MediaAlpha, Inc. Q2 FY2024 Earnings Call

Thank you for joining us. My name is Pam and I will be your operator today. I would like to welcome everyone to the MediaAlpha, Inc. Second Quarter 2024 Earnings Call. All lines have been muted to minimize background noise. After the speakers finish their remarks, we will have a question-and-answer session. I will now turn the conference over to Alex Liloia. You may begin.

Thanks, Pam. Good afternoon and thank you for joining us. With me are Co-Founder and CEO, Steve Yee, and CFO, Pat Thompson. On today's call, we will make forward-looking statements relating to our business and outlook for future financial results, including our financial guidance for the third quarter of 2024. These forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially. Please refer to our SEC filings, including our annual report on Form 10-K and quarterly reports on Form 10-Q, for a fuller explanation of those risks and uncertainties, and the limits applicable to forward-looking statements. All the forward-looking statements we make on this call reflect our assumptions and beliefs as of today, and we disclaim any obligation to update such statements except as required by law. Today's discussion will include non-GAAP financial measures, which are not a substitute for GAAP results. Reconciliations of these non-GAAP financial measures to the corresponding GAAP measures can be found in our press release and shareholder letter issued today, which are available on the Investor Relations section of our website. I'll now turn the call over to Steve.

Hey, thanks, Alex. Hi, everyone. Thank you for joining us. Our performance in the second quarter was the strongest in our history across many of our key metrics, with transaction value and adjusted EBITDA reaching record levels and exceeding the high end of our guidance ranges. For those newer to the MediaAlpha story, I'll start today with a brief overview of the company. We're an advertising technology company that operates what we believe are the largest online customer acquisition marketplaces serving the P&C and health insurance industries. We do not sell insurance policies and we don't earn commissions on the sale or renewal of policies. Our product is a transparent and scalable programmatic advertising platform that enables insurance carriers and brokers to reach high-intent insurance shoppers in real time. We primarily facilitate these connections through our network of hundreds of third-party publishers, where we earn a percentage of the value of each advertising transaction. We also operate our own websites that represent a small amount, less than 15% of our overall transaction value. Now turning to our Q2 results, our P&C insurance vertical achieved record transaction value, growing over 300% year-over-year. We saw strong growth in marketing investments by an increasing number of our P&C carrier partners as auto insurance underwriting profitability continued to improve. We expect carrier spending in our marketplaces to further increase in Q3, with P&C transaction value growing well beyond normal seasonality. Moving forward, we expect P&C market conditions to remain favorable well into 2025, given that many carriers have yet to resume normal levels of marketing investment. In our health insurance vertical, we delivered solid second quarter growth consistent with our expectations. Given the strong performance of our P&C business, our health vertical is expected to generate approximately 20% of transaction value for the full year 2024. As we've discussed previously, we continue to cooperate fully with the FTC civil inquiry, which has been ongoing since February 2023. We've conducted an extensive review of our marketing practices, and while we can't predict the ultimate outcome of this matter, we continue to believe our practices comply with legal and regulatory requirements. Our goal is to resolve this matter as soon as possible, and we'll provide an update when we have one to share. Given recent market dynamics, I want to briefly acknowledge a short seller report that was published about our company last quarter. Our view is that the report fundamentally misrepresents our business model and business practices. Contrary to the report, neither my Co-Founder, Eugene, nor I sold shares in the recent secondary offerings. We continue to collectively own nearly 20% of the company, and we're more excited today about our growth opportunities for our shareholders, partners, and team members than we were when we founded the company in 2011. With that, I'll turn the call over to Pat for a more detailed review of our second quarter performance and third quarter guidance.

