MediaAlpha, Inc. Q1 FY2025 Earnings Call

Thank you for waiting. My name is Carmen, and I want to welcome everyone to the MediaAlpha First Quarter 2025 Earnings Conference Call. All lines have been muted to avoid background noise. After the speaker's comments, there will be a question and answer session. Now, I will hand the call over to Alex Laleo from Investor Relations. Please proceed.

Thanks, Carmen. Good afternoon, and thank you for joining us. With me are Co-Founder and CEO, Steve Yi; and CFO, Pat Thompson. On today's call, we'll make four forward-looking statements relating to our business and outlook for future financial results, including our financial guidance for the second quarter of 2025. 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 full 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. 2025 is off to an outstanding start as we delivered record first quarter financial results that exceeded our guidance across all key performance metrics. Our strong results were driven by continued strength in our P&C insurance vertical, supported by robust growth investments from several carriers amid solid underlying profitability in the personal auto insurance sector. While automotive tariff developments may put pressure on profitability as the year progresses, we anticipate continued near-term momentum and another strong quarter for our core P&C business. In our health insurance vertical, our first-quarter performance was in line with expectations. Going forward, we've made the strategic decision to scale back certain areas of our under-65 business as we continue to shift our focus to Medicare Advantage, a large and growing market where we believe we have a strong competitive position. With regard to the FTC matter, we continue to engage in constructive dialogue with the FTC staff in an effort to work towards a reasonable resolution. In connection with these evolving discussions, we increased our reserve related to this matter by $5 million, bringing the total reserve to $12 million at the end of the quarter. While we cannot predict the outcome, we remain committed to resolving the FTC's claims in a manner that is in the best long-term interests of our shareholders. Looking ahead, we remain bullish on our near-term outlook for auto insurance advertising spend. While the upcoming automotive tariff has the potential to negatively affect the industry, carriers, by and large, are highly profitable at this time and are ready to react quickly by adjusting rates if needed. We're staying closely connected with our partners and remain focused on delivering high returns on advertising spend and providing performance-driven marketing solutions that help them succeed through different macroeconomic conditions. With that, I'll hand it over to Pat for a deeper dive into our first-quarter performance and second-quarter guidance.

Thanks, Steve. I'll start by walking through the drivers of our Q1 results, which beat expectations. Transaction value for Q1 was $473 million, up 116% year-over-year, driven by 200% year-over-year growth in our P&C vertical. P&C transaction value was up sequentially, above expectations as several carriers meaningfully increased marketing investments in March. Transaction value in our health vertical was down 17% year-over-year, in line with expectations. Q1 adjusted EBITDA doubled year-over-year to $29.4 million, representing 67% of contribution, up from 52% in the prior year. Q1 adjusted EBITDA included $6.9 million of add-backs related to the FTC matter. These consisted of $1.9 million of legal expenses along with an additional $5 million reserve recorded in accordance with U.S. GAAP requirements. We also recognized a $13.4 million charge to write off certain intangible assets acquired as part of the CHT acquisition. Additionally, we have decided to exit the travel vertical by the end of the second quarter, which contributed approximately $1 million of transaction value and $100,000 of profit in Q1. Looking forward to Q2, we have seen continued strength in P&C carrier marketing investments, particularly among those maintaining profit margins at or above their target levels. Accordingly, we expect P&C transaction value levels to grow approximately 65% to 75% year-over-year. In our health vertical, we expect transaction value to be down 25% to 30% year-over-year. Improving trends in Medicare will more than offset a significant decline in under-65 as we scale back parts of that business. We expect Medicare to account for over 40% of our health vertical's transaction value for the quarter. Moving to our consolidated financial guidance, we expect Q2 transaction value to be between $470 million and $495 million, a year-over-year increase of 50% at the midpoint. We expect revenue to be between $235 million and $255 million, a year-over-year increase of 37% at the midpoint. We expect adjusted EBITDA to be between $25 million and $27 million, a year-over-year increase of 39% at the midpoint. We expect overhead to increase sequentially by approximately $500,000 to $1 million as we continue to selectively add headcounts to support and drive growth. We generated significant cash flow and made solid progress in deleveraging our balance sheet during the quarter. Cash flow was $20 million, and we ended the quarter with approximately $64 million of cash in a net debt-to-adjusted EBITDA ratio of less than one times. Moving forward, we expect to convert a significant portion of adjusted EBITDA into unlevered free cash flow due to the operating efficiencies in our business, including minimal capital expenditures and low working capital needs. With that, operator, we are ready for the first question.

