Q4 2022 Mediaalpha Inc Earnings Call
Good day, everyone and welcome to the media off of fourth quarter and full year 2022 earnings call. Today's call is being recorded all lines have been placed on mute to prevent any background noise and after the Speakers' remarks, there will be a question and answer session.
You would like to ask a question. During this time simply press star one on your telephone keypad. If you would like to remove yourself from the queue that is star one again.
I would now like to turn the conference over to Denise Garcia Investor Relations. Please go ahead.
Thank you Lisa I think the market close today media also issued a press release and shareholder letter announcing results for the fourth quarter and full year ended December 31, 2022. These documents are available in the investors section of our website and we will be referring to them on this call. Our discussion today will include forward looking statements about.
Our business and our outlook for future financial results, including our financial guidance for the first quarter of 2023, which are based on assumptions forecasts expectations and information currently available to management. These forward looking statements are subject to risks and uncertainties that could cause future results or events to differ materially from those reflect.
And those statements. Please refer to the company's SEC filings, including its annual report on Form 10-K, and its quarterly reports on Form 10-Q for a fuller explanation of those risks and uncertainties and the limits applicable to forward looking statements.
These forward looking statements are based on assumptions as of today February 23rd 2023, and the company undertakes no obligation to revise or update them. In addition on today's call, we will be referring to certain actual and projected financial metrics of media outlets that are presented on a non-GAAP basis. This includes adjusted EBITDA, which we pre.
In order to supplement your understanding and assessment of our financial performance non-GAAP measures should not be considered as a substitute for or superior to financial measures calculated in accordance with GAAP reconciliations.
Reconciliations of these non-GAAP measures to the most directly comparable GAAP measures are included in our press release and a shareholder letter issued today finally, I'd like to remind everyone that this call is being recorded and will be made available for replay via a link on the investors section of the company's web site at investors got me Alpha Dot Com now.
I'll turn the call over to Steve and Pat for a few introductory remarks before opening the call to your questions.
Hey, Thanks, Denise Hi, everyone welcome to our fourth quarter and full year 2022 earnings call I'd.
I'd like to make a few observations before turning the call over to Pat for his comments.
We saw strong performance in our health insurance vertical in the fourth quarter.
It was driven by a sharp year over year increase in demand for Medicare advantage carriers I know remain bullish about the long term growth opportunity with this segment.
Market for Medicare advantage is expected to continue to outpace growth of Medicare as a whole.
Seniors are increasingly shopping for Medicare advantage policies online.
With carriers prioritizing direct relationships with their members. We stop we expect health insurance companies to continue to increase their direct marketing investments, which represents tremendous long term tailwind.
Yeah.
Turning to our P&C insurance vertical.
We believe Q4 was the low point of the art.
So insurance hard market cycle.
And we're optimistic that 2023 will be a better year than 2022.
Driven by the resumption of marketing investment by one leading carrier with early to achieve rate adequacy.
We expect spend in our P&C marketplace to roughly double from Q4 to Q1, which is well above typical seasonal patterns.
As the year progresses, we expect more carriers to returned to growth mode as rate increases continued to be approved and its underwriting profitability is gradually restored.
Coupled with the heightened consumer shopping behavior that will result from the double digit pricing increases.
Believe that this has the potential to create market condition to support outsized growth coming out of this hard market.
Now taking a step back.
It is now clear that 2022 will be remembered as one of the most difficult years ever for the P&C insurance industry.
Our ability to do.
Deliver adjusted EBITDA and free cash flow.
Unprecedented market environment, not only speaks to the efficiency of our marketplace model, but also to our team and culture.
As a bootstrap company doing more with less it's always been in our DNA and I couldnt be prouder of how the entire media off the team rose to vacation this past year.
Labeling us to flatten our expense growth to meet these challenging conditions.
Looking ahead, we continue to believe PD also can be a multibillion dollar company due to the vast size of our addressable market and a highly differentiated marketplace model.
We look forward to executing on this market opportunity and delivering strong top and bottom line growth in the upcoming years.
With that I'll turn the call over to Pat before we open the call to your questions.
Thanks, Steve.
We exceeded our expectations during the fourth quarter due to better topline growth in our health vertical and favorable expenses, excluding noncash items, we remain highly disciplined in our spending and continue to identify efficiency opportunities across the business.
I'll start with our balance sheet and cash flow.
During the fourth quarter, we paid down seven $4 million of debt, bringing our cumulative debt repayments over the past three quarters to $27 1 billion.
We were pleased to generate $28 2 million of full year free cash flow. During what we believe was the bottom of the current P&C cycle and we ended the year with $14 $5 million of cash and considerable headroom relative to our debt covenants, leaving us well positioned to invest in growth coming out of the P&C hard market.
