Good afternoon, and welcome to the MediaAlpha Inc. Third Quarter 2025 Earnings Call. I am France, and I'll be the operator assisting you today. I would now like to turn the call over to Alex Liloia, Investor Relations. Please go ahead.

Thanks, France. 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 forward-looking statements relating to our business and outlook for future financial results, including our financial guidance for the fourth 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 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.

Thanks, Alex. Hi, everyone. Thank you for joining us. I'm pleased to report that we delivered record third quarter results, driven by continued momentum in our P&C insurance vertical. Growth in the quarter was fueled by increased marketing investments from leading auto insurance carriers who continue to lean into customer acquisition in what remains a highly favorable operating environment. With underwriting margins at unusually high levels, carriers are in a strong position to pursue policy growth. Importantly, peak underwriting profitability does not mean that carrier advertising spending has peaked. To the contrary, we're seeing an increasing number of carriers turn their focus in earnest to capturing market share, and our marketplace continues to be the most efficient and scaled platform for them to acquire new customers. These dynamics give us significant runway for continued growth in the quarters ahead. In our health insurance vertical, our results were impacted by our recent reset in under-65, which was in line with expectations. Our partnerships with leading Medicare Advantage carriers continue to perform well, and we expect digital advertising to capture a larger share of health insurance distribution spend over time. As these secular tailwinds play out, we believe we're well positioned to restart growth from this new baseline. As we look ahead, we're encouraged by the strength of our P&C business, the long-term potential of our Medicare vertical, and the expanding opportunities we see across digital insurance distribution. In our P&C vertical, we believe we're in the early stages of a multiyear soft market, characterized by strong carrier profitability and robust market share competition, which we expect to sustain healthy marketing spend for years to come. The combination of strong industry fundamentals, deep partnerships, and the efficiency of our platform gives us conviction in our ability to deliver sustainable growth. We'll continue to balance investment in innovation with disciplined capital deployment, ensuring that we build enduring value for our partners and shareholders. In addition to favorable industry fundamentals, powerful technology shifts, particularly those related to AI, are likely to reshape how consumers discover, evaluate, and purchase insurance. In the near to midterm, it's foreseeable that AI may disrupt traffic patterns and monetization models for some of our publishers while also creating entirely new supply-side opportunities. Because our marketplace spans hundreds of publishers across multiple formats and media channels, we expect our ecosystem as a whole to adapt well to these changes, preserving a resilient and diversified supply base. With materially greater scale than our competitors and growing network effects, we expect to remain the partner of choice for both publishers and advertisers and to continue gaining share as AI adoption accelerates. We're also highly focused on leveraging AI to enhance the productivity of our organization and better serve our partners. We believe we're just scratching the surface here and look forward to keeping you updated in the coming quarters. With that, I'll hand it over to Pat.

