Operator
Welcome to SelectQuotes' third quarter earnings conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star followed by the number 1 on your telephone keypad. If you would like to withdraw your question, press the star followed by the number 1 again. It is now my pleasure to introduce Matt Gunter, SelectQuote Investor Relations. Mr. Gunter, you may begin the conference.
Thank you and good morning everyone. Welcome to SelectQuotes Fiscal Third Quarter Earnings Call. Before we begin our call, I would like to mention that on our website, we have provided a slide presentation to help guide our discussion. After today's call, a replay will also be available on our website. Joining me from the company, I have our Chief Executive Officer, Tim Danker, and Chief Financial Officer, Ryan Clement. Following Tim and Ryan's comments today, we will also have a question and answer session. As referenced on slide two, during this call, we will be discussing some non-GAAP financial measures. The most directly comparable GAAP financial measures and a reconciliation of the differences between the GAAP and non-GAAP financial measures are available in our earnings release and investor presentation on our website. And finally, a reminder that certain statements made today may be forward-looking statements. These statements are made based upon management's current expectations and beliefs concerning future events impacting the company, and therefore involve a number of uncertainties and risks, including but not limited to those described in our earnings release, annual report on Form 10-K for the period ended June 30, 2025, and subsequent filings with the SEC. Therefore, the actual results of operations or financial condition of the company could differ materially from those expressed or implied in our forward-looking statements. And with that, I'd like to turn the call over to our Chief Executive Officer, Tim Danker. Tim?
Thank you, Matt, and appreciate everyone joining us this morning. We're pleased to report another quarter of strong financial results across each of our segments. We reaffirm our outlook for fiscal 2026 and continue to execute our goal to drive profitability and cash flow. We're especially proud of the results given the headwinds our industry has faced over the past year plus. This is a testament to our people and strategy. Slecote continued to advance our goal to expand cash flow, and the company is very well positioned to accelerate that effort in fiscal 2027. To summarize, Slecote generated $431 million in revenue driven by solid results across each of our segments. Adjusted EBITDA totaled $45 million, growth of 18% year-over-year. In senior, we grew revenue by 8% year-over-year to $183 million. Growth was driven by a healthier OEP, strong agent productivity and customer retention, as well as a positive change to our Commission's receivables that Ryan will detail. As we have mentioned before, we firmly believe the SelectWhip strategy and our agents make the difference. This now marks four consecutive years of strong operating performance in senior, despite widely varying Medicare Advantage backdrops each year. To say it lightly, we're very proud of the results in our differentiated model. Senior adjusted EBITDA totaled $59 million, which includes the positive $14 million adjustment I just mentioned. It is important to note that the adjustment reaffirms the value of the commissions receivable on our balance sheet and the approximate $1 billion in assets we expect to receive in the quarters and years ahead. When we offer bespoke advice to American seniors, and do so year in and year out, they get the best care, and we and our carrier partners benefit through strong retention. That said, excluding and normalizing the adjustment for comparison purposes, Blackload's model once again drove strong senior margins of 26% and a Medicare Advantage backdrop that was mixed this season. Turning to healthcare services, revenue grew 5% compared to a year ago, totaling $199 million. Our revenue and profitability in SelectRx was impacted by both carrier-specific actions on reimbursement, which we detailed earlier this year, and the implementation of the Inflation Reduction Act. Ryan will provide detail on that impact shortly. Those headwinds notwithstanding, our adjusted EBITDA improves sequentially to $5 million, and we maintain our view that healthcare services will be a significant driver of profitable cash flow growth in fiscal 2027 and beyond. Overall, including our life insurance segment, we expect to exit fiscal 2026 on very strong footing in spite of what was a challenging environment. Looking ahead to 2027, we are encouraged by increasing visibility within the Medicare Advantage ecosystem. We're excited about Suclid's ability to compound cash flow growth in the near future and see significant value for shareholders as a result, especially at what we believe is a wildly dislocated valuation for our company. To that end, let me be clear that we will take all necessary