Moving to our Q1 2023 guidance, we expect PMC transaction value to nearly double compared with Q4 2022, driven by an improvement in market conditions in our P&C vertical in addition to normal seasonality.
Although we are encouraged by these early signs of recovery, we still expect PNC transaction value to be well below Q1 2022 levels.
In our health insurance vertical we expect modest year over year growth in transaction value as we continued deepening our relationships with key carriers.
For the life and other verticals, we expect transaction value to decline year over year at a similar rate as in Q4 of 2022.
As a result of deaths, we expect Q1 transaction value for the company to be between 180 million to $195 million a year over year decrease of 22% at the midpoint.
We expect revenue to range from $106 million to $116 million.
Year over year decrease of 22%.
Lastly, we expect adjusted EBITDA to be between $5 5 million to $7 5 million a year over year decrease of 9% at the midpoint.
We expect Q1, adjusted EBITDA margin to improve modestly year over year at the midpoint as we expect expenses to be roughly flat compared with Q4 of 2022.
We expect quarterly expenses for the rest of this year to remain flat to up slightly as compared with Q1.
Due to the uncertainty around the timing and slope of the P&C market recovery, we are not providing full year 2023 guidance, but we believe the inherent operating leverage in our model and our ongoing expense discipline creates the potential for strong adjusted EBITDA growth moving forward with that operator, we are ready for the first question.
Thank you once again, everyone that is star one on your telephone to ask a question. We will take our first question from Michael Graham with Canaccord.
Hey, Thank you and thanks for the information guys Big.
A big statement that Q4 is the low point for our P&C.
I know you were you were one of the ones to say that this hard market might last longer than most people expected. So I think that's it that's a good positive statement I just wanted to ask about.
The.
In past cycles, when you see like one carrier coming on strong here with rate adequacy as you outlined in your shareholder letter you know.
Can you just talk about like the fomo involved.
Other carriers then.
Sort of coming to market and.
Do you have any thoughts on like historically, what a typical time line.
Between sort of the leaders getting rate adequacy and starting to spend more versus some of the others.
Hey, Michael it's Steve.
Let's say, it's a great question and I appreciate your commentary.
Yes, I think the way that this market cycle is unfolding it is remarkably similar to past.
Hard market cycles, where there was one leading carrier who is very early to achieve rate adequacy and restore underwriting profitability.
The front running the rest of the market in a big way and leading back into growth mode and that just leaning I would say jumping.
Now what we know is that this will.
This will proceed the return of demand from a broader base of carriers.
But in terms of the overall timing.
I think thats when I think the parallels between the last hard market in this sort of market kind of stopped because really what youre going to see each carrier being on their own timeline.
Based on the rate adequacy that they've been able to achieve and how long each of the carriers will wait until these rate increases earned through.
To improve the underwriting results before they then jumped back into growth mode themselves and so the best that we can tell you is that we expect this to happen through this year with various carriers coming in at different stages of the year.
We do expect this to last into 'twenty four.
But in terms of.
The overall timing and is it six months or is it three months that that a lot.
Leading carriers going to front run the rest of the marketplace I mean, thats really hard to predict and it's really going to depend on the individual carriers and their ability to really get their rates to a good place and where they need to be in terms of their underwriting performance before they really jumped back into growth mode.
Alright, great. Thanks, a lot Steve.
We will take our next question from Cory Carpenter with Jpmorgan.
Thanks for the question.
Steve One for you and then one for Pat.
Just kind of following up on that one some of the recent carrier results have been I think it's fair to say disappointing in used car prices are actually starting to rise. This year. So just curious more recently what are you hearing in your conversations with carriers around those dynamics.
And any risk that it could lead to further delays for call. It some of the Laggards and then maybe for Pat just on the guide you mentioned seasonality and then also improved carrier spin any way to kind of parse out.
How much each of those is contributing tier ones you got thank you.
Yes sure.
So.
We're seeing the same results roll in and certainly I think I think it is carrier specific in terms of the tenor of the conversations that we're having with each carrier.
There are carriers, who have posted stronger results and you see them with a clear trajectory to restoring profitability and you can easily see those carriers coming back into the marketplace.
And three to six months.
The other carriers.
Who really are indicating that 2023 or the vast majority of 2023 will be focused on getting their pricing right.
So in terms of the.
Unexpected developments I don't know that were seeing the same thing or hearing that some carriers I think what you've seen over the last six quarters.
Rate increases really outpacing increase and loss costs, which really means that the industry is finally, taking out and.
