Q2 2022 SelectQuote Inc Earnings Call
Yes.
Welcome to select quote second quarter earnings conference call.
All lines have been placed on mute to prevent any background noise. After the speakers' 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 one on your telephone keypad.
If you if you would like to withdraw your question press the pound key.
It is now my pleasure to introduce Mr. Matt sensor select quote Investor Relations. Mr. Gunther you may begin the conference.
Thank you and good afternoon, everyone welcome to <unk> fiscal second 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 this afternoon.
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 Denker, and Chief Financial Officer of <unk>.
Following <unk> comments today, we will have a question and answer session in order to allow everyone. The opportunity to participate we do ask that you limit yourself to one question and one follow up at a time and then fall back into the queue for any additional questions.
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 , and other 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, Jim Baker.
Tim.
Thanks, Matt and thank you to everyone joining on the call as you saw in our press release, so like what had a disappointing quarter compared to our expectations. We will use the beginning of this call to discuss the challenges we face this AEP and how we're evolving our strategy going forward before we begin, though I'd like to be clear to shareholders that way.
View these results as unacceptable unacceptable to us certainly, but also unacceptable compared to what we know is achievable within the <unk> organization and our differentiated position within the shifting health care system.
With that let's begin on slide three.
Consolidated revenue for the quarter totaled $195 million and adjusted EBITDA finished at negative $163 million revenues decreased 45% compared to a year ago and adjusted EBITA declined significantly driven by a number of unexpected factors. This AEP season, which we will detail in a minute.
The challenges with an AEP in the quarter. We also recognize that cohort tail adjustment of $145 million in the quarter, which includes the potential risk previously disclosed this earlier and larger adjustment reflects lower persistency, primarily from higher intra year lapse rates, we experienced during the calendar year 2000.
'twenty one.
Bottom line. These results were materially below our expectations and given the significant waiting and importance of the second quarter. Our full year results will come in below our outlook range as well as you saw in our press release, our new outlook range for revenue is $810 million to $850 million in the range of adjust.
EBITDA is negative 235 million to negative $260 million given the headwinds we've realized to date RAF will give more details on our outlook for 2022, but clearly this will be a transitional year for our company.
To that point the cycle management team and our board of directors are actively reviewing business strategy, especially within our senior Medicare advantage distribution business, we will share our initial action plan on this call, but it's important to understand that this review will run through the remainder of the fiscal year and likely into next fiscal year as well.
We are committed to getting this right not just for our Medicare advantage business that because of the value. We know select what provides us a unique connector between policyholders and patients and the health care insurers and providers that pay for and provide their care.
To that point, our population health initiative in select Rx in particular and then.
Bright spot for US we continue to see strong consumer need and demand for the growing array of health care services, we coordinate with our population health platform.
Tumor interest in our select Rx pharmacy solution in particular continues to ramp up to date, we have completed over 40000 gross customer enrollments and we are beginning to hit our stride in terms of shipments and recently eclipsed 10000 active members receiving prescriptions.
We know we can address the challenges impacting our senior distribution business and grow our population health business simultaneously, but our highest priority is to deliver value to shareholders based on the meaningful synergy between these businesses and the thousands of senior Americans that are services touch every day.
Let's turn to slide four and discuss what happened this season, and our senior Medicare distribution business.
We worked from left to right. The first headwind began during our preparation for AEP, where we faced a very challenging labor market as we discussed last quarter and.
And hiring for AEP, many prospective sales agents verbally accepted our offers that failed to complete the licensing process or took other employment.
Filling these positions caused the delay to our hiring goals for the season, which we discussed during our last earnings call. We also indicated our expectation that those delays with impact effectiveness early in AEP, but we expected those agents would eventually achieve close rates more in line with historical flex agent classes.
Although close rates did improve over the course of AEP did not improve as much as anticipated.
Additionally, CMS mandated in industry wide review of marketing materials immediately prior to the start of AEP, which added delays to some of our marketing programs and more critically mass the number of close rate pressures.
Experienced early on in the season, we believed at the time that the flex agent Onboarding delays and the CMS marketing review process, where the underlying reasons for our depressed close rates and that both dynamics would ultimately prove temporary in nature.
On the right side of the page. This Medicare advantage season was also unique because of the seeming parity in Medicare advantage plan features and prior years. Several large carrier partners underwent a multi year process of building, new and richer benefits such as more expansive dental prescription drug healthy meal and wellness programs into their MA plan.
These new and exciting plan features created compelling reasons for customers to move into a new MAA plan. This year is a greater level of parity and planned features across our carrier partners negatively impacted our sales process, which slowed throughput and significantly lowered close rates in hindsight, the greater parity in plan design.
And ultimately proved to be a larger headwind to close rates and policy production than we initially believed early in AEP.
Lastly, we experienced a higher than usual falloff and submitted to approved policies driven by increased shopping behavior. Among Medicare consumers put plainly in many cases, we saw consumers consider a new plan only to remain with their existing plan given the lack of disparity in new features.
In sum the impact was a significant decline in our close rates compared to past seasons. During this AEP season, our average close rate was down more than 20% from last season, which had an even greater detrimental impact on agent productivity.
