MediaAlpha Inc. Q1 2023 Earnings Call
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Hello, My name is Chris and I'll be your conference operator today at this time I'd like to welcome everyone to the media also Q1 2023 earnings call.
All lines have been placed on mute to prevent any background noise.
After the Speakers' remarks, there'll be a question and answer session.
If you'd like to ask a question. During this time simply press Star then the number one on your telephone keypad.
To withdraw your question. Please press star one again.
Thank you Denise Garcia Investor Relations you may begin.
Thank you Chris after the market closed today media also issued a press release and shareholder letter announcing results for the first quarter ended March 31 2023.
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 second 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 reflected in 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.
The forward looking statements.
These forward looking statements are based on assumptions as of today May four 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 Alpha that are presented on a non-GAAP basis, including adjusted EBITDA, which we present it.
In order to supplement your understanding and assessment of our financial performance non-GAAP measures should not be considered as a substitute for or superior to financial measures calculated in accordance with GAAP.
Reconciliations of these non-GAAP measures to the most directly comparable GAAP measures are included in our press release and shareholder letter issued today finally, I'd like to remind everyone that this call is being recorded and will be made available for replay via a link on the investors section of the Companys website at investors Dot media outlet Dot Com now I will turn the call.
Over to Steve and Pat for a few introductory remarks before opening the call to your host.
Okay. Thanks, Denise Hi, everyone welcome to our first quarter earnings call.
Like to make a few observations before turning the call over to our CFO Pat Barrett.
Got it.
As we discussed in the shareholder letter after a strong start to the year, our largest P&C carrier partner sharply pulled back to the marketing investment in light of renewed profitability concerns.
As a result, we expect the inevitable market recovery.
P&C vertical be pushed back several quarters relative to our prior expectation.
We responded to this unexpected change in our near term outlook by making the difficult, but necessary decision to reduce our workforce by 16%.
As a result, we're guiding to a positive adjusted EBITDA in Q2.
Despite an expected 40% to 50% year over year reduction in P&C transaction value.
And the typical most solid in our health insurance vertical.
While the magnitude and duration of the TMC hard market cycle has been frustrating for us both at the management team and as significant shareholders.
We remain confident in the fundamental competitive advantages of a marketplace model and our ability to capture an increasing share of the multibillion dollar opportunity across all of our insurance vertical.
We will emerge from the current market downturn with a stronger and more efficient organization, which will in turn enable us to generate significant operating leverage as our top line results will cover.
With that I'll turn the call over to Pat.
Thanks, Steve.
We delivered a solid first quarter with results above the midpoint of our guidance ranges across all metrics. This.
This outperformance was driven by 108% quarter over quarter transaction value growth in our P&C vertical which was slightly ahead of the roughly 100% sequential growth expectation, we discussed on last quarter's call.
Moving to our Q2 guidance as Steve mentioned earlier, we expect PNC transaction value declined 40% to 50% year over year.
Our health insurance vertical we expect transaction value to remain roughly flat year over year and in our life in other verticals, we expect transaction value to decline at a similar rate to Q1.
As a result, we expect Q2 transaction value to be between $107 million and $122 million a year over year decrease of 37% at the midpoint.
We expect revenue to be between $74 million and $84 million a year over year decrease of 24% at the midpoint.
Lastly, we expect adjusted EBITDA to be between 500000 at $2 5 million a year over year decrease of 67% at the midpoint.
We expect our recently initiated workforce reduction to result in approximately $6 million annual cash expense savings.
We are therefore projecting operating expenses after adjusted EBITDA add backs to be approximately $1 5 million lower than Q1 levels and to remain at these levels in Q3.
I would now like to touch on a couple of housekeeping items related to our adjusted EBITDA add backs first we expect to add back roughly one 3 million of cash severance in Q2 related to our workforce reduction.
Second in Q1, we added back 300000 of legal fees related to the ongoing FTC inquiry and we expect to incur similar slightly higher amounts for the next few quarters.
We believe we have been and remain fully compliant with all laws and regulations and we are cooperating with the FTC as they continue their inquiry.
We are adding back both of these items as we believe they do not reflect the ongoing operating performance of the business.
Turning to the balance sheet, we are focused on reducing net debt and expect to continue to be in compliance with our debt covenants, we generated positive cash flow from operations in Q1, and due to our transaction based revenue model and low capital requirements. We expect cash flows to improve sharply and in line with adjusted EBITDA coming out of the P&C.
The hard market cycle.
With that operator, we are ready for the first question.