Thank you. Your first question comes from Maria Ripps with Canaccord. Maria, please go ahead with your question.

Great. Thanks so much for taking my questions, and congrats on the strong quarter. Well, thanks for all the color on the P&C vertical in the shareholder letter. And it looks like the strength is continuing in Q2. I know you're not providing full-year guidance, but any additional color maybe you can share on how carrier spend may play out in the second half of the year, especially given tariffs. I guess, is there anything sort of you're seeing in carrier behavior that gives you any early maybe indications, or what are some sort of considerations here to keep in mind?

Hey, Maria, it's Steve. Thanks for the question. I think we continue to believe that overall, the auto insurance marketplace remains very well-positioned for a period of sustained growth. Our optimism for this space goes back to the underlying profitability that we continue to see remaining very strong in the auto sector. There are certain carriers who are not just at good profitability rates. I think they have some carriers who are even above or better than their long-term profitability goals. And I think that really bodes well for what the upcoming quarters will bring in terms of the investment from these carriers into growth and customer acquisition. We do see, I think, quarter-by-quarter, the market is gradually entering into a period of heightened competition. We see new carriers every quarter really shifting from rate-taking and profitability focus to growth and customer acquisition focus. The recovery and the participation on the demand side in our marketplace is becoming more broad-based every quarter. One thing that bodes well for longer-term growth as the year progresses is that with everything I have just said, there are still top 10 carriers who we believe are not investing as much as they should be in terms of their presence in this channel, whether you measure that based on their historical leverage with spend or just their overall market position. With that said, we're very happy with our partnerships with these carriers because the level of integration we have with them, the level of sophistication in their internal marketing teams and the product development discussions we are having with them, position them very well to grow for the remainder of this year and next year as they continue to emphasize direct-to-consumer distribution, whether in place of agent-based distribution or in addition to it. The only dark lining here is the potential for these automotive tariffs to create headwinds in carrier profitability in the second half of this year and next year. However, many carriers are finding that they have a buffer for loss rates to actually increase. The general consensus is that the impact of the automotive tariffs will likely be moderate, with estimates between low to mid-single digits expected in the second half of this year. The carriers are very well-positioned to react quickly to these loss cost increases by filing for rate adjustments early. For these reasons, we think that the impact of the automotive tariffs will generally be manageable by the overall industry, and that the industry will continue to invest in customer acquisition and growth during this period.

Great, that's very helpful. And then, just a quick follow up, can you maybe refresh us on key dynamics across your open and private marketplaces? Maybe just talk about some of the reasons or benefits or use cases a carrier would opt for a private marketplace?

Yes. The private marketplaces are designed for our largest publishers and their ability to work directly with our largest advertisers. It covers a minority of the relationships we create through our marketplace. As we get a broader base of demand and supply coming into the marketplace, we expect to see more transactions happening in the open exchange. The seller exchange product we provide, where parties can contract directly and pay us a platform fee for connection, is really meant for large publishers connecting directly with large advertisers.

Great, that's very helpful. Thank you so much, Steve.

And this is Pat. I just wanted to add one thing to what Steve said there, which is that as you think about the open to private mix in our business, it's important to consider the vertical mix that we have as well. Historically, P&C had a higher mix of private marketplace than health. We have seen that if we win a big partner, that partner may be relatively more private and can shift the numbers a little bit in one direction. Everything Steve said is correct; over time, we expect to see more business going open, but in the short term, we wouldn't be surprised if it skews more private.

Your next question comes from the line of Cory Carpenter with J.P. Morgan. Cory, please go ahead.

Thanks, good afternoon. I have two. Maybe the first was speaking on P&C. Steve said last quarter that pricing was down to start the year. It sounds like that picked back up again in March. Just curious what you think changed specifically in March. And then, secondly, on the health business, could you just talk more about your decision to scale back the under-65 business? How much of that is due to business conditions or could that have also perhaps been related to some of the FTC changes? Thank you.

Hey, Cory. I'll address the first part of that question. I don't know that anything changed in March. I think what we saw was strong demand from carriers as the quarter progressed, really manifesting itself in terms of having access to greater budgets. This was, I think, the conservatism that we saw from carriers as the year started wearing off. We saw stronger performance in March because carriers are highly profitable, and they see heightened consumer shopping behavior. It's hard for them to remain conservative for too long when the market environment is this strong. Therefore, we saw the strength continue into Q2, which is embedded in our forecast.

