Q2 2021 Mediaalpha Inc Earnings Call

Good day, and thank you for standing by and welcome to the media for second quarter 2021 earnings conference call. At this time, all participants are in listen only mode.

The speaker's presentation, there will be a question and answer session.

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You had the conference over to your Speaker today, Ms. Denise Garcia Investor Relations. Please go ahead.

Thank you Sara our discussion today will include forward looking statements about our outlook for future financial results, including our financial guidance for the third quarter and the full year 2021 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 today's guidance. Please.

Please refer to the earnings release, we filed with the SEC on form 8-K in the shareholder letter, we posted to the Investor Relations section of our website today for a fuller explanation of those risks and uncertainties and the limits applicable to forward looking statements.

Media Alpha will routinely posts information that may be important to investors on our IR website investors got media Alpha Dotcom and we use this website address as a means of disclosing material information to the public in a broad non exclusionary manner for purposes of the SEC's.

As regulation fair disclosure and.

In addition, we will be referring to start to certain actual and projected financial metrics of media Alpha which are non-GAAP financial measures. 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 a substitute.

For or superior to financial measures calculated in accordance with GAAP. The most directly comparable GAAP measures as well as reconciliations of the non-GAAP measures to those GAAP measures are available in our second quarter earnings release as a reminder, we published a shareholder letter on our IR website that we'll refer to during this Q&A session.

Now I'll turn the call over to Steve for a few introductory remarks before opening the call to your questions go ahead Steve.

Hey, Thanks, Denise Hi, everyone.

Pleased to report yet another strong quarter.

Our topline transaction value in the second quarter of 2021 was $256 million, an increase of 46% year over year.

We continue to focus on executing against the large market opportunity and increasing our share of wallet with some of the largest advertisers in the world.

Our performance was driven by strength across all of our insurance vertical as carriers continue to move more of their customer acquisition investments online.

As the largest digital customer acquisition platform in the insurance industry, we have an unmatched level of scale.

That scale combined with our data science capabilities.

It enables us to innovate and drive significant business value for our partners.

Which in turn drives our market share growth as measured by transaction value.

As we continue to deepen our relationships with our carrier partners through an increasing number of technology integration.

We unlock opportunities for long term growth <unk>.

Including as outlined in our shareholder letter, a $1 billion plus incremental market opportunity.

Efforts to work with major insurance carriers and supply partners.

We have a tremendous runway for growth.

As we've barely scratched the surface of our potential in areas of innovation and I look forward to sharing more on our progress.

With that we'll open it up to your questions.

As a reminder to ask a question you will need to press star one on your telephone to withdraw your question press the pound key again, if I would like to ask a question simply press Star then the number one on your telephone keypad. Please time bother, we compile the Q&A roster.

Yeah.

First question comes from the line of Cory Carpenter from J P. Morgan Your line is open.

Okay, great. Thanks for the question and I have to probably both for you Steve.

First just hoping you could expand a bit on the comments in the letter you made around the changes youre seeing in P&C carrier spending and how that's informing your second half guide.

And then second just hoping for an update on media Alpha for agents.

Hey, Corey.

So.

So I would say, let's start off by saying that I think it's still very early and in fact too early to say really what the impact of some of the profitability concerns that we're seeing in the industry will be on our business. So I mean really from an industry perspective, I think it's still unclear whether or not this is the case of a certain number of carriers or an isolated number of carriers requiring some minor course.

<unk>.

Driving behavior starts to return to more normal levels and it is happening either at a faster rate than they were expecting or just in different patterns than what they were expecting.

Or you know weather.

Based on what we talked about in the shareholder letter this could be the start of a broader market trend alright.

The direct carrier feedback that we've gotten had been mix. It's only been a couple of carriers have really slowed their investment growth or indicated that they may now while the vast majority of others have actually been adding to their budgets and actually telling us that they definitely plan to maintain our strong growth posture for the remainder of the year.

The reason that we highlighted in our shareholder letter was because as a newly public company. We just wanted to educate our investors and talk more about the cyclicality in this industry as we did about seasonality.

And to be transparent about some of the early profitability signals that we've been getting from some of our carrier partners.

I do want to reiterate one thing that we've said in the letter to which is that.

We've been in this space for now going on 11 years, So we've grown through and increased our market share through these broader market cycles in the past and we expect to be able to continue to do so again.

And our confidence is based on the continued secular shift to online direct distribution.

The direct measure ability of the customer acquisition investments in our ecosystem, which lead us to believe based on feedback from our carrier partners as well.

That if there is the pullback in customer acquisition spend that a channel like ours will be one of the last places where an insurance carrier would pull back.

And just the increasingly diverse mix of demand and supply partners that we have in our ecosystem versus the past what we went through the cycle a few years ago.

So your second question it was about agents in that initiative.