Thank you as a reminder, if you'd like to ask a question. Please press Star then one on your telephone keypad.
The first question is from Michael Graham with Canaccord. Your line is open.
Thanks, and thanks for the color on the quarter guys, maybe just reflecting the shareholder letter you talked about.
We had a major carrier returning to spend and then in the last days of March sort of saw higher loss ratios can you just maybe.
Go a layer deeper in terms of like what do you think is going on at the carrier level.
Just any more color you can share on sort of like what you see is the cadence within P&C as we move throughout the rest of the year here.
Yeah, Hey, Michael this is Steve.
So I'll take that question.
So I think that you know.
Really the pullback.
By this major carrier, who believe that they had achieved rate adequacy.
I think is an indication of I think how unusual this hard market cycle.
And how uncertain the current underwriting environment remains and so.
I think it's great.
Difficult to foresee.
Christine I can predict exactly when they're going to return to the marketplace I think based on their comments and our discussions with them I think our best estimate is that they'll come back into the marketplace.
Two to three quarters.
From now.
<unk> get more comfortable with what their profitability looks like for the remainder of the year.
And so really I think what we're seeing is yes.
The magnitude of this hard market cycle, and the lingering inflationary pressures that insurance carriers continue to face.
And so I think overall what that means for the P&C market recovery is that it's very likely going to be delayed a few quarters from what our original expectations were.
But.
I would like to remind everyone that the Q1 results that we had.
Hum.
And the growth investments that we saw from that carrier, which were immediately back to normal historical levels right. When they felt confident about their profitability.
As a sign that when the carriers get comfortable with where the rates are.
And the stability of the underwriting environment that these growth investments, namely investments into our marketplace to acquire new customers and policies will.
We will return quickly and can return very sharply and when that's matched with the heightened shopping behavior of consumers.
So in Q1 exactly what happened back half of your question.
Posted record policy growth numbers during Q1.
And so when the market does turn Andy's advertising budget to come back.
We expect to see a sudden influx of investment from these carriers.
Which will then meet the heightened shopping that.
That we see from consumers at their rates have gone up 15, 2025%.
Okay. Thanks Thats helpful.
Ask a follow up on the.
When you when you think about on the health side.
When you think about the Medicare products and has there been any structural change there there were some there was some chatter during the quarter regarding.
Regulatory changes that would make it more difficult for you.
Bidding activity to happen.
Might end up being a factor for businesses like yours as we get into open enrollment later in the year can you just maybe talk about are you seeing any changes.
On that front.
Hey, Michael This is Steve again, I think what Youre, what youre, referring to are some of the new CMS regulation.
Around how you can market Medicare advantage policies.
So there were there were final rules were released I think in April of this year.
Even though the final rules have been released it's a little too early to say exactly what the impact is going to be.
In our marketplace and Thats because there is some interpretation that's needed from these rules, particularly as to figure out exactly how thats going to apply into an online advertising environment and so at this point, we're working really closely with all of our major partners and most notably our major carrier partners to figure out exactly.
These rules will be interpreted and applied to the online marketing context.
With that said I think just seeing these rules and based on our early discussions with these carriers.
Optimistic about the limited impact that we expect it to have.
Coming enrollment period.
What foreseeable is that there may be some downward pressure in pricing for outbound data leads namely leads that are.
Purchased by brokers and carriers start to call out on consumers, who are interested in Medicare depending on the interpretation of a 48 hour a waiting period requirement and whether thats set to actually apply to these data leads and so so notwithstanding that we don't expect a lot of impact on the two primary.
I'd product that we have in our marketplace, which are inbound calls and clicks and in fact, if we do see some downward pressure and lower demand for these data leads we could very foreseeable see increased pricing for inbound calls clicks, which would be actually overall, a net positive for our marketplace and this is Pat I'll just add one.
Thinking of what Steve said and he hinted at it but the outbound data leads are a very very small percentage of our overall managed care business.
Okay, great. Thank you guys.
Thanks, Michael.
The next question is from Daniel <unk> with Citi. Your line is open.
Hi, guys. Thanks for taking the question I wanted to kind of stick with that line of questioning on on a 48 hour ROA in Medicare advantage. So are you, saying, it's your understanding that the 48 hour rule will not apply to.
Incoming.
It's just the outbound calls that it will yes.
Oh, Hey, Daniel sorry to interrupt you.
Yes.
Our interpretation of that is the interpretation that we're that we're getting from our partners again, including.
Including our health insurance partners and so.