A step back these headwinds clearly impacted volume, but what might be less apparent is the pressure our model faces on unit profitability, but the type of unexpected slowdown we've experienced this season, but simply our operating leverage was too high for this unique environment and I'll touch on that as it relates to our strategy in a minute.
Before I do let's turn to slide five and I'll give some context on how each headwind impacted our profitability relative to plan on.
On the left side of the bridge, we begin with our outlook for consolidated EBITDA and implied <unk> forecast of approximately $150 million. If we work from left to right again first you can see the impact of the $145 million cohort tail adjustment recognized this quarter to be clear. This includes the potential risk of $65 million for it.
Cohort sale adjustment that was included in our previous full year 2022 outlook as part of our fourth quarter estimates RAF will provide more detail in a minute on the makeup of that adjustment as well as actions. We are taking to change our LTV methodology, given the shift in the environment.
Next as I mentioned, you can see the 20% plus decline in year over year AEP close rates accounted for the lion's share of our EBITDA shortfall outside of the tail adjustment. This EBITDA shortfall is a function of two things.
First is the unexpected general parity in carrier plan design, which drove lower volumes and limited our throughput which negatively impacted our topline.
The second relates to the significant amount of operating leverage in our Medicare advantage business as you know the AEP in OE peak season for Medicare advantage distribution is a compressed timeline that includes a number of fixed cost for the season, including recruiting training agents and marketing when the season performs within a normal range the results in <unk>.
<unk> ability or more than attractive as we've exhibited over the past few years.
The flip side is clearly true and as a result of this season, we are reviewing what the appropriate balances between growth and risk as defined by operating leverage.
If we move to the next section of the bridge you can see the additional impact that we've experienced from senior LTV, primarily driven by lower persistency as well as the impact we've imposed with wider assumptions on our constraint as well as our first year and renewal provisions RAF will speak at length to those assumption changes in a minute.
And lastly, we encountered some headwinds to other revenue primarily made up of our auto and home and life divisions.
While we were able to save $43 million in expenses that was not nearly enough to offset the revenue declines and therefore adjusted EBITDA came in significantly below our expectations.
Again, clearly not what we expected when we prepared for the season, but we are using this experience in real time to realign our strategy.
To that point, please turn to slide six and let me offer our initial high level assessment of slack, what seniors business model and the direction, we need to take it given the shifting environment.
At the left it is clear that many participants in the MA space, including select quote we're organized for rapid growth against an addressable market that remains very large.
It remains our view that Fuckwit has significant competitive advantages given our data driven technology and agent led model.
That said, our historical philosophy for growth and operating leverage is not aligned with today's market.
To be clear, we believe the market for Medicare advantage policies is very large and will continue to grow with the aging of America.
We plan to benefit from and execute against the strong demographic backdrop for years to come but we also owe it to our shareholders to mitigate volatility in our results.
As I mentioned, we are working hard with our board to review our approach and we believe our ultimate strategy for the Medicare advantage business will be to reset our growth philosophy with a stronger focus on repeatable unit operating margins and predictable cash flows within a wide range of market scenarios.
<unk> year, we will likely build a plan that pulls back on submissions year over year to reset the baseline with the intention of growing modestly from there.
This will allow us to operate more efficiently with a higher mix of tenured agents and lower flex agent hiring needs, which reduces volatility and lowest cost. It also improves cash flow significantly.
While this year's AEP included a number of unexpected headwinds, we need to better plan for risk and we believe <unk> has the ability to still grow at an attractive rate, while also significantly reducing our operating leverage and downside risk.
Moving down the page as we have discussed in previous quarters policyholder lapse rates from season to season have also driven volatility in our results Ralph will discuss the changes we are making to our LTV assumptions to reset expectations here as well.
Lastly, like what's real value and potential exists beyond just Medicare advantage. So like what is value is a connector facilitator and intermediary within the shifting health care landscape is core to our strategy.
If we flip to slide seven let me provide some initial thoughts on how we expect <unk> to ship strategically with the ultimate goal of driving shareholder value through improved margin predictability and cash flow.
Again, you hit the top of the diagram has mentioned we believe <unk> can continue to grow the Medicare distribution business in the future, but do so at slower rates after resetting the baseline next year most.
Most importantly, we believe we can ultimately achieve growth with better cash flow dynamics and less volatility of results as mentioned unexpected factors like we saw this season and increasing competition has clearly impacted the risk reward balance at the very high level of growth. The industry has sought in the past year or two we've.
We maintain our conviction that <unk> has built the industry's best platform to capitalize on this large opportunity and we are taking appropriate action to ensure that we deliver attractive returns to shareholders and a wide range of market conditions.
Clockwise down to the right. We believe slower growth will also allow us to reduce the operating leverage and risk and the Medicare advantage business.
Non operating leverage we have identified a number of opportunities to reduce operational risk factors and we'll continue to do so to improve overall efficiency.
At the bottom of the diagram as I alluded to the shifting market dynamics and policyholder behavior require us to review, our LTV forecasting and moderate appropriately Ralph will give more detail on the changes and drivers here and as I noted it is our responsibility to shareholders to mitigate the backward looking volatility we've experienced in <unk>.
Cohorts as reflected through tail adjustments.
Lastly, <unk> has a unique opportunity and capability to be much more than a Medicare advantage distribution platform.