Great. Thanks, Steve. As Steve mentioned, our second quarter results exceeded the high end of our guidance ranges across all metrics, and we generated record transaction value and adjusted EBITDA of $321.8 million and $18.7 million respectively. P&C transaction value was up 88% sequentially, above our expectations of 60% to 70%, driven by significant month-over-month step-ups in marketing investment by our carrier partners as the quarter progressed. Transaction value in our health vertical was up 9% year-over-year, in line with our expectations. Overhead was slightly above our expectations as we increased our investment in the business to accommodate the growth we are experiencing. The net effect of all this is that adjusted EBITDA increased by $15.1 million, representing over 400% growth year-over-year. We generated $14 million of cash last quarter, nearly doubling our cash balance to $29 million at quarter end, while paying down over $5 million of debt. There were a couple of notable items in our Q2 adjusted EBITDA reconciliation, including $700,000 of legal expenses related to the ongoing FTC inquiry and $600,000 of legal and accounting expenses related to our secondary equity offerings. In addition, one of our health partners, Assurance IQ, ceased operations during the quarter resulting in a one-time contract termination fee payable to us of $1.7 million. Looking forward to Q3, we expect 40% to 45% sequential growth in P&C transaction value, well in excess of normal seasonality as the pace of recovery builds, and we continue to gain market share. In health, we expect similar transaction value growth year-over-year to what we saw in Q2. Moving to our consolidated financial guidance, we expect Q3 transaction value to be between $415 million and $435 million, a year-over-year increase of 290% at the midpoint. We expect revenue to be between $240 million and $255 million, a year-over-year increase of over 20% at the midpoint, and we expect adjusted EBITDA to be between $22 million and $24 million, a year-over-year increase of over 540% at the midpoint, driven by higher contribution and moderate expense growth. We expect overhead to be flat to slightly up versus Q2 before increasing another $1 million in Q4 as we selectively add headcount to drive growth. Lastly, Q3 legal costs associated with the ongoing FTC inquiry are expected to be at a similar level to Q2. Given the strong growth we are seeing, we are investing in the business while continuing to generate operating leverage. As we discussed last quarter, our lean team and capital-efficient model have enabled us to deliver significant year-over-year margin expansion, and we expect this to continue in Q3. Our near-term capital allocation priority remains to reduce net debt, though we will continue to evaluate alternative capital deployment opportunities as business and market conditions evolve. With that, operator, we are ready for the first question.

Thank you. Your first question comes from the line of Michael Graham of Canaccord Genuity. Please go ahead.

Hey, thanks very much, and congrats on the numbers and the guidance raise is really impressive. So it seems like things are going well, and I just wanted to start with a question about the recovery. You mentioned in your letter that multiple P&C carriers were increasing spend meaningfully. So, yes, just looking to see if you could put a little bit of depth around that and talk about with such dramatic acceleration in growth expected in Q3, how conservative or aggressive or how much visibility you have into that sort of forecast would be great? Thank you.

Thank you, Michael. I'll address that. One thing we correctly predicted was the unpredictability of this recovery, and I believe Pat captured that well. However, growth in our property and casualty marketplace is occurring more rapidly than we anticipated. The early carriers that began to increase their rates and shift back into growth mode have been more aggressive in responding to the mixed recovery and market dislocation than we expected. Initially, we thought they would be cautious about re-entering the marketplace, given the unpredictability of recent years and historical underwriting conditions, but that hasn't been the case. Many carriers that had been sidelined and not advertising for years lost a lot of policies during that time. Now that they are regaining profitability and confidence in their rates, they are eager to capitalize on current market conditions, which feature a limited, but growing, number of carriers that have recovered, adjusted their rates, and reached their target profitability. With consumer sentiment and insurance shopping behavior at historically high levels, these carriers are seizing the opportunity to gain market share, and we have benefited from their aggressive approach, as reflected in our results. Looking ahead, I expect these positive market trends to continue, especially since several key carriers that were major spenders before the hard market are still not investing significantly right now. As these carriers regain profitability, we expect them to follow the lead of the earlier carriers and increase their marketing efforts in our marketplace. Additionally, we should note that certain regions, particularly California, New York, and New Jersey, have been slow to implement rate increases, which means carriers aren't fully marketing yet. Consequently, we anticipate that the positive market conditions and momentum will continue into 2025.

