanks, Pat.

To address the second part of your question, which I appreciate, we tend to look at things in terms of years and not necessarily quarters. When you do that, what we’ve seen in past cycles is that these hard market times represent an opportunity for us. The reason it does so is that the carriers, when they prioritize profitability over growth, show very efficient urgency around efficiency initiatives that we are pushing all the time, but these are projects that can sometimes get sidelined when carriers are in full growth mode, looking for additional volume. It’s about improving conversion tracking, improving data passing, and programs to monetize not converting shoppers, something in particular that we’re gaining traction with this cycle. It’s during times like this that we tend to make the most headway with these types of initiatives. These small changes in aggregate allow us to squeeze several percentage points of efficiency from the carrier spend. Our ability, through our hundreds of supply partners in our marketplace, and our programmatic approach allows carriers to achieve and maintain their efficiency targets while scaling their spend rapidly without sacrificing efficiency. This is the hallmark of our marketplace and why we can outpace competitors coming out of these hard market cycles. I can say that during previous cycles such as COVID, when you saw a substantial influx of ad budgets going online, we were the primary beneficiaries due to this work we do during these times, leading to granular measurement of efficiency and enabling carriers to scale spend very rapidly.

Okay. Thanks a lot, Steve. I appreciate the answer.

Thanks, Michael.

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