To be clear there is a significant value in that MA business, including as an on ramp to additional population health services like select Rx that said, our ability to capitalize on synergies and the broader health care landscape will be at the forefront of our ongoing strategy review.
Now I want to give some brief context about <unk> history on slide eight first of all we're clearly shifting our strategy as it relates to our Medicare advantage business, but I want to be clear that what we're talking about with population health and leveraging our platform to pursue new revenue streams is not new to select clubs.
Over the past three decades like what is continually evolved across end markets, but with a common strategy at our course likelihood of strategically built to leverage customer leads and the unique information we capture to offer value added services, while also optimizing revenue per marketing dollar invested.
And the company's early days, we successfully leveraged our term life business to add auto and home insurance more recently the scale of our Medicare advantage distribution business allowed for the expansion into our growing final expense products and now we believe population health is the natural progression of how <unk> can best leverage our unique assets and customer.
Base to add value.
On that concept lets turn to slide nine and briefly discuss what we believe <unk> can achieve with our unique set of assets data technology agents and partners as we've discussed we believe our population health initiatives position fluctuate as a critical value creator across each of the important constituents and the health care spectrum as you know our <unk>.
Medicare advantage business makes like what a first point of contact for the growing number of senior Americans each year from.
From this point of entry are data intensive and agent led model can connect policyholders patients health care providers and payers across a wide array of health care services.
Select Rx in a number of our value based care initiatives are just the beginning of the broader population health strategy and we believe <unk> has a number of strategic advantages to capitalize on this very large market.
Now I'd like to be very candid in saying that we provide this longer term vision to give you a sense of our strategic direction.
Based on our recent results, we and the board completely accept that it is our responsibility to shareholders to earn credibility for the strategy through tangible results.
To that point, let me conclude my comments on slide 10, and give investors and analysts some insight to what to expect from us in the coming quarters as I mentioned.
Our strategic review will continue beyond this fiscal year, but I can't tell you today is it cycle currently plans to take the following actions first looking ahead to next year's AEP season, and in line with our objective to reduce operating risk we plan to hire the majority of our agent class for next AEP much earlier. Similarly, we expect a reduction.
And overall agent head count, including a lower mix of flex agents by next year.
Next we plan to provide regular updates on our select Rx membership and revenues as I mentioned earlier, we remain well on pace with our original expectations of 25000 members by the end of this fiscal year and plan to share more detail on our expectations for the business later in our fiscal year.
Third you can expect to see additional detail from us regarding how we intend to increase visibility to our cash flow and earnings beginning with the changes we are making to our LTV assumptions. Additionally, we plan to scrutinize, our corporate expense structure with an eye to bringing cost in line with our forecasted policy production and revenue in light of our expected reset.
And the size of our Medicare distribution business.
Lastly, as I mentioned on the previous slide the growth of population health initiatives as a key focus and we expect will be a growing contributor to our revenues and value over time.
With that RAF will now provide more detail on our financial and operational results for the quarter craft.
Thanks, Tim turning to slide 11 in our consolidated results as Tim already said this was an extremely difficult quarter, we had multiple operational issues, we had to deal with and despite pulling many levers we could not offset all of the headwinds that we faced.
In addition, we took certain proactive measures to address persistency like assessing that cohort tailing adjustment and increasing the constraint and provision which impacted the quarter.
Consolidated revenue for the quarter came in at $195 million. This included a $145 million negative adjustment for the senior M. A cohort tailored adjustment.
Given the visibility into the January renewal event, and the lapse rates experienced during calendar year 2021, we determined an adjustment was probable and reduced our commissions revenue in the second quarter.
Excluding this cohort tail adjustment revenue was $340 million, which was down about 5% year over year <unk>.
Despite growing M. A privilege policies, 27% lower LTV per policy drove lower revenue and our senior business year over year.
As stated earlier, we incurred incremental costs associated with trying to produce more policies, but lower revenue associated with lower than expected policy production and the cohort tailing adjustment. This drove adjusted EBITDA to negative $163 million for the quarter.
Excluding the cohort tail adjustment.
<unk> EBITDA would have been negative $18 million.
Needless to say this has been a humbling quarter for all of us.
Forced us not only to examine the current environment, we find ourselves in but also how we want to run the business going forward.
While the margins of the business has certainly been compressed we believe there are meaningful changes that we can make that will have a positive impact on the senior distribution business going forward.
These include resetting the baseline of policy production.
While we're not providing guidance for fiscal 'twenty three yet we anticipate creating a plan that will produce fewer policies year over year before getting back to modest growth in fiscal 'twenty four and beyond.
We anticipate this will have multiple immediate benefits, including reducing the number of flex agents, we need to hire which will lower our overall onboarding and recruiting costs.
During those flex agents by mid summer, which we believe will take the variability out of hiring plans and allow for more consistent training and onboarding.
This will also allow us to operate with a more tenured workforce, especially during a P and L. P.
Should positively impact average close rates and agent productivity.
Cutting back on policy production and the seasonally low periods of the first quarter and fourth quarter, which will preserve cash and lower overall operating costs.
Finally, we continue to invest in our health care services business with additional products and services that set the unique needs of our customers and leverage the marketing spend we're already incurring on the distribution side to add additional revenue most of which should come from products and services that are cash efficient have quicker breakeven points and add value to the entire.
Health care ecosystem.