Thanks, Steve. I'll start by walking through the key drivers of our Q3 results. Transaction value was $589 million, up 30% year-over-year, driven by 41% year-over-year growth in our P&C vertical. In our health vertical, transaction value declined 40% year-over-year, consistent with our expectations. Adjusted EBITDA for the quarter was $29.1 million, an increase of 11% year-over-year. Our efficient operating model and disciplined expense management allowed us to convert 64% of contribution to adjusted EBITDA, up from 63% in the prior year. Excluding under-65 Health, our core business performance was very strong with year-over-year transaction value and adjusted EBITDA growth of 38% and 31%, respectively. Our take rate, defined as contribution divided by transaction value, decreased year-over-year as expected for 3 main reasons. First, our under-65 subvertical, which was historically at high take rates, has declined. Second, our largest P&C carrier partners have continued to represent an outsized share of spend in our marketplace. These carriers were among the first to restore underwriting profitability, which has given them a head start, but we are confident that other carriers will enter the race in a more meaningful way. Lastly, our take rate was impacted by large-scale new supply partner wins. These factors together have increased the percentage of transaction value from private marketplace transactions, which carry lower take rates. Importantly, our open marketplace take rates have remained relatively stable. The pressure we're seeing is primarily a function of mix shift. Looking ahead, we expect our Q4 take rate to be approximately 7%, with private marketplace transactions representing approximately 54% of total transaction value. As we plan for 2026, our current base case assumes we will start the year with a take rate roughly consistent with Q4 levels before the broadening of carrier demand has a meaningful impact on our take rate. Given the strong momentum we are seeing in carrier spend and our usual OpEx discipline, we believe we are well positioned to deliver adjusted EBITDA growth and maintain strong free cash flow generation next year. Longer term, we expect an uplift in take rates as more of our carrier partners ramp up their marketing spend to compete for policy growth, resulting in an increasing percentage of spend being transacted on our open marketplace. We expect record fourth quarter transaction value as we benefit from continued strong demand from the largest carriers in our marketplace. Accordingly, we expect P&C transaction value to grow approximately 45% year-over-year. In our Health vertical, which includes both Medicare and under-65 Health, we expect transaction value to decline approximately 45% year-over-year, driven primarily by under-65, which is stabilizing at a lower baseline. On a year-over-year basis, we expect fourth quarter transaction value and contribution from under-65 Health to decline by $34 million to $38 million or 61% to 68% and $8 million to $9 million or 80% to 90%, respectively. To provide additional insight into the new baseline for our Health vertical, similar to last quarter, we've included in this quarter's shareholder letter, both transaction value and contribution for our under-65 business. As a reminder, we expect 2025 under-65 transaction value of $95 million to $100 million and contribution of about $10 million to $11 million, with around $1 million to $2 million of that contribution coming in the fourth quarter. Looking ahead, we expect that under-65 will generate annual contribution dollars in the mid-single-digit millions, reflecting the reset in both scale and profitability for this subvertical. Moving to our consolidated financial guidance. We expect Q4 transaction value to be between $620 million and $645 million, representing a year-over-year increase of 27% at the midpoint. We expect revenue to be between $280 million and $300 million, representing a year-over-year decrease of 4% at the midpoint. We expect revenue as a percentage of transaction value to decrease meaningfully year-over-year as private marketplace transactions, which are recognized on a net basis, are expected to represent around 54% of transaction value, up from 41% in Q4 of last year. Adjusted EBITDA is expected to be between $27.5 million and $29.5 million, representing a year-over-year decrease of 22% at the midpoint, including $8 million to $9 million of impact from an expected year-over-year decline in under-65 contribution. Excluding under-65 Health, we expect adjusted EBITDA to be roughly flat year-over-year. Finally, we expect overhead to be roughly flat to Q3 levels. Turning to the balance sheet. We generated $23.6 million of free cash flow in the third quarter. We ended the quarter with a net debt to adjusted EBITDA ratio below 1x and cash of $39 million plus restricted cash of $33.5 million. Earlier this month, the restricted cash was used to make the initial FTC settlement payment, and the remaining $11.5 million is payable in Q1 of 2026. Excluding these settlement payments, we expect to convert a substantial portion of adjusted EBITDA into free cash flow, providing us with continued financial flexibility to support our strategic priorities. Given our confidence in our strategy and long-term growth opportunities, we think our stock is an attractive investment and share buybacks are an accretive use of excess cash, particularly at current levels. During the quarter, we repurchased approximately 5% of our outstanding shares at a discount to market for $32.9 million. In addition, earlier today, we announced a new share repurchase authorization of up to $50 million, consistent with our disciplined approach to capital allocation and focus on maximizing shareholder value. With that, operator, we are ready to take the first question.

And your first question comes from the line of Maria Ripps from Canaccord.

This is Maria Ripps. It seems like a lot of investors are focused on carrier profitability sort of peak margins currently. And as you know, one of the largest carriers recently recorded a sizable credit expense to reflect excess profits. Can you maybe talk about sort of your view on how sustainable current profitability levels are and what that might mean for customer acquisition spend overall?