All right. I'll go back in the queue. Thanks so much, Steve.

Thanks, Michael. Your next question comes from the line of Cory Carpenter of J.P. Morgan. Please go ahead.

Great. Hello. Thank you. So Steve, just kind of building on that question, is the right way to think about this as that the early movers are back to normalized spend, maybe with the exception of a few states? And if so, how should we think about the growth opportunity from here, given your added transaction value level today, which is a record level? Like how do you think are you comfortable with growth from current levels? I have a follow-up, but I'll stop there.

Okay. Well, listen, I'll start to address the questions, and Pat might chime in as I start to answer that. I mean, I think we're giving you the visibility that we have right now, right, for Q3. Based on the unpredictability and our underestimation in the last couple of quarters, I think as these carriers come back, it will be hard to predict what's going to happen. I do think that the growth rates overall for the P&C industry on a year-over-year basis, we will continue at high levels. I think on a quarter-by-quarter basis, going forward into 2025, we can certainly foresee that that will be lower, again as pricing normalizes, as some of the volume around the heightened consumer shopping behavior starts to normalize as well, but in terms of just giving you an indication of really what we think the market is going to do for the remainder of the year, I mean, we're giving you our best estimate for Q3, and certainly, we do expect positive tailwinds again well into 2025 as the market recovers and again, as the secular trend of insurance carriers embracing the online direct-to-consumer model continues, and we expect that secular tailwind to continue in 2025 and beyond. And so, Pat, did you want to add anything to that?

Yes, and I think Steve, you touched on the price versus volume piece, which I can maybe elaborate on a little bit, which is, you know, if you look at the last peak of the business for us was in late 2020, early 2021, and what we've seen over the last few years is that the volume trend has been generally flat to up over that time period, but volumes are a decent bit higher than they were at that time, and pricing is now kind of in the ballpark slightly higher than it was at the last peak as well. And so, you know, where both of those things are going to end up, I think Steve kind of touched on it, which is we think the trend lines are in the right direction, but it's hard to predict the exact slope of those. However, I think we're pretty bullish given where we're at in terms of our recovery, and we think there are more good times to come.

Okay. Thank you, and just for the follow-up, I wanted to ask about the health business. We've received more questions of late. Kind of an open-ended question here, but wanted to hear your thoughts just generally on your outlook for the health business. Other companies have chosen to exit; you guys have chosen to stay in. Kind of why is that? And then also, I wanted to give you a chance to respond to maybe some of the business practice allegations that have come up in the short report as well.

Yeah, Cory, I'll maybe address that first part of it: why we're staying in the business, and then can hand it over to Steve for the second part of that question. So, as we think about the health business, there are a couple of things that play there. First off, it's been a growing business for us consistently over time. And so we've grown that business from being a pretty small business a number of years ago to a meaningful one today, and we're optimistic about the future of the business. As we think about it, there are a couple of different pieces of it. There's Medicare Advantage, which is a product that has really strong fundamentals. It's a compelling product for many consumers in that it offers them additional benefits and no out of pocket costs. It's a business that's attractive for carriers, and a number of them have made big bets in the area, and it's a solidly profitable business for them. This business enjoys bipartisan support within government as well for the benefits it provides, and on the under-65 side that's been a nice business for us as well, where we've grown that across different political administrations. It's one that we think provides value to consumers and to the marketplace, and I would also point you towards some of the folks that have exited the health vertical. Their models were much more agent-heavy models where they were focused on binding policies themselves, and as Steve said in the prepared remarks, we have no agents, we don't directly contract with any agents, and we don't receive commissions for the sale of any insurance policies in our business, and so the business models in our view are pretty different. And so, Steve, do you want to tackle the second part?