Putting our insurance carrier partners health care providers and more importantly, our customers.
All of the changes I've discussed above should have a positive impact on cash flow and accelerate the timing of getting to cash flow breakeven relative to our expectations six months ago.
D. It off of a lower adjusted EBITDA base to start with.
And with that let me now get into our operating results for the quarter.
Moving on to our senior results on slide 12.
Grew our total approved policy is 22% and our and they approved policy is 27%.
They approved policy growth was lower than our submitted policy growth as we saw significantly higher switching activity. After we submitted our policy on our customers' behalf. This impacted submitted to approved conversion rates.
Tim alluded to this year agent productivity was negatively impacted by multiple factors, including higher flex versus core agent mix, a more competitive marketplace and lower close rates associated with plan design paradigm.
Over the past couple of years, we achieved steadily increasing agent productivity, but unfortunately that trend reversed abruptly with the start of this AEP, indicating that something that's fundamentally different in the market.
We saw average agent productivity declined 45%.
With 20 plus percent close rate declines for both core and flex agents.
When we last spoke to you in early November we thought that the softness in the first few weeks of AEP was driven by some CMS marketing changes that were made at the last minute and by the high number of less tenured flex agents that we had hired.
We felt like the CMS marketing issue had mostly resolved itself and as those less tenured agents gained more experience, we would see close rates tick up from there we.
We do normally see close rates increased during the course of AP.
Unfortunately, while close rates did improve they did not improve nearly enough.
We saw lower close rates across every marketing channel every agent type which points towards a general marketplace dynamic mostly driven by plan design this year.
We've evaluated several years' worth of data and in years, where there's a greater client party close rates are lower.
When there are greater differences between plants close rates are higher.
This is difficult to anticipate because we only find out plan design very close to the beginning of AEP.
As we think about how we want to run the business going forward.
Numerous operational changes that we're making should help reduce volatility and improve profitability.
With respect to M. A ltvs, while we anticipated M&A ltvs to be down 10% they ended up being down about 27%.
This incremental decline was driven by three factors.
Lower persistency higher constraint and higher provision for intra year lapses.
So the lower persistency, which represented around 60% of the incremental decline, we actually updated our 36 month weighted average to include the preliminary lower overall persistency. We've experienced this year normally that wouldn't impact ltvs until the fourth quarter, however to be conservative we chose to.
Use our preliminary view of persistency for the second quarter, given the decline we're seeing to start feeling that lower expectation into our results as soon as possible.
On the constraint, we have increased our constraints from 6% to 15% a significant increase in one designed to try to reduce the likelihood and magnitude of ctrip cohort tail adjustments for new policies written.
The increase in constraint represented around 25% of the incremental decline.
Lastly, we reflected higher lapse rates for both first year and renewal year lapses based on what we experienced this year.
Now if we move to slide 13, let me provide more detail on the $145 million cohort tail adjustment, we took in the quarter.
As a reminder, we had a potential risk of a fourth quarter $65 million cohort tail adjustment.
This risk was based on an assumption that persistency would be flat to last year lower than what was originally projected when some of our cohorts were written.
As a reminder, we had previously disclosed that we were seeing higher intra year lapse rates during the course of the year.
However, we did not know if that lapse rate pressure that we were experiencing.
The timing of when people lapse their policy versus truly a reduction in overall persistency life.
Lapse rates from October through the end of the year continued to increase year over year.
The preliminary and of your aggregate renewal event seems to have come in better year over year, but not enough to offset the lapses that had already happened throughout the year.
Especially for certain first year carrier cohort combinations that you used up all of their constraint.
Now that we are several weeks past the renewal event, we know enough at a cohort level to project with a high degree of confidence the impact of this lower overall persistency on a cohort tail adjustment while.
While it will take several months to have final persistency rates, we felt that given the known trends it was prudent to recognize the cohort tail adjustment in the second quarter.
As you can see the vast majority over 80% of the increase in the estimate on the cohort kill adjustment is driven by fiscal 'twenty one policies.
This was driven predominantly by three specific cohorts that you've all their constraint and triggered a cohort until adjustments.
These are the large adjustments and reflect a pretty significant decline in persistency over the last three years, mostly concentrated in the first several of them in all years of the policy.
We are surprised at how quickly things have changed and the impact it has had over the last 18 months.
As we've previously stated we utilized 36 months of actual historical persistency results to determine the rates baked into our LTV calculations.
We adopted this approach years ago to eliminate management discretion inherent in forecasting future persistency performance.
Historically persistency rates have been very stable and predictable, but clearly the market has changed while we are currently booking lower and lower persistency as we update our assumptions based on actual experience. We also made the decision to significantly increase the constraint from 6% to 15% Oi.
These changes way on Ltvs and margins and impact how we make investment decisions going forward as both Tim and I have referenced earlier.
Now if we turn to slide 14, let me provide an update on the significant progress we have made growing our select Rx pharmacy business.
Since we entered the space last night, we've invested in the business and have significantly increased our organizational and operational capacity to serve more customers with chronic conditions and polypharmacy needs.
Most importantly, we are more excited than ever about the high level of consumer interest in and demand for the pharmacy services we offer.
As the chart on the left demonstrates as of January 31, we have already enrolled over 40000, new members into our select Rx offering that.