And Cory, this is Pat. I can address the second part of the question. As a company, we prioritize compliance as a core part of how we operate, regularly reviewing and enhancing our compliance programs to stay ahead of regulations and drive industry best practices. As part of these efforts, we have proactively implemented additional measures, updated our partner code of conduct, and expanded proactive monitoring of calls to ensure ongoing compliance. Our focus remains on delivering a great product that is transparent and accurate, linking up consumers with the right brokers, carriers, and agents to meet their needs.

Thank you.

Your next question comes from the line of Tom McJoynt with KBW. Please go ahead, Tommy.

Hey, good afternoon, guys. Staying on the subject of the under-65 segment, can you just clarify exactly what you mean by scale back? Does that mean a wind down? When you think about the revenue or transaction value, or best would be kind of earnings mix of that under-65 segment within health, anything you can share to disclose around that?

Oh, sorry, I was on mute. Yes, sorry, I was on mute there. So, Tommy, I would say on that, with the health business or the under-65 business, we said we were scaling down that business, and I would not read that as being an exit. Rather, we are going to be taking a partial step backwards in it. We provided guidance for the upcoming quarter that we thought the health vertical would be down 25% to 30%. We believe that business will be rebaselined over the coming quarters.

Okay, got it. And then, staying within the health side, looking at Medicare Advantage, can you share what you see in terms of the health of that market? It seems like we've seen mixed reviews from some healthcare providers in recent quarterly reports. It'd be helpful to hear your commentary.

Certainly. The Medicare Advantage market is in a temporary hard market cycle. We view it as being similar to some past cycles we've seen in the P&C space. As a reminder, we dealt with this in 2022 and 2023. These cycles are normal and temporary, driven by some carrier partners facing headwinds due to elevated loss costs, pressuring overall profitability. However, the Medicare Advantage business has significant long-term potential as the number of seniors and the eligible population for Medicare continues to grow, and they are increasingly opting into Medicare Advantage. We believe we are well positioned to help that industry navigate the transition to online shopping, as we have seen in other insurance verticals.

Hi, Tommy. I'll add that while Medicare Advantage has broad bipartisan support, it is marginally more supported by Republican administrations. We're starting to see a more favorable climate emerge from increased payment rates that the industry is pleasantly surprised with, which were set at over 5% by CMS earlier this month. This indicates a potentially different regulatory approach that this administration is taking with Medicare Advantage. We believe the carriers are well positioned for future growth as this landscape evolves.

Thank you.

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

Hey, great. Good afternoon. I know that there might be a complicated question, but can you help unpack some of what's contributing to the contribution margin ratio declining?

Yes, Mike, which contribution margin are you talking about? Is the percentage of revenue?

Yes, percentage of revenue.

I would say we don't focus heavily on metrics as a percentage of revenue. The two big metrics we focus on are take rate, which is contribution as a percentage of transaction value. For us, that number has been decreasing a bit over time. First, that number tends to peak every year in the fourth quarter when health is the largest portion of our business. Secondly, it's been trending down as P&C continues to become a larger percentage of our business. And third, as certain publishers have gotten larger, we've seen compression in take rates to reflect the increased scale they have achieved. This is also tied to the mix of open and private exchange, as the private exchange has a lower take rate.

That's helpful, Pat. And anything going on with the mix of clicks increasing meaningfully that impacts some of the profit margin KPIs we look at?

Yes, the mix is changing slightly, but the big driver of that mix change is the mix of P&C versus health. The P&C business is very heavily click-driven for us, whereas the health business is more balanced.

Okay, got it. That's helpful. I guess, going back to the two-part question on auto. Steve, you mentioned potential tariffs and their impact. Did you embed any conservatism from tariffs in your Q2 guidance? When you think back to three months ago, when you released your Q1 '25 guidance, which was significantly exceeded, what changed?

So, Pat can address that first question about the forecast. As for how we guided for Q1, I think the conservatism in carriers at the start of the year began to wear off as the quarter progressed. We saw stronger performance than expected in March, and that growth carried into Q2 as the carriers realized the profitability of their business and the consumer behavior trends. As for our Q2 forecast, we have a high degree of confidence that it considers everything we've learned from April and what we expect moving forward.