And youre seeing other things.
California is starting to.
Crude rate increases for the first time in years.
So I think overall when you look at the broader industry.
There are some negative signals coming from carriers, but as a whole I do see the entire industry really starting to dig out.
And this is reflected in the tenor of the conversations that we're having with each of the carriers, which is far more constructive and growth oriented than.
And then they were in past years, and so we take that as a really positive sign.
And there will be some carriers that are laggards that will probably come back in to the marketplace. In the first half of 2024, but I would characterize the majority of the carriers that we're talking to as expecting a return to the marketplace sometime in 2023.
And Corey this is Pat to answer this.
The second question just on.
For our guide for Q1 for P&C in the sequential growth as compared to Q4, how much of that is seasonality versus recovery.
Yes, I think if you look at our results over the last couple of years for Q4 versus Q1, you would see that on a typical year for us for P&C. It would be up 10 or 15% at the low end 30, 30 ish percent at the high end. So you can think of that as probably being.
Seasonality just the consumer shop more in Q1 than Q4.
And the balance of it being recovery trends <unk> volume or price.
Great. Thank you guys.
Thanks Karri.
We will take our next question from Meyer Shields with <unk>.
Thanks, so much.
I guess small numerical questions be G&A expense in the quarter was higher than it had been running and.
I was hoping you could talk through.
Whether there was anything unusual in that.
Yes.
<unk>.
I would say nothing nothing overly unusual on that I think there were definitely some items that.
That fell into that.
That would be.
Excluded from adjusted EBITDA.
Sure and so.
I would say that.
We really think its kind of managing the business to the adjusted EBITDA number in the G&A number kind of as we.
It feeds into adjusted EBITDA has been pretty darn consistent over the last couple of few quarters.
Okay. No. That's helpful. I guess on a related note pet.
Mentioned in your prepared remarks ramping up investments and I was hoping you could talk through sort of the timeline of.
Of that debt.
Peyton tied to P&C carrier space.
Yes, so on that on that question Meyer would say that we have been managing managing the business pretty tightly through the hard market and so I think if you were to look back at where we were on April 1st after we closed the CHP acquisition, we've got fewer people working at the company now.
And.
I think we're in a spot where we feel like we're adequately resource now I think as we get further into the hard market at Ics.
Needing a bit more help on some of the account teams.
But I see us.
Investing to unlock some capacity and some other teams yes.
Good.
But don't think thats eminent in the next quarter or two and as we think about the investment profile of the business over the next couple of years, our view is that.
We are very focused on running efficiently Steve mentioned in his prepared comments, we're a bootstrap company inefficiency is in our DNA and we don't plan on losing that focus over time.
Okay, perfect and if I can throw in one more question.
You mentioned I think Steve that the health insurance brokers were pulling back and I think that's very consistent with what we're seeing broadly do you have any sense in conversations with them, whether that's like a one two year phenomenon or this is the new reality for them.
That's a great question.
I will say that.
Right now it's too early to tell.
One encouraging sign that we saw in the last enrollment period was that click spend from the broker segment held up reasonably well.
And the reason that we see that as an encouraging sign is that that's used to support their own assisted online enrollment channel, which we increasingly see ads.
The future shopping experience for Medicare advantage and so so that was a really encouraging sign.
I think some of the early results that Youre seeing have also been encouraging from the broker segment.
But in terms of you know what.
Where they are in terms of working through their LTV and profitability issues I think it's a little bit too early to tell whether that's a one year or a two year thing.
But what we do expect over the long term that the demand mix within our marketplace, particularly within a Medicare marketplace will be a pretty healthy blend of direct carrier spend which we see as the long term secular trend as we saw with the auto insurance space.
And a good mix of broker demand as well, it's going to be that's what the distribution channel at this marketplace is going to look like going forward and we think that that's going to be reflected in our marketplace as well yes.
Meyer. This is Pat again, I would just wanted to follow up on your G&A question.
So the big driver of it being down within our being up was in Q2 and Q3, we had some noncash write offs of an earn out related to an acquisition and so they were noncash items and Thats why.
It appears as if it was up but on a cash basis and cost of operating the business. It was.
It was pretty darn consistent.
Got it perfect. Thank you so much.
Sure. Thanks Mark.
We will take our next question from Andrew <unk> with credit Suisse.
Hey, good evening.
Follow up on the last questions.
So.
In health the trend with the brokers.
We cover a few companies that have these med advantage brokers and <unk>.
They are hurting a lot on these customer acquisition cost is that is that the spot it's really.
Just just making it too difficult for them is it customer acquisition costs is it getting your bid.