That demand was generated almost entirely from enrollments of new and existing select quote Medicare advantage customers at very low incremental acquisition cost to the company.
There's typically a several month lag between initial enrollment and then release receiving their first shipment and member falloff will occur during that time frame.
However, the left hand chart clearly shows there is significant demand for this service as.
As we have scaled the business over the last six months.
The nuances of this business and made many operational improvements to lower falloff and speed up the onboarding process.
You can see those efforts starting to take shape on the right hand chart, which shows the growth in our paying membership as of January 31, we now have over 10000 active paying customers on the select Rx platform.
Importantly, we exited the month of January with over 75% more active paying members than we had at the end of November demonstrating that our process enhancements are really starting to pay off.
We remain excited about the positive and predictable cash flow impact. This business can have on our overall results and we remain confident with our forecast to exit this fiscal year with around 25000 active paying select Rx members over 10 times, what we started the year with.
Now if we move to slide 15, let me provide an update on our capital position.
The second quarter is always our biggest quarter for use of cash as we have all the expenses of operating during AEP marketing cost and sales agent commissions. However, we don't start getting paid for the policies we sell until January for.
For the quarter, we used approximately $219 million of cash from operations and $12 million of Capex.
During the quarter, we did draw down $245 million from our delayed draw term loan.
We brought on several new lenders into our revolver and increased our committed revolver capacity to $135 million.
There's currently nothing drawn on that revolver facility.
We also still have 100 million undrawn on our delayed draw term loan.
As of December 31, 2021, we ended the quarter with $193 million of cash and $717 million of debt.
We also ended the quarter with $1 billion of accounts receivable and short and long term commissions receivable balances.
Finally on slide 16 based on the performance in the second quarter and our new expectations for the rest of the year, we are adjusting our guidance for fiscal year 2022.
We currently project revenue in the range of $810 million to $150 million net loss in the range of $236 million to $255 million and adjusted EBITDA in the range of negative $235 million to negative $260 million as a reminder, we assessed the cohort.
[laughter] tailored adjustment in the second quarter, and we will true up that calculation if required in the fourth quarter.
As Tim noted the coming year will be one of transition for select quote, but I'll echo his confidence in the value. We can create with our population health initiatives on top of the reset we are undergoing in the Medicare advantage business.
The health care market is very large and select quote continues to be an important hub for policyholders patients providers and payers.
Look forward to proving our value to those constituents and our shareholders in the quarters and years ahead.
That let me turn it back to the operator for your questions.
Thank you at this time I would like to remind everyone in order to ask a question press the star One then.
For Star one on your telephone keypad. Please limit your questions to one and one follow up thank you.
We have your first question from Gena Linzess Singh with Credit Suisse. Your line is open.
Yeah. Thank you and Hello, everyone I wanted to better understand his comment that all greater credit even strong benefit for the 20th tornado benefit years kept pushing illustrates how do I reconcile that with the comments from some of the insurance companies as well as your peers at MAA plants are getting more competitive driving market share shift for insurers.
If you don't have drive driven more shopping behavior among senior so help us reconcile that commentary.
Yes, John this is Tim I'll make some comments and maybe Bob double click on your specific question I mean, clearly this AEP was.
Very different than anything we've ever experienced in our decade plus of experience.
And in the Medicare space, obviously, we had a confluence of events.
Round industry wide CMS issue.
That masked some of the underlying issues. We also talked about the tight labor market and our need to to.
Bring on some of our agents later than we expected and I think that those things at the time the last time, we talked.
That was what we really thought were the issues only to really as we kind of peel that back and uncovered throughout the course of AEP that plant.
Planned parity was more of the underlying issue that caused the significant compression in close rates that we mentioned on the on the call here, Bob do you want to talk a little bit from a sales perspective and carrier perspective.
Yeah, It's a really good question Joel Undrawn again, we've never really seen anything like this journey in AEP and what we are describing as far as planned parity is I guess, just less compelling reasons to buy a plan on each individual call.
However, we are seeing a big increase in shopping behavior, which I know that sounds counterintuitive, but it's it's driving less close rate on each call that we have.
While still seeing people switch at a high level.
Which is really different the knee environment, we'd really seen genre.
Okay, and then my follow up I would like to understand your comment about modest top line long term growth. He referred can you be little bit more specific are you talking about like going in line with the market growth and maybe I'd love to get any thoughts on your T V longer term and more importantly, the increased scrutiny on the distribution channel.
Pressure on NPV cost push on marketing and sneezing at cost and the unit economics.
Omics even work in this business, especially if there's no operating leverage.
Yeah, I guess I'll address that I think.
We're making lots of changes to the business going forward.
I think this year is obviously going to be a challenging year.
But it is not reflective of what we think the business can do in the future.
Clearly the margins have been compressed and we are going to be making changes to be able to operate in an environment that has lower close rates to the extent that that continues and lower margins.
But it will look very different than it did this year.
That's on the distribution side, obviously, it's important to have a healthy distribution business and the non ramp.
For our growing health care services business and so that is the plan going forward relative to growth rates and then how we think about that.
While we're not providing guidance with respect to fiscal 'twenty three.
We are going to build a plan next year that has less policy production.
Then we will produce this year.
And basically resetting the baseline there.
And that has lots of immediate benefit that I think we've talked about in the call after that.