action to maintain our listing on the New York Stock Exchange. We remain confident our stock will continue to be traded on the NYSE for years to come. Lastly, I'd like to take a minute to highlight a new and important initiative called SelectQuote Local. As you know, we have long been proud of our company's ability to help underserved Americans. SelectQuote Local is a natural extension of our model and allows local community health care and life insurance participants to leverage our information and market advantages to help more people in need. The business offers our leading marketing, technology, product, and customer service platform through a franchise model with local sales and service. Put another way, we're offering local providers the information engine of SelectQuote on a fee-based arrangement, and we can do so with minimal capital investment. Similar to the expansion of our revenue-to-CAC metric with the growth of healthcare services, we see SelectQuote Local as another extension of how our model can help more Americans with the same scaled dollar of investment. SelectQuote Local won't be a meaningful revenue driver in the near term, but strategically, it broadens our reach and addressable market. Now, let's flip to slide four, and let's take a look at the KPIs from our very strong quarter. We've shown these before, primarily for our senior business, but we've also included additional detail on SelectRx. Starting with senior on the left, we drove another strong quarter measured by agent productivity and OEP. Agent service and productivity are an evergreen goal of ours, but I'd remind you that this is all the more impressive considering the very strong compares in the previous two years. Specifically, we drove a 1% improvement in policies per agent over this time frame despite historically wide swings in the environment from one season to the next. Moving down the page, we saw even better results on marketing efficiency, spending 14% less per approved policy compared to two years ago. Ryan will speak to elevated approval rates this season, but even excluding that unique impact, we saw a strong return on marketing spend beyond just policy booking. Senior engagement was high across the full range of our channels. We're underscoring our senior division efficiency performance here because we oftentimes find investors and analysts overlook the progress we've made on cash conversion in the segment. Moving to the right side of the page, we highlight the significant progress we've made with onboarding of SelectRx members. As you can see, we've driven a 64% increase in prescription shipped compared to two years ago relative to a commensurate 55% increase in SelectRx members. Progressive maturity and onboarding of our membership combined with the improved operating efficiency of our Olathe, Kansas distribution facility has driven significant leverage on a relatively fixed cost base. As a result, SelectQuote generated a global revenue to cap multiple of 6.7x. Only SelectQuote offers this unique combination of capabilities to help patients in multiple ways. This increases the value we bring to consumers and drives additional profitability with each senior we engage with. For products and services that are inherently recurring, especially when done at our level of care, the cash flow streams from our customers drive very compelling returns on invested capital. As we've noted, there's a wide disconnect between the value we see in our platform and cash flow streams and the valuation of common equity. Take one simple example. Our Medicare Advantage Commission's receivable balance at the end of fiscal third quarter totaled nearly $1 billion, which compares to our market cap of under $200 million today. We've fielded questions about the LTV assumptions in our Commission's accounting going all the way back to our IPO, but I'd simply note that Selectbook has just operated in two of the most disruptive Medicare Advantage environments on record. Over those two years, we had a recapture rate of over 33% and were able to recognize a favorable adjustment to our receivables. The point being, we have visibility and conviction in our balance sheet asset and multiple capital markets transactions would suggest others analyzing the business closely share that conviction. Before I hand the call over to Ryan, we're very proud of the great progress we've made over the past four years, both operationally and on our capital structure. We continue to prioritize cash flow generation and will deliver significant year-over-year improvement and operating cash flow in Fiscal 26. We expect to build upon that meaningful cash flow improvement in Fiscal 27 and beyond with a stated goal to delever our balance sheet in the years to come. I'll end my comments by underscoring our commitment to remedying the disconnect in our equity value and see a very compelling opportunity in select quote for investors in the future. With that, let me turn the call over to Ryan to review our third quarter. Ryan?