When they have to bid on something in your channel is it just too expensive for them, what's kind of holding them back from being more impactful.
Yes I.
I think that's a great question.
So I don't think it's related to customer acquisition cost per se.
I think the some of the issues that they've been having.
It's really getting a better grasp of what the expected lifetime value.
As of the policies that they were requiring because at the end of the day.
And when you're in performance marketing and in growth Mark getting what you need to do is understand the expected value of a policy that yourself and then match that to that customer acquisition cost. So that you could have a target target return on ad spend.
And so if you don't have a granular understanding of really exactly duration of the policy and what the expected value is that youre going to extract or that consumer that you are selling a policy to venue.
And then youre going to have a hard time really dialing in the customer acquisition costs. So that so that your ROI positive with your AD spend and so I think it's really the fact that the brokers are getting a better handle unexpected.
LTV.
How these differ based on different marketing channels that they have.
And then leveraging the granular controls in the programmatic controls that you would have in the marketplace like ours to really be able to match. What you are willing to pay to acquire that consumer with what you expect that consumer the value that you can expect to gain from that consumer and it is really that matching.
It's what they need to get right.
And so I think as they get a better understanding of really what the expected retention rates are up their consumers and how these different based on different marketing channels.
Fully expect them to be able to come back into the market and leverage our programmatic channel like ours to match, what they are willing to pay what that expected value and so it is related to customer acquisition costs in some ways, but it's really about the ability to match that to the expected LTV and I think thats really the not that theyre trying to crack.
Okay, Yeah that is a tough nut to crack and thanks for that thorough explanation, Steve and then and then maybe just digging a little deeper on the Piceance.
P&C transaction value.
Sure.
As you were talking about the players most of them coming back in 2023.
How about on a state by state basis do you see some companies that.
May be disinclined to be in certain states say those on the coast.
Versus.
Some other states I mean are you seeing some pick up that's mixed among carriers.
Maybe you could talk a little bit about that.
Hey, good I think Thats a great question I think.
I think in a normal market environment, that's what you would see.
There are some states in which profitability has challenged our pullback in marketing in those states and really go heavy in states, where they actually have established profitability and have a high confidence in their rates.
And what you would expect to see coming out of a market. Like this is that carriers to start to lean back in those states, where they have a high degree of confidence in the rates rates that they've achieved now I think one of the one of the things that we're seeing in this marketplace that may be a little different than what we saw in the last hard market cycle is that.
Is that were seeing less of that kind of behavior.
And the indications that we're getting from carriers is that.
Their profitability has been challenged severely for the last couple of years.
And that when they come back they expect to come back in full and they will come back as the rates start to earn through and actually impact their underwriting profitability.
And that they're not going to front run rate.
Rate adequacy.
Well full rate adequacy by Cherry picking certain states, where they already have rate increases to start to gradually get back into the marketplace and so I think what we're going to expect to see as the year progresses.
Is that carriers will really need to establish broader profitability in order to then come back into the marketplace as a whole as opposed to starting to ease back into the market in those states, where they feel good about their rates.
That makes sense.
Yes, it makes a lot of sense, Steve Thanks, so much.
Okay.
Yes.
Okay.
Our next question comes from Daniel <unk> with Citi.
Hi, guys. Thanks for taking the question congrats on the quarter.
Let's stick with the health segment here so.
There's been some chatter out there in the Medicare advantage market about potential slowdown given the less generous advance notice for for plan.
And then your 24, obviously a lot of is up in the air but I'm curious if you're hearing anything from your partners.
That.
And if there are any levers you can pull if you see a macro slowdown in Medicare advantage.
Okay.
Yes.
I think that's a great question I mean I think it.
The short answer is it's too early to tell.
These proposed rates I think came out fairly recently I think a couple of weeks ago and they won't be finalized until April and so as you know that there's a healthy debate with with a large health insurance companies and CMS done really the adequacy of the rate increases that they can expect for 2024.
We've been in dialogue with our partners about that and I think universally I think the sentiment is that it's really too early to tell.
Yes, Okay, and you mentioned that.
That health growth, it's accretive to contribution margin.
In your shareholder letter I was wondering if you could quantify how much better health contribution is in the rest of the business and what are some of the drivers of that accretion.
Yes.
I think in our financials I think you can kind of tease out tease out some of those numbers, but the biggest the big difference I would say is that.
On the health side, we have.
Much higher.
The open marketplace mix, and we have effectively a higher take rate on the open marketplace side, so revenue equals transaction value and we have.
That contribution as a percentage of transaction value as COO.