I appreciate your question, Maria. We've been receiving a lot of inquiries about this topic as well, so it's great to clarify what is happening regarding the perceived peak profitability for carriers in relation to market cycles and advertising spend. To put it simply, conflating these factors could not be farther from the truth. To grasp this, it's important to understand the dynamics of hard and soft markets. We have just come out of a 2.5 to 3-year hard market cycle, which begins when profitability declines due to unexpectedly high loss ratios. As a result, carriers tighten underwriting restrictions, raise rates, and reduce marketing expenditures. During a hard market, margins start low and expand over time. As we transition to a soft market, margins peak and carriers become more competitive, relaxing underwriting guidelines, lowering prices, and investing more in customer acquisition. This competitive expansion compresses margins in a soft market. So when we hear about carriers being at peak profitability, it often signals that the soft market cycle is just beginning. Looking at our marketplace, demand is quite top-heavy. We're currently seeing 13 carriers spending over $1 million a month, the highest number historically. While demand is broadening, some leading carriers are aggressively increasing their marketing spend, dominating the market. As rates and profitability begin to decrease, we anticipate more carriers will ramp up their efforts in 2026 and beyond, as we delve deeper into the soft market cycle and experience continued demand growth, which should benefit us moving forward. It's important to note that soft market cycles generally outlast hard market cycles. Hard markets typically last 2 to 3 years, while soft markets can last 5 to 7 years on average. Thus, we foresee several years of growth in carrier advertising expenditures, particularly as more top carriers within the top 25 increase their spending through the open exchange as demand expands. I hope this clarifies our position on peak carrier profitability, which does not concern us; rather, it excites us as we enter the core of the soft market.

And Maria, this is Pat. I just want to add to what Steve mentioned, which is that we are about two years into an improving operating environment, and our guidance for Q4 anticipates 45% year-over-year transaction value growth for us in P&C. We feel we have strong momentum going into 2026.

Yes. That's great, that's very helpful. And then can you maybe share a little bit more color on the transition within your Health vertical? Is that largely complete at this point? And I guess, how are you thinking about the long-term opportunity within that vertical, sort of outside of under-65?

Yes. I'll address the second part first, while Pat can respond to the first part of your question. In the health insurance sector, we are primarily focusing on Medicare Advantage, which we view as a strategic area. This is a substantial market at $0.5 trillion and it's relatively new to direct-to-consumer advertising, presenting numerous long-term opportunities. Currently, the market is challenging due to elevated medical loss ratios driven by high utilization rates, leading to many plan redesigns and carriers withdrawing from certain markets. We are experiencing a tough market within the Medicare Advantage space similar to what we saw in the property and casualty sector. Many expect the market to recover, particularly starting in the next enrollment period, and we anticipate that carriers will begin to reinvest in growth at that time. Our emphasis is on the long-term potential of Medicare Advantage, considering the size of the market and the progress carriers are making in adopting direct-to-consumer advertising and platforms. We recognize significant opportunities for integrated solutions to assist this sector in transitioning to a direct-to-consumer distribution model.

And Maria, I'll tackle the shorter-term portion of that question and kind of the near-term financial outlook. So I think in under-65, we've taken a number of actions to kind of rebaseline that business. We think Q4 is kind of approximating that new baseline for us. And so for the quarter, we're expecting plus or minus a 65% year-over-year decline in transaction value, with contribution down 80% to 90%. And so it's a business that should make us $1 million or $2 million in Q4, and we believe it will be kind of a mid-single-digit million dollar contribution business for us next year. And kind of from a compliance standpoint, we've already implemented effectively all of the necessary changes. There hasn't been a whole lot of cost that we've had to layer on to do that. And actually, we've embedded some AI technologies into that framework, which has allowed us to automate a lot of the monitoring that historically would have been labor-intensive. So we feel like we're in a spot where kind of towards the middle of next year, the comps for the health vertical will start to normalize.

And your next question comes from Cory Carpenter from JPMorgan.

I was hoping you could drill down a bit more into what you're seeing in the discussions you're having with carriers. I think, Steve, last time we talked, carriers kind of hit the pause button a little bit just given the tariff uncertainty that started to ramp in 3Q, and now you're guiding to accelerating growth in 4Q. So maybe just talk about some of the dynamics you saw intra-quarter? And then also, how much visibility do you have into year-end budgets at this point in the cycle?