We're continuing to invest in product innovation, there and really building a great agency and as we've talked about in the past, we're not expecting a material contribution from this business segment for the remainder of this year.

Really just we're focused on building a strong foundation for this part of our business can make a material contribution to our growth in 'twenty two.

Yeah.

And Cory do you appreciate it.

Your first question listen Steven just to add a little bit of color to the diversity point that Steve made.

At eight in Q2 of 2021, we have greater diversity on both the demand side of the ecosystem and the supply side. So on the demand side, we had two customers that.

Together.

Counted for 28% of our revenue a year ago, a single customer accounted for 28% of our revenue.

And the same is true on the supply side, where no single supplier accounted for more than 10% of our revenue.

A year ago to suppliers accounted for roughly 23%.

So it's really great to see the diversity and mix on both sides of the marketplace.

Okay. Thank you.

Thanks Corey.

Your next question comes from the line of Michael Graham from Canaccord. Your line is open.

Hey, Thanks for taking my question.

It was great to get all the data in the shareholder letter regarding the <unk>.

Migration of demand partners to also become supply partners I think that's exciting.

I have two questions about that.

The first one is you mentioned that you have 35 carriers that have done the data integration necessary to become supply partners.

What do you think the roadmap as to I don't know what percentage of your customers that is but what do you think the roadmap is to get to get the rest of those people on board and then you mentioned that some of those carriers were able to offset as much as 30% up their spend by becoming supply partners and I'm. Just wondering what is a typical timeframe for.

When a carrier.

It becomes a supply partner for the first time, how long does it take them to kind of ramp up to that level.

Yes, thanks for that question Michael.

Hum.

I wish I could give you a clear answer on this one.

The reality isn't that insurance companies tend to act very thoughtfully and deliberately when they are adopting new programs like this like extending our partnership and not just becoming a buyer or an advertiser demand partner ecosystem, but also becoming an intelligent seller our supply partner in our ecosystem.

So the 35 partners that we have with 35 plus insurance carriers that we work within this capacity there.

They are at different levels of adoption.

And as we've mentioned in the past I believe right.

The easier parts are in getting these carriers too to serve comparison listings when they don't have a policy to sell to a consumer.

Now the justifiable concern alright that insurance companies typically have is that if they want to extend beyond this type of an implementation.

Which is really required.

To achieve that metric that benchmark metric that you mentioned the ability to offset 25%, 30%, 35% of your customer acquisition costs through an intelligent program like this.

The potential for losing policy sales by showing comparison options to insurance shoppers on their site has to be addressed and Thats really where our data science capabilities come in.

The data science is what enables us to work with insurance carriers to help identify those shoppers who are non converting or have a very very low likelihood of converting into a policy.

And so it's really about bringing the data science capabilities to bear.

To help address the concerns that carriers have.

About adopting this program in full.

And displaying it on their call pages. They showed their rate to insurance shoppers, but then also intelligently in certain cases also show comparison listings because the data science tells them that that consumer is really just not going to buy a policy from them at that time.

And so in terms of the adoption to get to that level.

I would put out a number and say it takes two to three years and our partnerships with insurance carriers to really get to that level, but as I started off very hard to predict because insurance companies. If we've learned anything about them is that they tend to move at their own pace.

Yes, all right well.

Thanks for that I appreciate that the data around that feature I think it's really helpful.

Sure. Thanks, Michael.

Again, if it was like to ask a question simply press Star then the number one on your telephone keypad.

Your next question comes from the line of Mayor Shields from K B W. Your line is now open.

Thanks.

I guess, when we look back in the insurance industry, we had.

Yes.

The significant increase in claim frequency in 2015, and 2016 and a lot of companies were actually pretty late.

In recognizing that I was wondering from your perspective do you have an idea.

Do you have any insight into.

How.

How are you.

Well the companies that are increasing their spend how aware they are of the potential.

Worsening frequency, we're seeing severity or other issues that are leading some companies pull back.

Yes, that's a great question.

From I think I think every carrier is pretty well aware of that.

I think that it is.

Really I mean, the fact that people are driving more and then getting into more accidents and that severity is going up I mean, those arent new things right. I mean, everyone was expecting that it's really about what is it coming back in the manner that what's forecast three months ago six months ago by most of the major insurance companies.

And in our direct discussions with dozens of P&C insurance carriers that feedback is mixed and certainly for some and you've seen this in the news that is coming back in a way that they hadn't predicted index requiring them to actually make some adjustments to their rate I E to increase their prices to cover that.

But we actually get a lot of feedback from our insurance carrier, saying that they are monitoring this very carefully.

Also understand the inherent uncertainty of this because the economy's never come back from something like a COVID-19 related pandemic related shutdowns and so it's very hard to predict exactly how driving patterns are going to come back.