Almost three X the rate of the private marketplace and so the mix is more favorable within that within the health side and so the take rate is quite a bit higher and so that's one of the reasons why Q4 is our biggest quarter because it's our biggest revenue quarter and it makes us down.
Yes makes sense and then just.
Housekeeping question, there was a big increase in accounts receivable this quarter, it's related but I am curious if you can talk about what drove that and you're a little bit low on cash now obviously, you're very efficient with that but do you anticipate you'll have to draw on your revolver.
And kind of what your working capital needs are in 'twenty three.
Yes, and on the IR side I think that.
Q4 is a big quarter for us on the health side, and so we have a number of folks that.
<unk> Big in the final days of AEP in OE.
So those were.
Built bell.
<unk> at the end of the month and so we had.
Some AAR from that we've had since no collection difficulties.
From a revolver standpoint.
Just kind of walk through the chronology of debt, we drew $25 million on it on April 1st to fund an acquisition.
Paid off $20 million of that.
Over the course of 2022, we still have $5 million outstanding on it and we do not anticipate needing to draw on that going forward.
Got it thank you.
Thanks, Dan.
We will take our next question from Mike Zaremski with BMO.
Hey, great good evening.
Moving back to the.
Property and casualty side of the business curious are you are you seeing your revenues more concentrated than in the past with with us.
A smaller subset of do you expect that to continue in the near term and if so just curious.
Does that mean that.
Transaction values per lead.
We'll remain a bit depressed because we you would need more just participants meaningful participants in the marketplace to come to come back in to kind of lift lift.
Lift out transaction value.
Levels as well.
Yes, and Mike This is Pat I can take that one so.
On the on the concentration on the P&C side it has become.
More concentrated in Q1 versus Q4 and that is caused by one carrier pivot.
Pivoting to growth mode, and spending more on that so the <unk>.
One spender in Q4 was a lower percentage than they were and then they will be in Q1.
Will that trend continue.
I'd say it will continue for a while until other carriers start to come back in a big way and then we'd expect to see the concentration start to decline.
And the real question is one of timing, which is when do other carriers start to come back in a big way, but when that happens we.
We have a high degree of confidence that the debt.
That the concentration will start to be a bit more dispersed.
The second part of your question regarding transaction value per lead.
The thing can say is that it is up meaningfully in Q1 versus Q4.
And I think that.
The Big reason for that is there are two big reasons one is.
One advertiser is generally more active bidding more and secondly, as coverage, which is some states may have been offer with very low bits and <unk> taken those up pretty considerably or turned it back on which has had a positive impact to the overall marketplace.
And I think the carriers in our marketplace I think.
<unk> because of the marketplace model and because of the slide partnerships that we have.
That.
Yes.
As pricing goes up they will get more volume.
Even if they're the highest given better for giving consumer segment.
And our past experience has been that yes, absolutely a competitive market environment.
It will drive up pricing.
And we expect to see those competitive dynamics revert back to a.
A more normalized.
Situation as the year progresses.
But it's been also that our experienced that you only need a small number of major carriers to be back in place to really replicate the competitive dynamics you need.
To start to get every advertiser really paying based on their expected return on AD spend independent of competitive considerations.
Got it that's helpful.
Second question is sticking with P&C just curious if any.
Any changes in the marketplace in terms of home insurance and bundling or is that.
That's still obviously a long term.
Growth driver I'm, just curious if anything's changing on that front.
I think.
I think this is more of a <unk>.
Speculation that youre seeing in the marketplace more than anything else that we're seeing in our marketplace.
Is that.
Because these pricing increases.
That consumers will be faced with.
Our pretty unprecedented I mean, these pricing increases are the highest that the industry has seen in about 40 years.
And because of the magnitude of these increases in the auto insurance segment.
That's the Bundlers, which are often referred to as the Robinsons.
Which is a very profitable and desirable segment for the entire industry.
May be up for grabs because people who are normally bundling their auto and home policies and willing to stick those together are wanting to keep those two together.
They actually break those apart and shop for separate auto insurance carrier because of the magnitude of the rate increases that they're seeing and so I think that will be a really interesting dynamic right.
See unfold because that Robinson segment is typically one that doesn't shop around very much.
Which is one of the reasons that they are so attractive to P&C carriers.
And if the pricing increases that we're seeing now which really again are unprecedented really starts to put this segment back into the marketplace to shop for auto insurance rates and and they show a willingness to really break apart that auto home bundle.
I think that will really lead to a very interesting dynamic.
And some pricing increases as its very higher highly desirable consumer segment really comes into play for the first time.
Interesting I appreciate the color.
Sure.
Yes.
And thank you, ladies and gentlemen that does conclude our call. Thank you for your participation and you may now disconnect.
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