We'll return to some level of growth, but it will be modest and certainly modest relative to.
Relative to the growth rates that we've that we've seen before exactly what that growth looks like we will have more to share on.
On that over the next couple of quarters as we work through our strategic plans.
Jill under just to double click on <unk> comment I mean, an understatement, it's extremely challenging year for us.
A transitional year for the company, but I don't think the return characteristics that we're seeing today is what they'll be moving forward we alluded to.
You know changes that we're going to make and refinements to our strategy to take out some of the operating leverage.
Things that we're doing with respect to a higher percentage of core agent marketing optimization are to focus on profitability.
And our goal to accelerate our cash flow breakeven we think.
We're highlighting through.
Some of the good early progress on select Rx population health can be an extension of the services that we provide ultimately to drive additional underlying value to consumers, but financially away for us to leverage the investment that we have.
And play and we think that.
Moving forward, we will still have a strong and robust.
Platform, but strategically we want to use that as the on ramp.
Into a broader health care services ecosystem.
We have your next question from Steven Valiquette with Barclays. Your line is open.
Great. Thanks, good afternoon, everybody so.
Couple of questions here, you know I guess.
I'm sure there's a bias to that want to talk too much about individual carriers, but just given the high visibility on.
Humana's AEP results. It seems the issues that you guys are facing almost the opposite of what their what was happening from their point of view.
Do you think your lender I kind of touched on a little bit just at a high level, but I.
I guess two questions I had but just be at a high level is this can we say, yes or no that some of your issues are related to.
Humana is resolved and youre.
Correlated with that or is or is it almost the opposite I'm just trying to get to the bottom of that and then number two would just be is there any sense that major carriers are just taking matters into their own hands and maybe this year and going forward. They may rely more on internal channels and sales efforts to drive growth for themselves instead of external telesales channel that <unk>.
Includes a.
So that quote and your peers.
Yeah, Steve the system. Good good question and I'll address your second question first.
Terms of any type of pullback from other carriers I think there could be pulled back.
With respect to some direct to consumer brokers.
With various carriers, we certainly wouldn't expect to be part of that pullback I think we have a very long and steady path with respect to our carriers. It continues to grow and expand.
I think as there has been.
More evaluation, if you will of brokers as to who is doing a better worse job, we've actually seen more engagement and more investment from our carrier partners I think ultimately there could be a flight to quality I think that certainly benefits us Bob.
Yeah, I agree and I think one thing that's interesting is that.
Carriers are talking about the competitive landscape a lot where they are kind of targeting certain benefits and an.
And but that does parity and competitiveness I know are a little bit different in our mind. There. The market is extremely competitive from a marketing standpoint things like that however, parity is driving lower close rates I do want to comment on that first and yes. We are seeing some of the same pressures that the carriers are seeing in the fact that.
That competitiveness at times with specific carriers is causing some pressure on churn rates to where RAF talked about earlier.
Okay, alright, great. Thanks.
We have your next question from Jeff Garro with Piper Sandler Your line is open.
Yes, good afternoon, and thanks for taking the question.
Clearly stay at how you've been running the business for growth and EBITDA margin and it sounds now like the focus is going to be shifting more to cash flow. So how should we think about the timeline.
With which you can reach cash flow breakeven.
Yeah.
Yeah I'll take that.
I guess.
Look this quarter, obviously very.
Very challenging.
We are going to make.
And are making multiple changes to the business as we discussed.
The biggest driver of that is really going to be resetting the baseline.
We'll do next fiscal year and as we've talked about to some extent.
Cheating cash flow breakeven and timing all of that is.
Relative to the to the growth that we choose and growth is a choice that we make.
The last couple of years, we've been growing at.
Very fast growth rates.
By pulling back next year that will have an immediate benefit as.
The overall cost to write new business will be.
Lower than it was this year, but you'll get the renewal dollars associated with policies that you've sold this year coming into coming through the business next year.
So I think you'll start seeing that next year.
There is obviously a working capital dynamic that.
I think we talked about in our last earnings call that so it takes 12 to 18 months to play itself out, but some of the benefits you shall see as early as next year.
Got it that helps and then maybe follow up on the unit economics side of things, we've talked a little bit about the hiring and you guys have a lot of control over that so maybe I'll ask about the customer acquisition side of things I was hoping you could comment on what you saw in terms of lead quality and lead costs.
In the quarter and how your approach meet acquisition going forward and maybe just throw out could you shift to owning significantly more of the the lead generation are generating more of the lead internally.
Yeah I'll take that we are certainly in the process of kind of scrubbing all of our channels and layering in all of the data that we're seeing in terms of the all of the current kind of persistency rates and everything that.
That we've seen because the market has changed.
Credibly quickly right. So it was fairly as Ralph mentioned earlier very consistent for years and now we've seen rapid change. So what we're seeing as we layer in a lot of that and we really look at our marketing channels and dive into great detail is one we see pressure across the board. So there's no one channel.
It is really working and one that's just really awful what we see within that is there is kind of good and bad within each of those channels and what we really need is to kind of dive in with each of those and figure out how to optimize within those channels how to eliminate some of the things we're seeing with this growing population of.
Our what we call Super switchers, so folks that are shopping more and more and more comfortable with.
With shopping.