But what we're hearing from actually the majority of our carriers is that it is not coming back in a way that they hadn't anticipated.

Which in turn I think is leading to that and saying that they want to continue to grow for the remainder of the year.

Okay. That's very helpful. Thank you.

Very good question.

I don't know how comfortable you are talking about what we're seeing in the third quarter, but with all of the.

I guess concerned about the delta variants et cetera is that impacting the other vertical I'm thinking obviously, specifically about travel.

I think it is.

And I think it will.

The the thing to note about travel is that that business has been growing for us as we highlighted.

Certainly, it's still not back to pre COVID-19 levels for us or pre pandemic levels for us.

And a couple of things are driving that even before <unk>.

<unk> about the Delta variant, which is that international travel really hadn't come back and business travel really hadn't come back and the reason that's important even though even though I think leisure domestic travel has largely rebounded.

International and business travel are very high margin areas for the travel industry and so the feedback that we're getting from CMO is.

The different travel companies level that we're working with is that until those two areas come back.

Most in the travel industry will be.

<unk> in terms of the aggressiveness with which theyre going to advertise and try to acquire new customers.

And then I think.

With those factors and then with the new Delta variant coming on and the uncertainty related to that.

Say again, it's very hard to predict so it's apple business, how it is going to come back, but we're also we're very happy with the position that we're in in that vertical with the team that we have in that vertical and we will be ready when the market does come back.

Okay perfect. Thank you so much.

Thanks, guys.

Yes.

And if he would like to ask a question simply press Star then the number one on your telephone keypad.

Our last question comes from the line of Senior Cross Slide from Citi. Your line is open.

Hi, guys. Thanks for taking the question and we continue to see a movement to the private market I think at this point last year around 30% of transaction value was in the private market and this year. It's around 41% just curious if we should think about kind of that private market is growing in total share of transaction value.

I know <unk> is probably more weighted towards health, which is more open market, but just going forward just a trend towards more private market transaction.

And.

As smaller supply partners come online are they increasingly going to the private market or are they sticking with open market.

Hey, Daniel it's Steve.

Let me take the first crack at that question.

Which is you.

You pointed out all the right things.

The.

Yeah.

Growth from smaller or newer supply partners as well as smaller and newer demand partners I E. A lot of traditional agency writers, who are now really jumping into direct customer acquisition for the first time.

We do expect to see more growth in our ecosystem coming from those types of partners.

And to your question those types of partners are the ones, who are stellar exchange product, which is what we call our private marketplace product.

It is not meant for that sorry, I should've said it differently.

Divot marketplace product is not really meant for those small medium size or newer demand and supply partners. It's really ideally suited for larger supply partners want to work with some of their very largest demand partners directly. So just in the nature of how I describe that right.

This is why we don't focus on this metric much because in any given quarter. There is a large supply partner, who will start to work directly with one or two large insurance carriers. I mean, this could impact that metric pretty meaningfully in any given month or quarter.

And then in addition to that our supply partnership team, obviously is constantly working to bring on new supply partnerships and if we get a large supply partnership and that large supply partners. One that's ideally suited for stellar exchange products. We wanted best service that partner really without any consideration for the transaction value to revenue mix or the open exchange to dollar exchange rate.

And this is all the reasons behind why we just really focus on transaction value and don't worry about this makes much but really loop around.

To your question, we still think that equilibrium point is somewhere below where we are now right.

And so but again in the near term, we could see that fluctuate and.

In one direction or another.

Okay. That's helpful.

As I look at your guidance.

For what's implied for <unk>, it's a pretty pretty big step up in both transaction value and.

And revenue and a sequential basis from <unk>.

Is that mostly due to.

AEP for Medicare.

Or are there other things that are driving that sequential increase in <unk>.

Daniel I think you've got that story right, which is in Q4, we expect the seasonal mix shift with the growth of the health and Medicare business.

Due to OAP and AAP and it's concentrated in Q4 really over a couple of months.

And those verticals.

Tend to be higher open marketplace transaction value because our owned and operated websites are a larger component of the mix.

And so it's really the seasonality pattern that we expect from here out.

That's driving.

That step up that you're seeing in terms of transaction value revenue and revenue as a percentage of transaction value.

Because <unk> is a component there it tends to be higher margin as well from a contribution perspective, so that trend really flows down through from transaction value revenue contribution into EBITDA.

We saw this last year as well right in Q4, the impact was a little more muted because if you remember we had outsized investment allocations in Q4 of last year in P&C, we don't.

Have visibility yet into those types of allocations of budget.

So whats reflected today is a return to that normalized.

Seasonality pattern that we would expect.

From Q3 to Q4.

Yes very helpful. Thanks, guys.

Thanks, Dan.

There are no further question at this time. This concludes today's conference call. Thank you for participating you may now disconnect.

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