Thanks, Tim. I'll pick it up on slide five with a summary of our consolidated financial results. As Tim noted, SelectQuote had a strong quarter with revenue growth of 6% year-over-year, totaling $431 million. The growth was driven by both our senior and healthcare services businesses, reflecting a strong OEP and continued demand for SelectRx. Adjusted EBITDA of $45 million was aided by the positive change in estimates to our commission's receivable that Tim noted. Excluding the favorable adjustment, our consolidated EBITDA margin for fiscal 3Q would have been 7%, which is a strong result for an OEP quarter. Overall, given a volatile backdrop, we are proud of the progress we continue to make on profitability and cash flow generation. The fiscal third quarter was strong operationally, and we are very well positioned to end fiscal 2026 on a positive note and carry momentum into 2027. Let me begin the segment overview on slide six with a summary of our senior business. As Tim noted, senior revenue grew eight percent compared to last year, totaling 183 million on four percent growth in approved MA policies and the positive change in estimate. Let's detail those two drivers, starting with approved policies. While growth in approved policies was strong, it's important to note that approval rates this OEP were materially higher than in previous years. While we are encouraged by these strong carrier approval rates, we will continue to monitor as it's possible some of this increase may reflect approval timing and volume that was pulled forward from 4Q, contributing to the outside strength this quarter. Shifting to the positive adjustment, the majority of the $14 million increase in receivals was due to a change in our estimate of expected renewals driven by additional anticipated renewals from our policy holders as we continue to gain visibility to retention through this most recent renewal event. Having now operated through 15 Medicare seasons, we are proud to say we still have customers from our earliest cohorts. As a reminder, our LTV accounting assumes 10 renewal years and also assumes a 15% constraint. We think this is yet another indicator that our commission's receivables balance represents a large and perhaps not appropriately understood source of future cash flow to the business. Moving to adjusted EBITDA, senior generated $59 million, including the favorable $14 million adjustment to our commission's receivable. Excluding that adjustment, the senior segment produced an EBITDA margin of 26%. We have now maintained profitability of at least 25% during the AEP and OEP seasons for each of the last four consecutive years. Over that timeframe, the select quote senior business has averaged EBITDA margins of over 25% on a full-year basis. Moving to slide seven, our healthcare services business performed in line with our expectations against the pressures Tim mentioned. As we forecasted, membership growth in the quarter was strong at 11%, but moderated compared to the recent past. To be clear, demand remains very strong, but we continue to focus on driving further improvement in segment profitability. Our nearly 117,000 members drove revenue of $199 million for the fiscal third quarter. Let me take a moment to speak through the dynamic that changed booked revenue sequentially. The Inflation Reduction Act went into effect on January 1st of this year and set maximum fair prices for 10 higher-priced drugs. Essentially, all the sequential drop in revenue was driven by that specific price change in the quarter. It's important to note that while the IRA drove a notable change to our top line, the actual impact to EBITDA was in the low single-digit millions and was fully accounted for an original forecast. To that point, moving down the page, we drove adjusted EBITDA of $5 million, despite the headwinds mentioned. As we noted last quarter, we see significant profit and cash flow in our base to select our ex-members. We are driving profit improvement through the seasoning and higher utilization of our membership base. Additionally, we continue to grow more and more optimistic about the cost efficiency of our LESA distribution facility, which came online in April of 2025. At this time, less than 20% of our prescriptions ship from that facility, but we are already recognizing 30% plus efficiency gains on those shipments relative to our two legacy locations. We have been investing in the development of a proprietary pharmacy management system to support all of our locations, and we are in the testing phase at this point. Upon successful completion of our testing, the new pharmacy management system will allow us to fulfill many more SelectRx members through the Olathe facility in the quarters to come. We currently use less than half of the facility space and run only one shift in that facility, so there's ample room to scale into this highly efficient operation. Flipping to life insurance on slide eight, the business remains steady with cross-currents between our two main products, Final Expense and Term Life. Final Expense continues to be a tailwind for the business, with commissions up more than 8% year-over-year at highly attractive margins. We continue to see strong demand for this product and believe it will be a consistent growth driver well into the future. Strength in final expense was partially offset by term life, which remains a competitive market as consumers are shifting where and how they consume media. Overall, life revenue grew 4% to $48 million and generated adjusted EBITDA of $6 million. While small, it's worth noting that the life business generates efficient cash flow similar to our health care services segment. In summary, our Life Division remains a steady contributor of profitability and cash flow. Finally, on slide nine, we are reaffirming our revenue range of $1.61 to $1.71 billion and adjusted EBITDA range of $90 million to $100 million. Despite realizing a positive adjustment this quarter, we believe it is prudent to maintain our guidance ranges at this time. As mentioned earlier, 3Q results were aided by approval rates in seniors that were materially higher than previous years. While we are encouraged by this approval rate increase, we want to continue to monitor whether some of this goodness may be timing-related, impacting our fourth-quarter approved policy levels. To echo Tim's comment, the SelectQuote model is generating visible and strengthening cash profitability, and we are highly focused on closing the disconnect between our equity market value and the real value of those cash flows. With that, let me now turn the call back to the operator to take your questions.