We're not really seen a issue with kind of raw lead cost in terms of like a huge increase in overall lead costs. When you compare year over year on an apples to apples basis. What we really saw this year was just that customer acquisition cost relative to close rate not rare.
<unk> to the actual cost the actual costs came in pretty much in line and really stayed within where we would expect them to see I don't think you know when we look at a quality issue I mean.
There are a lot of those channels are the same a lot of those channels are things that we generate ourselves. So I really think that it comes down to more of a compelling reason of why that consumer would switch in terms of you know when we talked about planned parody to say look those plans we're still good still.
Well loaded with benefits there just wasn't that one <unk>.
Single.
Flashing Green light reason why somebody should change.
And we saw close rates depressed I think one thing I Wanna comment with when we slow down a bit I do think that it will give us the ability to to really optimize our lead channels are in terms of kind of figuring out okay, where are we seen the most goodness within each of those channels that gives us ability.
To optimize there.
Better you know as.
As we move forward.
We have your next question from your own Qunar with Jefferies. Your line is open.
Hi, good afternoon.
My first question probably goes to Bob.
You correctly noted that the higher shopping activity in the face of greater plant parity is counterintuitive and admittedly I still don't really understand the relationship could you maybe try to explain that again.
Yeah to Bill's point.
Usually we theres carriers that win on.
Core benefits like maximum out of pocket prescription drug savings things like that what we're starting to find is there's way more nuanced.
Planned changes and things like that a lot of things to market towards so there's a ton of activity and a ton of people actually calling in and a lot of increased demand. However, it's harder on a single conversation. She find the exact reason or the silver bullet like bill talked about to get somebody to switch. So you see lower closed.
Rates on those single calls the increase in the overall kind of shopping.
Throughout AEP. So it's it just creates a more difficult sales environment. While there is still a really strong kind of demand for change from consumer. So we're seeing kind of pressure on lapses because of the demands for consumers, but at the same time, it's much more difficult to find the exact reason why somebody should switch.
We sell towards benefits.
A lot, which would be more towards core benefits in the past again prescription drug savings.
Making sure that your maximum out of pocket is properly aligned those types of things we switched a lot of things up to try to address this.
And I have seen some progress there, but it's so much more complicated.
Got it.
And then on the idea or the strategy of pulling back growth some extent.
That as simple as just trying to weed out some of the serial shoppers that are out there or are there other key differences or changes that you're contemplating.
Uh huh.
You run all I'll hit that at a high level and Bob maybe you can walk through it I think there's a series of things that we think that we can do to optimize our business and our engine as we kind of pulled back on growth I think we talked a little bit about much.
Higher percentage of core.
Core agents versus flex agents. It is one thing that we learned over time that that can help kind of moderate the volatility I think bill spoke about some of the marketing optimization I think we're taking a very.
No hard look at our kind of.
Unit cost and unit margins.
And so there's multiple things we can do there I'd also kind of highlight.
And it's up to us to prove it to shareholders and to the market.
But our move into population health Rx in other ways that we can solve consumer needs and more effectively.
Monetize the marketing spend that's in play I think that's another important consideration Bob anything that you'd add.
Yeah, I'd, just say you know I want to reiterate Bill's point the pulling back does allow you to kind of pinpoint whats working.
From a marketing standpoint, and really optimize better I would say, though the other thing that allows you to optimize more successfully is having more tenured agents. We always did have a lot of operating leverage but.
The later classes this year really hurt us because theyre always lower close rates than tenured classes and earlier in the summer hires of however, we've always done quite well with those classes. This year with the with the adjustments on close rates, we didn't see very good results out of those later classes.
And by having more stability and allows us to.
To make adjustments much faster be a significantly more cash flow efficient and really hone into what exactly is working and hindsight being 2020, what we should have done this year, because we didn't get the normal operating leverage we do and we would have been more successful with earlier hires and more core agents.
We have your next question from Daniel Crosslight with Citi. Your line is open.
Hi, guys. Thanks for taking the question.
Your commentary on higher lapse rates and lower persistency suggest that Wow parity is making it harder to sell new policies someone's doing it someone's closing on these seniors.
Or else, we wouldn't have this increased in ENT and churn.
So I'm curious where are they going who's closing them.
Because they're obviously buying their plans from from somewhere.
Have you been able to track where these folks are going when they lapse from a policy that was previously sold by select quote.
Yeah.
I think we can take that one yeah. There's a couple of things here and I'll turn it over to Bob I mean at two separate concepts with respect to what we saw on entry year lapse rates that continue to Mount throughout the year and then the specific.
Kind of convergence of plants that we saw during the AEP period I think those are.
Two two different concepts there, we just need to kind of get clarity on Bob.
Yeah, I think also plans really align with consumers' health care needs and things like that so you still see quite a bit of switching, especially amongst as bill talked about kind of super shopper Super switchers.
And those types of cohorts, but we are seeing quite a bit of stability on our other our other cohorts. It's just we couldn't.
Really deal with the pressure of our newer Paul are our older policies switching and kind of those super shoppers and supercenters.
Increasing their switching behavior.
Yeah, and I think as Bob said before.
There are sort of two concepts here.
The relative to the persistency and lapse rate issues.
Impacted the cohorts heal adjustment.
That's really associated with plan.
That were sold in prior years not this AEP season.