Sure, Cory. I believe that when carriers paused their spending, it was due to uncertainties surrounding tariffs. However, that pause was fairly brief. The carriers that were actively spending before Q3 have returned to their previous spending levels, and we are currently observing an increase in their expenditures, as reflected in our estimates and forecasts. Regarding our visibility into Q4, we are sharing insights based on the guidance we have provided. Historically, in such markets, there tends to be some excess budget available to us as the quarter concludes. Since we are an efficient and adaptable source, this excess budget often comes our way, but we are not counting on it at this moment. Our Q4 estimates are based on the best assessment of carrier budgets for the rest of the year. We are beginning initial discussions regarding 2026 budgets, which have been very promising. These conversations appear to support the view that the recovery of ad spend from the previous hard market has been quite limited and primarily driven by a small number of carriers. We are engaging with a wider range of carriers and are starting to see a significant increase in demand anticipated for 2026. The timing of this broadening in demand is challenging to predict, but the carriers we are currently speaking with who are leading this trend have gained a considerable advantage. Therefore, it may take some time and a few quarters for this demand expansion to positively influence our take rates. Nonetheless, we are optimistic about the early conversations we've had with many of the major carriers beyond just the top few, and we expect that 2026 will be a year marked by significant demand growth in our property and casualty marketplace.

You answered my second question, which was any early thoughts in '26, so I'll turn it back over.

And your next question comes from Tommy McJoynt from KBW.

A couple of questions on your comments around the take rate. Can you remind us, is there seasonality in 4Q? And then I just want to confirm that you're expecting both those quarters, the fourth quarter and then the start of 2026 to be a 7% take rate. And then just your expectation about increasing the take rate over time, is that a function of a broader array of demand partners or supply partners or both?

Sure, I can start addressing that question, and then Steve and I may collaborate on the last one. Regarding seasonality, we have historically seen a fair amount of seasonality in our business related to take rates, especially when our Property and Casualty segment was a smaller part of our overall mix compared to the Health vertical. Currently, in Q4, since the under-65 segment has decreased significantly, there is much less seasonality in take rates as the Medicare share closely resembles the overall Property and Casualty mix. To respond to the second part of your question, our guidance for Q4 indicates we expect a take rate around 7%. As a reminder, we define take rate as contribution divided by transaction value. We believe that maintaining a range of about 7% in the coming quarters is appropriate. Regarding the potential to increase the take rate over time, we see the expansion of demand as the primary factor driving this growth. While increasing supply could also contribute, we believe that the demand side presents a more significant opportunity. Notably, our largest advertisers tend to be more private, while smaller advertisers usually have a more open approach. As more participants enter the marketplace and start spending seven figures monthly, we anticipate a gradual shift toward more openness in our business model.

Yes. And what I'll add is that as the demand starts to broaden out, which will be the key driver of take rate improvement on our end, one of the reasons that, that will primarily flow through the open marketplace is that the next set of carriers, right, who are underrepresented in our marketplace need a lot of help from us, right? So they leverage our managed services and our machine learning algorithms to optimize their campaigns on their behalf. They leverage our platform solutions and integrated platform solutions in order to help host and optimize certain parts of the conversion experience. And so we're putting a lot of effort behind those services that will better support and accelerate a lot of these carriers' journeys to really like embracing direct-to-consumer and embracing our channel and being successful in our channel. And again, all of those services are available really only through the open marketplace. And so that's why as demand starts to broaden now and we see other carriers within the top 25 really start to punch their weight in terms of allocation of advertising dollars to us, the way we make them successful is through these integrated solutions and managed services. And again, most of that spend is going to flow through the open exchange, which will have, over time, a very positive impact on our take rate.

Got it. And then switching over to some of our expectations for the overhead expenses. Do you guys have any plans to either add or account managers or technology headcount or make any other major new technology investments that we should be thinking about as we enter 2026 and think about the fixed expense leverage in the business next year?

Yes, and thank you for the question, Tommy. Over the past couple of years, we have been consistently investing in the business in a thoughtful and measured manner. We operate with a lean structure, currently employing about 150 people as a bootstrap business. Efficiency is fundamental to our operations. We will continue to invest to support our growth, and we expect to achieve leverage on our overhead expenses over time. By leverage, I mean that the relationship between contributions and adjusted EBITDA should remain flat or increase over time.