Yeah, absolutely. And Cory, I appreciate the question about the short report and some of the specifics there. What I can tell you is that we looked into it internally, did a full internal review, went through it with our board, including our independent directors. We continue to stand by our business practices, and we continue to believe that we're in compliance with all applicable rules and regulations. Really beyond that, I think it's a bit of a fool's errand to go point by point through the business practices that they outlined there and some of the allegations they made. Most people on this call probably understand how these firms work and how these reports are really all about, taking things out of context, making spurious connections between one thing and another in order to paint a misleading picture of a given company. Certainly, they've done that here, with the goal of driving down our stock price to make a quick buck at the expense of our long-term shareholders. We think that's a horrible thing to do. The last thing I want to do in a call like this when we've had a record quarter and are looking forward to another record quarter is to give any more airtime to a short seller like this, and so I appreciate the question, but I think that's where we want to leave it with the short seller report.

That's helpful. Thank you. Thank you, both.

Your next question comes from the line of Michael Zaremski of BMO Capital Markets. Please go ahead.

Hey, thanks. Maybe going back to lots of the good color you gave on transaction value specifically, I'll just stick with that. If we look at your Q3 guidance and just make a reasonable guesstimate of what it implies for P&C specific transaction value, and then also if I take in your comments of volume has been flat to up over the years and pricing is slightly higher than the last peak, it does imply what you said. I think the math implies you're taking a lot of market share because we know what the average price of auto insurance has been over the last few years. So if I'm right, I think you said you took a lot of market share. What maybe can you elaborate on, Pat, what's why are you taking market share? Or is it just simply maybe you guys are the only ones that do certain things? What's going on underneath the covers that's causing you guys to win so much more?

Yes, and Mike, I'm happy to take it, and then Steve can jump in if there's anything to add. I think your characterization is correct in that I think the volume trends have been good, and the pricing trends in particular over the last couple of quarters have been steeply up, which has driven the acceleration in transaction value that we've seen. I would say that I think we got this question a lot in the hard market of performance versus peers, and one of the biggest drivers of performance is business mix, and our business in P&C is overwhelmingly focused on the selling of clicks to carriers. So a number of these carriers, in a time when they are not rate adequate or not profitable, that is spend that they can very easily reduce or eliminate because the last thing they want to do is be acquiring lower-funnel customers that would be unprofitable on day one. So, we think we're in a situation now, as carriers are getting rate adequate and getting solidly profitable, they're eager to grow, and they are returning to our marketplace probably faster than we expected, and that has been driving the outperformance versus peers over the last couple of quarters. We think that trend will continue in the next year.

Yes, Pat, I want to highlight the strength of our marketplace model. We are the only pure-play marketplace among our comparable companies, which means we have integrated hundreds of insurance publishers into our ecosystem. This includes insurance price comparison sites like the Zebra and Insurify, as well as insurance carriers aiming to earn advertising revenue from non-converting shoppers. We also partner with personal finance apps like Credit Karma that assist insurance sellers in providing savings to their users through lead generation. This extensive network of insurance-specific websites can quickly adapt to the needs of carriers and their significant growth demands, especially in current conditions. What we’re witnessing is a validation of our transparent programmatic marketplace model, which we anticipate will yield positive results moving forward as more carriers increase their spending. We expect to significantly outpace our competitors well into 2025 due to this model, especially since the recovery will center on national direct-to-consumer carrier budgets that align with our focus. One point of clarification regarding your earlier comment: I believe you mentioned that the volume has been flat or just slightly increased since the last peak. In reality, the volume has risen quite significantly just last week.

And to further clarify on that last piece, I think in any given quarter on a year-over-year basis, it was flat to up over that, but cumulatively.

Yes, every year compound. Okay, yes. Okay, got it. I think the national carrier piece might be part of the equation to it that helps us think through this. Got it. And I guess just lastly, and maybe there's nothing to say here because you already kind of said it in the last question, but I feel like it's I kind of have to ask. So, have there been any meaningful business practice changes in recent months?

Sorry, business practice changes? I mean, are you asking in response to the short seller report?

