Earnings Call Transcript - MAX Q2 2022

Operator, Operator

Good afternoon. My name is Samantha, and I will be your conference operator today. At this time, I would like to welcome everyone to the MediaAlpha Q2 2022 earnings conference call. The conference is being recorded. Thank you. I would now like to turn the call over to your host, Denise Garcia, Investor Relations. Ma'am, you may begin your conference.

Denise Garcia, Investor Relations

Thank you, Samantha. After the market closed today, MediaAlpha issued a press release and shareholder letter announcing results for the Second Quarter ended June 30, 2022. The documents are available in the Investors section of our website, and we will be referring to them on this call. Our discussion today will include forward-looking statements about our business and our outlook for future financial results, including our financial guidance for the third 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 report 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, August 4, 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.

Steve Yi, CEO

Thanks, Denise. Hi everyone, and welcome to our second quarter 2022 earnings call. I'd like to start with a few key takeaways from our shareholder letter. A year into the P&C insurance hard market cycle, we continue to work through challenging market conditions as the industry grapples with some of the highest inflation it has seen in the past 50 years. As a result of elevated claims costs, the vast majority of our carrier partners continue to prioritize profitability over growth, which has resulted in additional price declines in the P&C marketplace. While we expect near-term results in the P&C vertical to remain under pressure for the remainder of the year, we continue to expect a swift rebound in demand once carriers restore their profitability. The transition periods following hard markets then yield compelling opportunities for carriers to gain market share, as higher rates lead to increased consumer shopping. This optimism stems from our direct past experience. When we emerged from the last hard market cycle in 2018, transaction value in our P&C vertical grew over 80% year-over-year. Turning to our health insurance vertical, we continue to anticipate a strong annual and open enrollment period in the upcoming fourth quarter. We closed the CHT acquisition on April 1st, and we have been encouraged by our early success in extending our team's social media capabilities to our under 65 health insurance vertical. We continue to expect the acquisition to help us benefit from the rapid growth in digital marketing investments from health insurance carriers, particularly in the years ahead as the expanding population of Medicare beneficiaries increasingly sharpens interest in Medicare Advantage policies. With that, I'll turn the call over to Pat for a few words before we open the call to your questions.

Pat Thompson, CFO

Great. Thank you, Steve. I'll now touch on a few more items before opening the call to questions. First, I'm pleased to announce that we have substantially completed the $5 million share repurchase plan launched in March. Under the plan, as of yesterday, we had $4.3 million remaining to repurchase approximately 450,000 shares at an average price of $10.97 per share. Our ability to opportunistically repurchase shares in the midst of a challenging P&C market speaks to the resiliency of our financial model. Given the tough operating environment, we are more focused than ever on maintaining our operational efficiency. We expect Q3 headcount and operating expenses, excluding non-cash items, to be roughly flat with the second quarter. Our highly automated model and expense discipline have enabled us to remain profitable in spite of significant revenue declines. Additionally, we remain intensely focused on operating efficiently. Turning to our third-quarter guidance, while we expect continued year-over-year click volume growth in our P&C vertical, we expect pricing to decline relative to what we saw in Q2. Outside of P&C, we expect Q3 transaction value vertical to be similar to Q2 levels as we face another difficult comp due to the non-recurrence of a special enrollment period for ACA plans, which impacted last year's comparable figures, as well as continued lower spend by our Medicare broker partners for leads and referrals. We expect to return to strong year-over-year growth in our health vertical during Q4, driven by annual open enrollment periods for under 65 and Medicare plans. During this hard market in P&C, we are staying focused on executing our long-term growth strategy, helping our partners become more efficient with our customer acquisition spending, increasing our data integrations with partners, and having productive conversations with several insurance carriers regarding new supply partnerships. We expect these efforts to bring us market share gains and strong growth when the P&C market recovers. Finally, our management team continues to believe that MediaAlpha stock is an attractive investment. During the quarter, I purchased 35,000 shares of MediaAlpha stock, and our co-founders, Steve and Eugene, are selling their portion of newly vested RSUs required to cover the associated tax liabilities. We are very much aligned with our long-term shareholders. With that, operator, we are ready for the first question.

Operator, Operator

And your first question comes from Michael Graham with Canaccord.

Michael Graham, Analyst

With all the information in the shareholder letter, I just wanted to ask a bigger-picture question about the competitive environment. We saw some reports from some of the other players like EverQuote and QuinStreet, and the decline in revenue there was fairly modest. I'm wondering if you had any comments about what you are seeing on the competitive front and what you think about your performance relative to some of those other players?