And your next question comes from Andrew Kligerman from TD Cowen.

First question is around open versus private. And as private becomes a bigger proportion, I think first 9 months, it's now 48%. Steve and Pat, how do you see that kind of playing out long term, maybe 3 years out, 5 years out? Like where does that mix kind of settle down if it ever settles down?

Yes. I think it's a good question. I think we're at unusually high levels favoring the private marketplace right now. And again, I think that's really a nature of how the market has recovered on the heels of this generationally difficult hard market cycle. What we had was a couple of leading carriers who are early to take rate, right, step on the gas a full 1.5 years or so ahead of everyone else. And these are carriers who are very sophisticated in direct-to-consumer advertising, very sophisticated and well experienced in our marketplace. And the private marketplace product was designed to support advertisers like this and their relationships with some of our biggest publishers. And so I think the way that the market has recovered has really lent itself to us being over-indexed on the private side. And I think as the long term plays out, again, as the industry and the recovery and the demand starts to broaden out, not just because carriers who are later to take rate and get to rate adequacy start to spend in advertising and growth again, but because the whole secular trend towards direct-to-consumer advertising, which means online advertising and greater budgets allocated to measurable sources like us, as that's starting to really take foot again, right, or take hold again, what we expect are just more and more of the top 25 carriers allocating a greater percentage of their overall customer acquisition spend and converting in effect, right, a lot of commissions that they're paying to agents into advertising dollars that they spend with us as they prioritize their direct channels. And again, this growth based on the support that they'll need, right, and being relatively new to this channel, the services and the platform support that they're going to require to be successful in our channel, we believe that is predominantly going to flow through the open exchange. And so I think what you're going to see over time is the shift back to the open exchange. And again, we don't have any views as to exactly what that level should be. But certainly, I think internally, what we think is that the private open mix is kind of at a high watermark because of the unusual nature of the heaviness of demand right now, which is really a byproduct of how this market recovered after the most recent hard market cycle.

I see. So maybe even next year, it could start to inflect more toward open again?

I think that's our anticipation. And again, I think what we're expecting is that for the next few quarters, the take rates will stay about where they are, right? But we do anticipate that next year, the demand will start to broaden out. And so you're going to see carriers 10 and 11 and 12 and 15 and 20 really start to spend more in our marketplace. And again, that's going to flow through the open exchange. And over time, that's really going to start to skew that mix back towards open from, I think, what we internally see as a high watermark right now.

Got it, Steve. In your shareholder letter, you mentioned that most carriers were investing significantly below their full potential. You pointed out that last year, the investment was lower than 2019 levels, even with a 44% increase in premiums. Now, a year later, it seems that premiums have stabilized year-over-year. I’m interested in knowing how we currently compare to 2019 in terms of carrier investments and what the situation looks like now compared to the 2024 projections.

Sure, let me address your question. In comparison to 2019, we've noted that, although overall market volume has increased, most of the top 25 carriers have not returned to pre-hard market levels of 2019 and 2020. This is a reason why we are currently more dependent on a few leading carriers than we were in 2020. However, if we're discussing where carriers stand now compared to 2019, I want to highlight that there are 13 carriers in the FEHB spending over $1 million a month, which is a record for us. This might seem contradictory, but it indicates that our marketplace has expanded significantly. Additionally, there are now more carriers than in 2019 and 2020 ready to engage in this channel, with increased integrations that support their success. We're witnessing an encouraging trend with growing demand, as many more carriers are now prepared to grow and compete effectively in this space than we have seen previously. Andrew, did that address your question?

Yes, it did. It feels like directionally, there's still a lot of momentum there. Is that kind of the right take on what you're saying?