Operator
We will now begin the question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. To withdraw your question, press star 1 again. We ask that you pick up your handset when asking a question, and if you are muted locally, please remember to unmute your device. Your first question comes from the line of Drew Sturrett from RBC Capital. Please go ahead.
Hi, this is Drew Sturrett on for Ben Hendricks. You previously noted that PBM Headwinds have continued for SelectRx. And for this quarter, it appears reimbursement came in a little ahead of our expectations. Do you have any additional commentary around this? And how should we think about the PMB reimbursement environment going forward?
Yeah, Drew, thanks for joining. This is Tim. I'll take the first part of the call and maybe have Ryan also speak to the IRA impact. But as far as the PBM reimbursement environment, it remains very stable. As we talked about earlier this year, you know, we faced a challenge with a change in a reimbursement rate. We have successfully resolved that issue and have seen reimbursement rates normalized in the third quarter results. So we'd categorize the environment from a reimbursement rate is stable. And we're happy to secure, you know, a multi-year agreement with our largest PBM partner. Ryan, maybe you can elaborate a little bit more on the IRA dynamic Inflation Reduction Act that impacted revenue for the quarter.
Yeah, happy to. As Tim noted and I mentioned on the call, the revenue sequentially declined, and the biggest driver there or the driver is the Inflation Reduction Act, which we look at optically revenue obviously dropping, but the bottom line impact very different from what we see at the top line. Top line is outsized. And the reason for that is we're receiving refunds from the drug manufacturers, and that's actually flowing through in the cost of goods line items. So for the quarter, we actually received $13 million in refunds. But again, there's a little bit of a geography change that's happening. And certainly, optically, it looks like there's a sequential decline, but that's really driven by the IRA impacts which we're fully accounted for in our guide.
Operator
Sorry. Your next question comes from the line of George Sutton from Craig Halloum. Your line is open. Please go ahead.
That's a new way to say it. Craig Halloum. So nice results.
I wondered, Tim, if you could talk about uh you mentioned in your prepared comments your position to accelerate the cash flow dynamics in 2027 can you just give us a little picture of that i'd be happy to george uh and uh appreciate you being on george uh as far as uh cash flow dynamic we feel like we're making uh substantial progress uh year over year i think it's a byproduct of uh you know the positive changes that we made in the capital structure and kind of cash interest obligations. Certainly, as you've seen the results for OEP, which I think, you know, we had highlighted is there's been a lot of change over the past two years around the environment. So we feel really good about the OEP results and the underlying efficiency that we're driving in our senior distribution business, both from an agent productivity, as well as, you know, from a marketing efficiency standpoint. And clearly, you know, we had a bounce back quarter in terms of SelectRx, and that's a big part of the story moving forward, really those three factors that would emphasize, you know, SelectRx as a significant opportunity for us to continue to improve the cash flow generation. So, you know, we highlighted the Olathe, Kansas, you know, Olathe, Kansas or Metro Kansas City facility and some of the things that we're doing there that are driving, you know, 30 percent plus efficiency relative to our legacy pharmacies. And we expect that to continue to compound as we exit fourth quarter this year into next year.
Great. And you also mentioned increased visibility in the Medicare Advantage ecosystem. I wondered, you know, you've got some fairly public comments from a large carrier about their plans, which, you know, don't necessarily align with the brokers. I'm curious where you're seeing this increased visibility. Can you give us a sense of the discussions that you're having with the carriers?