Steve Yi, CEO

Hey, Michael. This is Steve. That's a great question. I think what you're seeing is a reflection of some of the differences in our business models. Most of our publicly traded peers are lead generators. They buy traffic to their sites, convert this traffic into clicks for carriers, and leads that they sell to agents. So in a hard market, as compared to direct carrier demand, agent demand tends to perform relatively well. A couple of reasons for this are that the marketing subsidies that agents receive from their carriers largely remain in place. It’s also important to understand that the economic incentives for agents are somewhat favorable even when carriers pull back. Therefore, during hard market cycles, agents typically continue to market, while carriers themselves may scale back. This agent demand acts as a stabilizer for a lot of these lead generators. Our model, however, is different. We are a marketplace focused on connecting direct carrier demand with millions of shoppers through our hundreds of supply partners. We continue to focus on these carrier partnerships because this is where our growth and scale will come from when the hard market cycle ends.

Michael Graham, Analyst

That makes a lot of sense. And then if I could just ask a quick follow-up. Are there any data points that you are getting from your carrier partners that lead you to be more optimistic or less optimistic compared to last quarter regarding how long this market will persist?

Steve Yi, CEO

Thanks, Michael. I think we echo some of the sentiments you've been hearing from people within our industry and the broader P&C space is that we do have a more pessimistic outlook. Currently, we believe you won't see a broad-based recovery in carrier marketing demand until 2023. This is due to continued inflation in claim costs, and in some larger states, delays in rate approvals are worse than initially anticipated. This has contributed to second-quarter combined ratios that are coming out worse than expected. Even though the current cycle is indeed turning out to be deeper and longer than most predicted, our belief is that achieving rate adequacy is not a question of 'if' but 'when.' Once this happens, as I've mentioned before, carriers typically snap back to growth mode rapidly. Our marketplace model enables carriers to scale their customer acquisition investments better than the other models coming out of the last hard market cycle. We've outperformed competitors because of our marketplace's unique qualities, and we intend to do it again.

Michael Graham, Analyst

Thanks a lot, Steve.

Steve Yi, CEO

Thanks, Mike.

Operator, Operator

Your next question comes from the line of Andrew Kligerman with CS.

Andrew Kligerman, Analyst

Very close, Kligerman. But anyway, yeah, that was an interesting point about maybe taking until 2023 before you see that turn. Would you expect that kind of rapid snapback at that point in time? If indeed this does happen, where in the letter you mentioned an 80% turnaround in revenue, is that the kind of snapback you would expect? Could it be multiples of what you're seeing now in terms of revenue?

Steve Yi, CEO

That's based on our past experience. I think that snapback can happen in a period as short as six to nine months. It's hard to predict the overall scale and speed this time around because there are factors at play in this hard market cycle that are different from the last one. However, when carriers have not invested in growth for one and a half to two years, they quickly revert to growth pressures once they realize rates are adequate and see competitors starting to market again as consumers begin to shop more. This historically allows for a rapid transition from profitability pressure back to growth pressure. We've observed this before, and we expect to see it again.

Andrew Kligerman, Analyst

Okay…

Steve Yi, CEO

And there's probably one thing I would add, Andrew, regarding the pricing which is down around 50%. You can start to make assumptions on what happens if pricing recovers to prior year levels or a little bit less, and start to get a feel for how the business recovery curve could look like.

Andrew Kligerman, Analyst

I see. That's very helpful. And what about a little more color on the exit of the education vertical? Why did you feel the need to exit? It seems like a profitable business; maybe just some further color on that.

Steve Yi, CEO

Sure. The exit was primarily due to the end of one of our legacy partnerships. You all know that our current focus is almost entirely on insurance, but in the past, we were more broadly focused as an advertising technology platform across multiple verticals. The education vertical consisted of one legacy partnership supported by one full-time equivalent. So when this partnership ended, we decided to exit this vertical and continue our focus exclusively on insurance.

Andrew Kligerman, Analyst

That makes a lot of sense. Lastly, regarding headcount, you talked about a slight decline this quarter. Pat, I think you mentioned it would stay flat next quarter. Is this an area where you might have a little more flexibility? Earlier in the call, you mentioned that you maintain a very efficient staffing level already, but is there some flexibility going forward?