Something that we're working through and we're trying to get clarity on but initially that is the interpretation that most in our space have taken.
Got it okay.
And I guess.
If it were to apply to both inbound and outbound calls.
I wonder how much flexibility you have right now to kind of turn off the Medicare advantage or not necessarily turned off but transition away from the Medicare advantage product and into other products, which might not be subject to the rule like Medicare supplement and ancillary products and then obviously.
You have an under 65.
Segment, which may do well amid potential redetermination this year Tim.
Just curious how youre thinking about the potential shift away from Medicare advantage to those rules be more onerous than originally thought.
Yes.
Honestly I don't know that Theres, a lot of controversy around whether or not the 48 hour waiting period requirement would apply to inbound we haven't spoken to it a single health insurance carrier, who is going to interpret it that way and ultimately in terms of how these tools are initially interpret it and how the whole industry.
We will be able to move forward.
What's under these new requirement will be based on exactly what the major carriers interpretations are.
And so with that said.
If there is an interpretation that goes against what our end industries expectations are I mean, certainly we have a strong presence in under 65, we do have some partners.
Who focused on Medicare.
Who are worried about the potential impact of these new marketing regulations on on data lead.
And so some of those partners are starting to shift to other products like med sup as well as under 65 health insurance and so I think the whole space in Austin, our marketplace, we will be able to pivot to other areas that won't be impacted by these regulations, but again I think that in terms of how the rules new marketing rules reinterpreted.
I think there is a very very low likelihood that that weighting requirement will be interpreted to apply to inbound calls yes.
Dan This is Pat the other thing I would add to that is that.
Sure.
A healthy chunk of our overall Medicare business is clicks as well and I think.
There is really no rational interpretation you can take.
Any of the regulations that way.
Really changed.
The ability to bind policies.
FERC clicks in a timely manner. So I think our view is that portion of the business.
<unk> performed well over time as more consumers go online and particularly older consumers get comfortable going online and we believe that's a trend that will continue in the years to come.
Got it and last one for you.
The regulatory issue a bit broader in scope, but two months ago. The SEC proposed rules that would effectively make your supply partners more clearly and conspicuously.
Our display.
How they're going to use the data that they collect from potential beneficiaries I'm curious.
One do you know what I'm, referring to here and I am curious what impact if any.
<unk> rules proposed rules may have should they be finalized in there correct for.
Hey, Daniel.
I don't know that I know the specific rules that you're referring to.
But in terms of just the disclosures that needs to be made by by our publishers in our owned and operated sites in terms of what will how data will be used.
Whether or not the current regulations are clear enough I mean, we certainly strive to make that very clear to all consumers coming to the site.
I do think that any new regulations that come about making those disclosures even clear.
I don't have too many concerns about the ability of.
The participants in our marketplace and our owned and operated team to be able to to make those clear disclosures.
While maintaining conversion rates and so so.
So again, not knowing exactly what you're referring to and the magnitude of the changes that are required.
That's something that worries us a lot and lot.
Tend to happen with.
With some regularity, particularly within the lead generation space.
Got it very helpful. Thank you sure.
The next question is from Ben Hendrix with RBC capital markets. Your line is open.
Okay. Thank you very much Hey, you really answered my question, it's all about the 48 hour rule, but just.
No one of your partners Ehealth talked about potential for further rational rationalization in the market and just wondering if you had any thought any early thoughts kind of different thoughts on how this might impact E brokers versus the carrier partners.
And if theres anything to apply differently to the two groups.
Okay.
Yes, I think that okay. So.
Again I think.
If the 48 hour waiting rule rating requirement waiting period requirements sorry.
It seemed to apply to third party leads better purchase.
That would have a disproportionate impact on the broker universe, because that broker universe is the one.
Carriers that is who.
Who tend to buy more third party lead.
Their call center agents to dialogue on.
I think with that said.
<unk>.
With a lot of the cleanup that happened with the E brokers and looking at the lifetime value of the policies that they are selling.
One of the channels that day.
They cut where these third party leads and so I think that there will be some impact on the broker universe is certainly greater than that on carriers carriers typically don't buy leads to dialogue on.
But I think even that impact based on how much they cut back on these types of marketing channels I think will be relatively limited for the brokers as well, yes and no.
I'd just add probably two things to that which is as a reminder, and I think we've talked about this on prior calls that we have a healthy mix.
Demand from both carriers and brokers in the carrier piece has been.
Growing at a faster clip pretty consistently over the last three five years and Thats a trend we would bet on a continuum.