Yeah, I'd be happy to. Great question, George. You know, I think we are certainly seeing some positive developments, you know, relative to maybe a few quarters ago in the broader MA market recovery, if you will. But I think we would still caution at the pace of recovery. The things that we're seeing, I know that you and other analysts are covering from the payers that have reported is, you know, we're seeing some of the medical cost trends easing a bit. you know, still expected, you know, forecasted to be up in, you know, high single digit year over year, maybe coming in slightly favorable to that, but a reimbursement trend that's not fully sufficient to cover those costs. So, that's, you know, a bit of a mixed story there, if you will. Some of the changes to the STARS rating changes that we think is a positive tailwind if the payers can manage the enhanced focus on the clinical factors. And then you're seeing, you know, the payer's margin improvement recovery, you know, happening. I think when you put all that into the blender, if you will, we think there will be a continued discipline in the market for plan year 2027. We believe that there's, you know, some potential reemergence to targeted growth through plan year 2028. So, you know, we're anticipating that there could be, you know, some elevated disruption again this next year as carriers try to get to those target margin goals, but we have performed very well over the past two years. We certainly take the position that, you know, Sleclo has been in this business for 15 years. You know, many members of this exec team have been in Medicare for 20 years, and we know these cycles don't last forever. We continue to have an optimistic outlook. I would say cautious optimism.
Lastly, for me, if I could, both you and Ryan were pretty adamant about wanting to remedy the disconnect of your equity. And I'm just curious how broad you're thinking there. Obviously, execution is one factor, but I'm curious outside of that how broadly you're thinking in terms of things like segment sale or monetizing receivables or other M&A? Just curious on that side.
Yeah, fair question, George. I mean, we definitely plan to remedy it. And, you know, we made the public comments about ensuring that this company will be, you know, listed on the New York Stock Exchange. But beyond that, which we will certainly accomplish, you know, we continue to evaluate a series of options. And I think we've been on record as a company that continues to evaluate various capital markets, transactions, securitization. Obviously, we've accomplished one. We think the positive development of how we've worked through the past two years on the renewal side and this positive change in estimate gives us more conviction, even increased conviction around our back book receivables. That's certainly an option. And There's other M&A. We certainly believe that, and we've said this before, the market is at the point where consolidation might make sense. We think there'll be a small handful of sophisticated and capability-rich players, and Fleckville will certainly be one of those. We think the strength, the diversification, the durability of our business creates an option set for us that's quite wide.
Operator
Your next question comes from the line of Stephen Couchet from Jefferies. Please go ahead.
Hi, thank you for taking my questions. I'm on for Dave. Maybe we can start on SelectRx. Do you still expect to exit the year at the $40 to $50 million EBITDA run rate that you had previously messaged?
Hi, Stephen. I appreciate you joining, and I'm happy to answer that. I think we are highly confident that in the very near term, this business will be at a $40 to $50 million EBITDA run rate business. We continue to gain operational efficiencies like we commented on in our Kansas City facility, and we expect that to continue to compound as we exit 4Q and enter fiscal 27.
Okay, great. Right. And then I actually wanted to ask about Kansas City and how you think about taking volumes out of the other two facilities. I believe they're in Indy and Pittsburgh and moving them into Kansas City. And I mean, does it create some sort of, you know, stranded costs or decremental margins in the other two facilities when you move into Kansas City?
Yeah, I can take that one. As far as getting volume in, we are, we've been very open that We've been working on kind of a new pharmacy management system and some things like that in order to really take more volume in. We are really close, but we're working on getting that done. We've sent our first patients through that process. It's gone very, very well. So pretty soon we will be kind of moving more patients over. It doesn't actually, that should help the margins in the other facilities because it should take a little bit of a burden off of some of the later night shifts and things that we have to do. So, again, that cost savings that Ryan was talking about is very real. So we feel like that'll just enhance margins even more as we run more volume through there.
Okay. And then maybe one or two are on seniors. So the $14 million positive change of estimate, did I hear you correctly when it sounded like that better performance was on recent policies? I don't know if it was this most recent AP or maybe the one before that. And I guess the underlying question is, how much of that $14 million should we think about folding into the underlying EBITDA run rate?
Yeah, so I think with respect to, I mean, obviously the guide, we kind of set that out there, it said $90 to $100 million, and we weren't adjusting it. With respect to the positive tail adjustment, that's really, you know, we've been through another renewal then. We're sitting looking at our book of business, looking at persistency, making adjustments based off our expectations. And so through this enhanced visibility, you know, it became clear that we would expect to collect more than what we currently have on the balance sheet, which led to the change in estimate. So I think it's less about any specific cohort and more broadly, as we assess the book of business, you know, it became clear that it made sense to go ahead and make this adjustment. but again, at this time, we're not modifying the guidance. I want to see how Q4 develops, and obviously, we've talked about the approval rates, and so just seeing how that develops, but we're very pleased with the overall business results as well as the way the book is holding up.