Yes. Just well, I guess, clearly the whole industry has been somewhat reacting to the ongoing issues, and there have been issues going on for over a year now in the Medicare marketplace, for example. So just kind of I don't know if there's just if there's anything you think that maybe the whole market changed a bit that's worth reflecting on, or specifically any business practice changes that over the last maybe more than just a couple of months due to what's taking place in the market?

Yes, I mean, I think I can start this as well. I think Pat will have some things to add here. I mean, I think specifically you're referring to the health insurance market and some of the CMS, one-to-one consent requirements that are going to be in effect for this upcoming enrollment period, as well as some of the one-to-one consent requirements from the FCC under the new formulation of TCPA, which affect both the health insurance industry and the auto industry. I think the impact of these things are going to be mostly within the health insurance vertical because what these things are going to affect are mostly leads that are sold, and our P&C vertical is so predominantly click-focused that we don't foresee a lot of changes to the P&C ecosystem, if any at all. I think with regards to what's going to happen within the health insurance ecosystem, I mean, I think what you're going to see is the one-to-one consent really bringing about more transparency and higher quality leads, and certainly, we're going to welcome that. I think some of the devil is going to be in the details of exactly what's meant by an automatic dial, and I think companies are going to try to come into compliance with this in slightly different ways and so it will be interesting to see how things shake out. I think certainly we're testing a lot of different implementations to maximize conversion rates while still abiding by the new one-to-one consent requirement, but overall, for regulations like this, which really I think will limit the number of times a lead can be sold, making it more transparent exactly who's going to call you once you submit yourself as a lead to a health insurance company. Overall, the spirit of those things, we welcome and we've always welcomed those. So I don't know, Pat, if you have anything to add?

No, I think that was a good summary from my perspective.

And Mike, did that answer your question?

Yes, that's very helpful. Thank you.

Your next question comes from the line of Thomas McJoynt of KBW. Please go ahead.

Hey, good afternoon, guys. Thanks for taking my questions. On the seasonality front, you typically see a pickup in the gross profit margin in the fourth quarter. I think given the rise of the healthcare mix in that quarter, should that be more muted this year than previous years just given the rise in the mix of P&C and its larger share of the private platform mix? And is there any way to sort of quantify this?

Yeah, and Tommy, I would say the short answer to your question is yes, it'll be more muted, and really the way we would think about modeling it is for us, typically Q4 has about 40% of our transaction value for the year in the health vertical, and a round number of plus or minus. You can see over the last few years kind of how Q4 profit might compare to Q3 versus Q1, acknowledging there are some changes in P&C in there. You can start to get a feel for kind of how much extra profit the health vertical generates in Q4 because it is a pretty meaningful profit quarter for the health vertical as a whole.

Okay, got it. You guys often cite your sort of need for minimal capital expenditures. Can you just talk about where you guys are investing in the business and sort of what keeps you confident that you maybe shouldn't be spending more on CapEx to make sure that the business maintains its competitive advantages?

Yes. Tommy, I would say on the CapEx side, we from an accounting standpoint, we historically have not capitalized any software development expense, and that's because it hasn't met the threshold for capitalization. The CapEx we have is generally been for leasehold improvements and little IT stuff like laptops and things like that, and so there's just virtually nothing that's in that CapEx bucket for us. It was $100,000 last year, and it'll be in a similar ballpark of a couple of hundred thousand probably this year. I think on the investment side, you can see that we are investing in the business given the overhead numbers, and I think we talked about the Q2 numbers and the trend line for the balance of the year. As we think about those investments, I would say broadly speaking, they fall into two categories. One would be kind of fundamental product expansion and excellence, and you can think of that as being us adding to our capabilities from a tech product to data analytics standpoint. Those are fundamental differentiators for the business over time, and the second area in terms of real investment is going to be some of those heads that I would say are semi-variable or directly supporting revenue, and you can think of those as being sales and account management heads that become kind of more necessary and, quite frankly, more financially attractive in a time when the market is growing and the business is performing well.

Okay. Thanks for the explanation. Thanks, Pat.

Since there are no more questions, that concludes today's call.