And the second thing to say that brokers do clearly meet a consumer need and Thats. When you get into comparison shopping across plants, where you go Hey, I don't know if I want carrier agg or carrier Bahir carrier.
So I think.
There are a lot of the prognosticators that have different views on what the future looks like for brokers, but they are and we believe we will continue to remain an important part of the overall ecosystem.
Thank you very much.
Sure Ben.
As a reminder, the star one if you'd like to ask a question. The next question is from <unk>. Your line is open.
Hey, guys. This is Tommy joined that K BW, thanks for taking our questions here.
Looking on the on the P&C insurance side can you guys give us your latest thoughts about how the media alpha fits competitively against some of the other lead generation and customer acquisition offerings from other companies do.
Do you think that your platform is in any way better positioned to weather this downturn or to better capitalize on the eventual rebound in advertising budgets.
Yes, thanks for that question.
I think competitively.
We set it.
Is that vis vis our competitors or most of our competitors.
We are a marketplace model and that's really what differentiates us, but we have hundreds of supply partners.
Who we connect with insurance carriers.
And we connect them with insurance carriers, primarily for the.
National advertising budgets that they have and so these are the <unk>.
Other companies that are more strict lead generators.
While they rely on these national click budgets from carriers.
We also rely on lead budgets that agents have.
As we've mentioned before these lead budgets from agent tends to hold up relatively well during these hard market periods and so in terms of just the overall downturn and.
And and.
I guess.
The decline of National carrier budgets, we certainly we've been more impacted by that.
And some of our competitors have been and so I think with that said I think one of the things that we've talked about in the past is that when the recovery happens.
It'll happen with with the rebound in return of these budgets from carriers.
Not necessarily through additional spend from agents for Lee I mean that stays relatively constant. So it doesn't go down very hard market periods, but it also doesn't go up very much in soft market periods and so our focus on.
It remains really with working with these carriers to be ready for the day. When these budgets return and we certainly expect to outgrow our competition right with our marketplace model because thats also demonstrated its ability to really scale up very quickly right.
It's a network of hundreds of third party supply partners.
And so we fully expect coming out of this hard market to outgrow our competition and Thats exactly what happened coming out of the last hard market cycle as well yes.
I would just add one thing to that which is the key.
Q1, Q1 numbers I think gives you a kind of a sneak peek of what a recovery.
What the ultimate recovery could look like and.
We grew transaction value of P&C, 108% sequentially from Q4 into Q1 and that was.
Driven almost totally by just one major carrier.
Leaning back into marketing and.
I think and it's not a stretch to say.
When the carriers get to kind.
Kind of underwriting results that they're comfortable with which I would probably terminus breakeven or profitable, we would expect them to lean in on marketing.
Would expect to see.
Significant upticks in all of our financial metrics with probably just proportionate growth in EBITDA and I think Q1 transaction value was down.
About 20% year over year and EBITDA was up.
And so we kind of leaned up the cost structure and we're ready to take advantage when that happens.
Thanks, and along the same lines.
Obviously always tough to do a workforce reduction do you guys think of that reduction as more permanent or something that you would pay.
Perhaps need to.
Re hire some capacity to the extent there is a rebound sooner than expected.
Yes, thanks for that question.
Yes, I mean I think.
Bill.
Hard to do a reduction, but certainly we focus primarily on roles that werent revenue generating and we were careful to do two things one is to make sure that we were able to continue to invest in key areas, such as our health insurance business, and most notably our Medicare products or Medicare sub vertical.
And we're also very careful to make sure that we had our core P&C capabilities intact.
So that we can continue to work with carriers and be ready for when the rebound does happen. So that we can work with them on their growth plans when the market does turn and three quarters or so and so.
In terms of the roles that were cut and whether or not we need to replace them. It's certainly I don't think that thats something that we will need to do in the near term.
Some of the selected roles I mean, certainly it's foreseeable that a nine month time of 12 months time that we'll start to look for people to fill those roles again, as we think a little bit more towards the long term.
But I think generally speaking I think we can certainly grow back with the P&C market with the current team that we have.
Our current team is continuing to invest in all the important areas that we have.
And so so in terms of the near and mid term.
We don't see any need to really replace any specific Roe, but as we grow we'll it'll be dynamic.
We will start to hire again when the situation improves.
Makes sense I appreciate the answers.
Yes. Thanks.
We have no further questions at this time and that will conclude today's conference call. Thank you everyone for participating you may now disconnect.
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