And the biggest driver that adjustment is obviously lower persistency over a couple of years.
But much higher intra year fall off.
That impacted persistency this year, so going into AEP, we'd already had.
So many policies that had already fallen off.
Relative to people switching early on in the year.
<unk> parity, which impacted.
The close rates relative to AEP didn't really impact.
It didn't really impact those prior cohorts at least not yet.
While while the entry or lapse rates were higher year over year, which impacted overall persistency the actual renewal of that that happens at the end of the year.
Slightly better than last year, which certainly from a trend perspective was very different than the entry it lapses and.
And we think was a function of the planned parity. This year's set of people sticking with plans that they had is just so many policies lapsed throughout the year.
By AEP that debt.
That return that renewal event at the end of the year it wasn't enough to offset those lapses.
Okay.
That's helpful and then.
On Ltvs it seems like you've taken the bulk of LTV degradation this quarter.
On a sequential basis for the rest of the year would you expect ltvs to further degrade or have you kind of set a floor with the increase in the constraint and the pull forward of the 36 month average.
Yes, I think relative to the Ltvs, obviously, we've tried to be as proactive as possible in terms of feeding in.
The lower persistency that we're experiencing from this renewal event here in January that normally wouldn't see it until sort of the fourth quarter.
So we are taking that earlier to try and reflect that earlier and as you noted we significantly increase the constraint almost three times from 6% to 15%.
So that's the biggest drop.
I would imagine in terms of LTV is certainly this year.
<unk>.
And then for the next couple of quarters, it will sort of be in line with kind of what we've.
What we are where we are at now outside.
Or just general seasonality and there are certain times of the year, where the LTV is higher or lower but that's the biggest drop would have been relative to what we did here in the second quarter.
We have your next question from Lauren shrink with Morgan Stanley . Your line is open.
Oh, great I S. A sign up on that last question I understand that.
Sharon and the older cohorts is is the main issue, but it but it does look like churn is has that been also kind of where it's just kind of trying to square those comments away and then just one modeling question. What is the revenue that you assume in that and definitely your guide. Thanks.
Yes, so I guess relative to the experience that we've had with persistency as we've said in the past it really seems to be concentrated in the first two or three renewal periods.
The policy once you get beyond that.
It's much much lower variability.
And each of those renewal years and it's just.
The rates are higher there's less variability that's been pretty consistent.
Quite frankly also less dollars to collect once you get past the first couple of years of renewals. So.
Those are the trends that we've seen relative to the cohort tail adjustment we had originally anticipated.
<unk> for $65 million <unk>, just with the fourth quarter.
We have accelerated that and that has increased to $145 million.
We took this quarter.
Outside of any adjustments in.
That will be required in the fourth quarter, when we actually do the calculation.
That's that's the implied pieces in the guide.
But we took the second quarter.
Okay. Thanks.
We have your next question from Mayor Shields, we'd Kb double your line's open.
Oh, thanks to get back from questions. If I can one can you comment on agent retention, particularly core agents not just the new ones that didn't show up.
But we keep on hearing about the great resignation Im wondering how youre seeing that with your experience agent group.
Bob you want to take the lead on that yeah, absolutely. So we have seen a mild increase in <unk>.
<unk> agent accretion or retention issues, but nothing alarming or not what we're hearing on kind of the great.
Resignation to your point our level one agents were in the high Eighty's low ninety's before now our level one agents are at 83% for the last six months so.
We're still retaining our good agents at a high level little bit of pressure.
But that's just because it's a really competitive job environment and different than kind of what we've experienced before but not to the tune of what others. We think are experienced and know what we're seeing elsewhere.
Okay, No that's very helpful.
The second question.
I don't know how to even ask this specifically.
But as you talk about a slower growth rate anticipated for next year, what is the implication of that if we're talking about fewer.
Policies, what does that means population health and select Rx over the next two or three years.
Now I'll address our Firstmerit great question I mean.
As we've highlighted.
We will have a very very meaningful.
MAA platform as we go and optimize and really focus on.
Accelerating cash flow breakeven, we're having.
There is ton of demand out there with respect to population health are opt in rates are very very high and as you've seen one of the bright spots.
For the quarter really is the progress we're making on select Rx. So that is something that we'll continue to push on we continue to.
Build out I would say other highly relevant services for our population health engagement platform. The good thing is we will still have a very meaningful MA platform I wouldn't make that.
STREAMWAY clear, but there's opportunities for those that we may not convert into an Ma policy.
That can still be.
Candidates for help through population health Rx or otherwise so.
We don't think that that necessarily.
Slows down.
Really the ramp up of our health care services business.
I'm showing no further questions questions at this time I would now like to turn the conference back to Mr. Teen Danker CEO for any closing remarks.
Yes, Thanks again for joining us today as I mentioned the entire liquid organization is committed to realizing our potential that.
That we know and are unique that are unique business is capable.
In today's health care ecosystem.
We certainly believe we can improve improve the predictability of our core senior business, but more importantly.
We leverage our position as a critical connector and provider across health care services beyond Medicare advantage.
We look forward to proving that potential to you and we will take the significant challenges of this year to make our company stronger. Thank you again for your time and we'll talk soon.
Ladies and gentlemen, this concludes today's conference call. Thank you for your participation you may now disconnect.
Okay.
[music].
Hum.
[music].