Pat Thompson, CFO

Yes. I believe we said that the headcount and operating expenses would be roughly flat in Q3 versus Q2. I don't think we made any statements regarding next year. However, we believe we have an efficient operating model. We run lean, and given the market conditions, we are particularly selective when it comes to adding personnel. Over the last quarter, we have seen a slight decline in staff numbers, excluding the CHT acquisition, and we do not plan on increasing headcount significantly. Moving forward, as the P&C market recovers and we shift back into growth mode, we expect to need to add some personnel to grow our capacity and invest accordingly. But for now, we're making the right trade-offs between short-term and long-term needs.

Andrew Kligerman, Analyst

Thanks a lot.

Pat Thompson, CFO

Thank you.

Steve Yi, CEO

Thanks, Andrew.

Operator, Operator

Your next question comes from the line of Ben Hendrix with RBC Capital.

Ben Hendrix, Analyst

Thank you for taking the question, guys. We're certainly seeing DTC brokers slow their growth to focus on generating higher quality Medicare memberships on the senior side. For your senior vertical, do you think that this push—kind of as Steve mentioned—has resulted in a slowdown in activity? For those brokers that stay on your platform, is this trend towards higher quality membership fostering deeper relationships and further integration on your platform, maybe even more supply side relationships?

Pat Thompson, CFO

Ben, this is Pat. I'll tackle that question. Within Medicare, it's really a tale of two different sets of products for us. The click product has been performing well and that trend continued in Q2, across both brokers and carriers. We feel good about our positioning. However, for calls and leads, that area has been weak across brokers and carriers. From a broker standpoint, we haven't had any substantive brokers go dark. We've not seen a lot of them turn off our services, but we have noticed meaningful budget reductions in some places from brokers. Many are managing profitability, as they have encountered challenges there, and they've also felt inflation pressures on the agent cost side, with wages rising. Nonetheless, we remain very optimistic about clicks, calls, and leads in the Medicare segment, because fundamentally, the Medicare Advantage product is only 44% penetrated, and that number is continuously increasing. We view this situation as a temporary dip.

Steve Yi, CEO

Thanks, Ben.

Operator, Operator

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

Meyer Shields, Analyst

Great. Thanks. I just have a couple of quick questions. Pat, you mentioned in the letter the significant decline in P&C click prices this time around. Can you provide us with a sense of the starting position? In other words, is it a bigger decrease from the same peak, or were we starting from a higher starting point?

Pat Thompson, CFO

Meyer, we are coming from a higher point in 2021 than we were in 2016 when the prior hard market hit. The general trend over time in CPC indicates that our revenue per click has been elevated, and our starting point in 2021 was indeed higher than in 2016.

Steve Yi, CEO

Additionally, Meyer, keep in mind that over long periods, pricing can fluctuate based on the supply side mix. High-quality supply partners can command pricing upwards of $50 to $67 per click, while lower-priced publishers may see clicks valued at anything less than $10. Hence, fluctuations in our average pricing over time can also be influenced by the mix of our supply partners.

Meyer Shields, Analyst

Right. Okay, that makes perfect sense. One other question regarding your business model: If you have one major competitor or one major insurer that's adequate well before its peers, does pricing start to move up? Or do you need to have two companies focused on growth to see pricing increase meaningfully?

Steve Yi, CEO

That's a very good question. Pricing tends to start moving up even if only a few carriers emerge from a hard market cycle. While competitive pressures can certainly drive up pricing, our work with carrier partners focuses on optimizing their spend and bids based on the expected lifetime value of the policies they acquire. The expected lifetime value doesn't necessarily differ based on the competitiveness of the marketplace. Competition helps, and prices will rise as more carriers re-engage. However, we often observe early movers among carriers tend to begin increasing prices shortly once they regain confidence in the market. This action triggers a lot of supply partners to acquire higher quality traffic, which jump-starts that scale within our exchange, and it could take just one or a few carriers returning in a meaningful way to get that process underway.

Meyer Shields, Analyst

Okay, tremendous. That’s very helpful. One last question: You've been clear about the overall trajectory. However, if we delve deeper, is there direct distribution of homeowners insurance experiencing similar challenges as the auto sector?

Steve Yi, CEO

You're observing some similar pressures, but not entirely. The cost inflation affecting the homeowners' sector is present, but profitability varies significantly based on catastrophic events.

Operator, Operator

Ladies and gentlemen, this concludes today’s conference call. You may now disconnect.