Absolutely. The pandemic created a hard market cycle, and in not shifting to a soft market cycle, some critical industry changes got overlooked. The main point is that consumers are increasingly shopping for insurance online. The most effective way to reach these consumers and sell policies is through online advertising and allowing online policy sales. However, two-thirds of policies are still sold offline, where the primary expense is the commissions paid to agents. Consequently, it's expected that advertising budgets will continue to increase over time. This shift is essentially converting the commissions, which amount to about $17 billion to $18 billion annually for U.S. personal auto, into advertising expenditures as more carriers adopt direct-to-consumer marketing as a core part of their distribution strategy. This broader trend has been overshadowed by the cyclical changes we've experienced in recent years, and we are starting to see this trend materialize. Currently, we have 13 to 20 carriers that are well positioned to grow in our channel during the upcoming soft market cycle.

Super helpful. If I could ask one last question, given the turbulence in Medicare Advantage over the last few years, which has been quite challenging, do you see that business returning to its previous state? I think a lot has shifted to Medicare Supplement now. Do you envision that sector reverting to what it was in 2021, 2020, or 2019? It's been a tough few years.

Yes, that's a great question. People in the industry don't expect a return to the high levels of activity seen in those markets when Medicare Advantage payers or carriers were likely earning too much from Medicare Advantage policies. There has been a reset of payment rates and many plans. It's a $0.5 trillion industry, and Medicare Advantage policies remain profitable and significant profit centers for major carriers like UHC and Humana. In the past, selling a Medicare Advantage policy was 2 to 3 times more profitable than other policies. As profitability aligns more closely with other health insurance policies, we can expect the heightened activity to diminish. However, as the market matures, it will likely evolve to resemble the auto insurance industry, where carriers become more aggressive with advertising and attempt to capture market share from competitors. We anticipate the market will stabilize over time, resembling the auto insurance sector more than it does currently. The intense activity of earlier periods is likely to be absent for a while.

Yes. This is Pat. I would like to add a couple of points to what Steve mentioned. The consumer adoption of Medicare Advantage plans continues to increase slightly each year. This year, 54% of enrollees opted for it, and projections indicate this figure could rise to around 64% by 2034. Additionally, we believe online shopping will provide a positive boost in the Medicare market for several years. As individuals turn 65 and enter Medicare, they tend to be more comfortable with the Internet compared to the average Medicare consumer. Therefore, we expect this trend to persist, resulting in a growing number of tech-savvy seniors entering the market, which should be beneficial for our business in the long term.

And your next question comes from Ben Hendrix from RBC Capital Markets.

This is Michael Murray on for Ben. Congrats on the strong results. It looks like normalizing for the under-65 segment, adjusted EBITDA grew 31%. But then looking at your guidance, you expect EBITDA to be flat on transaction value growth of 38%, excluding the under-65 segment. So is there a level of conservatism baked in there? Any color on the puts and takes would be helpful.

Yes, this is Pat. Our approach to guidance is based on the information we currently have and what we are confident about. Historically, we've done well with our guidance, and our current guidance is informed by 28 days of actual data for this quarter and our expectations for future performance. Our objective is to present the most accurate numbers possible, and we are focused on achieving that this quarter. We will provide more details when we release our earnings in February, but we aim to set realistic numbers that we believe we can meet.

Okay. And just shifting gears. So a large MA payer recently indicated that they would be suspending their relationship with a large telebroker, which had high complaints to Medicare and also the least engaged members. Do you see any opportunity to gain share here just given payers' increased focus on quality leads?

Yes, I do. The way I see it is that is that I think there is a growing trend with payers to actually start to acquire customers directly and rely less on brokers and telebrokers. And so again, it's unfortunate that these types of things happen, right? Certainly, I think one of the reliance on telebrokers of this industry is that a lot of the carriers within the Medicare space are relatively new direct-to-consumer and certainly new to online customer acquisition. So I think as that industry gets more well-versed in that area, I think there will be a shift from reliance almost entirely on brokers and telebrokers and e-brokers to sell policies and, again, a greater shift to carriers selling policies directly. And that's something that you saw in the auto insurance industry in the early days, and we expect that trend to take hold within the Medicare Advantage space over time.

Okay. There are no further questions at this time. And that's all for now. Ladies and gentlemen, thank you all for joining. And that concludes today's conference call. All participants may now disconnect.