To address the tariffs and their potential impact on Q2, we guide to figures we have high confidence in. We feel our Q2 numbers are well supported by what we observe, starting with April and with visibility into May. The view on tariffs is that any impact might be relatively muted. The consensus indicates that the impact might not fully manifest until later this year.

Got it. And likely nothing you can say on the timeline for resolution to the legal inquiry that's ongoing?

It's difficult for us to comment while we're engaged in discussions with the FTC staff, particularly because the timing of these negotiations tends to be unpredictable.

Sorry, my last follow-up. Is there any statutory timeline whereby something would have to be disclosed based on this inquiry's duration, or will there be updates shared as they arise?

I'm not certain, but to my knowledge, there is no statutory timeline involved here.

If we reach a resolution, we'll update investors; otherwise, we will continue our quarterly disclosures.

Our next question will come from the line of Andrew Kligerman with TD Securities. Please go ahead, Andrew.

Hey, good evening. First question on the private market versus open exchange, I wasn't quite clear on why more business will flow to open exchange, so maybe you can elaborate. Pat, you mentioned that it would probably in the near term shift more toward private exchange. So, year-over-year, it went from 44.1% to 45.4%. How high could that private exchange proportion get in the near term?

The point I was making was that the recovery of the P&C market is primarily noticeable among large advertisers and large publishers. As broader demand increases, we expect more transactions to occur in the open exchange since the seller exchange option mainly serves large publishers connecting directly with major advertisers. As the recovery builds momentum across different sizes, a larger share will flow into the open exchange. Additionally, certain partnerships may skew this one direction or another.

That makes a lot of sense.

To your earlier point, several top carriers remain focused on their profitability rather than investing in growth. This indicates that the recouping of investment spending is expected to continue. As the recovery unfolds, there are opportunities for those carriers to increase their spending in direct-to-consumer channels.

I see. So, you feel that there's significant runway ahead?

Yes, absolutely.

And then, just one last question, regarding the customer help team and the write-down, it looks like it's valued at about $11 million. You acquired that back in February 2022. Can you share a little bit about why the write-down is happening after such a short time?

We acquired the customer helper team in 2022 as a business focused on social media within the Medicare and health space. While the acquisition brought new capabilities, it fell short of our expectations. We have sunset many social marketing activities as we focus on our core strengths. As a result, we had to recognize a write-off of certain intangible assets we acquired from that, and this will likely be the last you hear from us regarding CHT.

Got it. Hey, thanks a lot for answering all the questions.

I appreciate you asking.

Your next question is from the line of Eric Sheridan with Goldman Sachs.

Thank you so much for taking the questions. In terms of looking out over the next 12, 18 months, I want to know if you could parse out some of the investments that should be viewed as fixed against where you want to take the platform and elements of growth looking out over that time horizon, and where there could be elements of variability in the way you invest or protect margin if there was an overall slowdown in the broader macroeconomic activity.

For us, we run very lean as a company. We ended Q1 with 146 employees. In the hardest market over the last two years, we kept the core team intact and continued to hire selectively where business demand existed. If we needed to tighten the belt again, we would pull from areas we can live without. Our business experiences cycles, which can be painful on the downside, but preparation for the recovery is essential. We'll execute the proven playbook that has worked well over the last 15 years.

Great. I really appreciate it. Thank you.

Your next question is from the line of Ben Hendrix with RBC. Please go ahead, Ben.

Great. Thank you very much. Just wanted to go back to your comment on the senior Medicare Advantage business and the hard market cycle. We've seen that Elevance Health announced they will be removing nearly all of their Medicare Advantage plans from online marketing platforms. Just wanted to see if that is factoring into your thoughts for the back half of the year or if that's a behavior you're seeing from any other major MA carriers.

Ben, we're not currently discussing upcoming AEP discussions or making any predictions based on current actions from these carriers. These adjustments by carriers reflect a normal cycle to maintain profitability in the face of challenging loss rates. We believe the Medicare Advantage market, which encompasses $500 billion and over 50% of seniors, will continue to grow and transition to online platforms, which we are well-prepared to support.

I would add that Medicare dynamics resemble the P&C market, where carriers' responses to market pressures can differ. Some have acted earlier, while others are still adapting. However, our broker relationships are performing quite well in this space.

Great. Thanks for the insights.

Thank you, Ben.

There are no further questions at this time.

Well, thanks, everyone. I think that concludes the call.

Thank you, everyone, for joining today's call. You may now disconnect.