Okay, great. Then maybe I can sneak in one more here. So, when we think about, you know, the LTV calculation, obviously, this last AEP was extremely disruptive, probably max disruption and so when we think about moving forward the LTV calculation do we just need the industry-wide enrollment disruption to be less and that would theoretically benefit the LTV calculation or are there other variables at play um where you know just if the environment just stabilizes that wouldn't necessarily result in the LTV also stabilizing or improving yeah so So, obviously, there are many factors that impact the LTVs.
It's, you know, customer retention, care mix, payment structures. Obviously, we have, you know, been through two disruptive seasons, and that does put some pressure on persistency. We're incredibly pleased with the 34% recapture rate. We've done phenomenally well navigating the season. And I think it's worth calling out that when we do, you know, help someone with a new policy that may have a planned term, we're actually putting that policy on the books at a very low cost. You know, all that being said, I think clearly, you know, strong performance and the ability to navigate through a range of Medicare seasons. And your question around stability, you know, if we do see, you know, increased stability within the system, that would be a tailwind to lifetime values. And so, again, I think, you know, that's what we're hoping for in the future, but clearly been able to navigate four very different Medicare seasons.
Operator
Your next question comes from the line of Michael Kopinski from Noble Capital Markets. Please go ahead.
Thank you, and congratulations on your quarter. Tough to kind of go a little bit later in asking questions. Most of my questions have been answered. I was just wondering in terms of the marketing spend by national carriers, have you seen any changes there? And then also just in trends on your senior, I know that you've kind of touched around this. I'm just wondering if you can just kind of give us your thoughts in terms of the back half of the year and how it's trending particularly, and I know you touched on all of this in terms of submission volumes, approval rates, and average revenue, but I'm just wondering if you can kind of give us your thoughts in terms of how things are trending as we kind of look into the next quarter.
Yes, Michael, thanks for joining. Just to clarify, your first question is regarding kind of a carrier marketing investment. I just want to clarify before I respond.
Yes, the carrier marketing spend.
Yeah, thank you. Thank you, Michael. So, you know, the short answer to that, Michael, is, you know, no additional updates beyond what we shared on our second quarter call regarding strategic marketing investment, other than to say what we had projected is what we're experiencing. same. So we're certainly in line there. Carriers will go through their annual planning cycles with us this summer, and we'll expect to have a clearer picture when we provide our fiscal 27 guide. But I think if you look at, you know, how we navigated this OEP, we actually had to absorb some of the aforementioned $20 million impact, you know, material amount of that came through in our fiscal 3Q, and we were able to still drive, we believe, outsized results. So we think this is all certainly manageable. I think the second part of your question was, you know, additional detail on how the back half of the year is going, and would say that, you know, again, we just went through our second biggest quarter in OEP, we think, with flying colors, and we're really proud of the results and the efficiency uh and uh how that also uh you know builds towards our our uh commissions receivable as well as you know four straight years and 25 plus full year EBITDA margins we're quite proud of that uh we now enter into the SEP period and uh we are seeing honestly the SEP period looks a lot like last year uh no substantial uh changes uh for us year over year. We do believe that our year-round model and the viability of our economics, inclusive of the quieter SEP periods, is very unique amongst other direct-to-consumer players in our category. We're really able to make the quieter periods work economically and also enhanced by this unique asset we have called select rx and uh how our enterprise economics uh work even when um you know the heartbeat might be a little slower during scp so everything's kind of in line uh well early and uh expect to uh finish the year strong thanks for that added color i really appreciate that we appreciate you joining michael at this time there are no further questions i will now hand the conference over to CEO Tim Danker for closing remarks. Yeah thank you all again for your time and we appreciate your support of SelectQuote. As Ryan and I have both noted the SelectQuote model continues to drive consistent and reliable value value to our customers and insurance carrier partners. We know the underlying cash flows for our services are real and significant and we look forward to convincing more and more investors of that value in our equity in the months and years ahead we appreciate your time have a great day this concludes today's call thank you all for attending you may now disconnect
