Q2 2023 EverQuote Inc Earnings Call
Ladies and gentlemen, good afternoon. My name is Abby and I will be your conference operator today.
At this time I would like to welcome everyone to the ever quote second quarter 2023 earnings conference call.
Today's conference is being recorded and 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 that time simply press. The star key followed by the number one on your telephone keypad.
If you would like to withdraw your question Press Star one a second time.
Thank you and I will now turn the conference over to Brent Lee Johnson Investor Relations you may begin.
Thank you good afternoon, and welcome to Evercore second quarter 2023 earnings call well be discussing the results announced in our press release issued today after the market close with me on the call. This afternoon is Jamie Vandal Everglades, Chief Executive Officer, and Joseph standby Chief financial.
Officer I've ever club during the call, we'll make statements related to our business that may be considered forward looking statements under federal Securities law, including statements concerning our financial guidance, but the third quarter 2023 our growth strategy and our plans to execute on our growth strategy key initiatives, including our direct to consumer agency investments in the business the growth levers, we expect to do.
Drive our business, our ability to maintain existing and acquire new customers our expectations regarding recovery of the auto insurance industry and other statements regarding our plans and prospects forward looking statements maybe identified with words and phrases such as we expect we believe we intend we anticipate we plan may upcoming and similar words and phrases. These C.
Reflect our views only as of today and should not be considered our views as of any subsequent date, we specifically disclaim any obligation to update or revise these forward looking statements except as required by law.
We're looking statements are not promises or guarantees of future performance and are subject to a variety of risks and uncertainties that could cause the actual results to differ materially from our expectations for a discussion of material risks and other important factors that could cause our actual results to differ materially from our expectations. Please refer to those contained under the heading risk factors in our most recent quarterly report on Form 10-Q.
Our annual report on Form 10-K is on file with the Securities and Exchange Commission and available on the Investor Relations section of our website at Investor Dot Evercore Dot com and on the SEC's website at SEC Gov. Finally during the course of today's call will refer to certain non-GAAP financial measures, which we believe are helpful to investors a reconciliation.
A GAAP to non-GAAP measures was included in the press release issued after the close of market today, which is available on the Investor Relations section of our website at investors don't ever quote dot com and with that I'll turn it over to Jamie.
Thank you Brenda and thank you all for joining us today in.
In the second quarter, Evercore reported revenue of $68 million variable marketing margin or Vietnam of $24 $7 million and adjusted EBITDA of negative $2 $1 million, we achieved a record high V. M M. As a percentage of revenue of 36, 3%.
Our revenue results fell below our expectations largely driven by two factors that developed in the latter half of the second quarter. That's auto insurance carriers continue to wrestle with significant profitability challenges.
First our major carrier partner reduced its budget multiple times over the quarter, resulting in their lowest levels of spend in our marketplace. Since the auto insurance downturn began in late summer of 2021.
Second we experienced a substantial contraction in agent demand following reductions in carrier marketing subsidies for local agents.
We exited the quarter with auto demand at a new low point, which we now expect to persist into the back half of the year.
In response to this renewed pullback and continued uncertainty about the timing of a more sustainable recovery.
We initiated a restructuring of the business in June .
The restructuring included a large reduction in force and exit of our health insurance vertical and its associated direct to consumer agency operations.
The scale down of our <unk> operations, serving the auto and home verticals.
We also took actions to strengthen our balance sheet, which Joseph will cover in more detail.
The combination of actions, we have taken puts ever put in a stronger position to weather a further prolonged period of volatility in the auto insurance market.
While the restructuring was catalyzed by the lower for longer auto insurance outlook specific decisions. We made were informed by a deeper assessment of our overall strategy.
We are also restoring greater focus on our most differentiated assets to deliver deeper value to our customers.
These assets include our insurance shopping traffic scale in technology, our local agent network and our proprietary data and associated data science and machine learning capabilities, which we expect to take on greater significance as we continue to identify AI applications for insurance distribution.
And in doing so we reset our cost structure to enable significant adjusted EBITDA expansion and cash generation as the auto insurance market recovers.
While we are proud of the health and Medicare business, we built over the last three years, our decision to exit the vertical reflects our renewed commitment to a greater focus.
As a more people and capital intensive operation these verticals operated with materially lower capital efficiency than our other verticals.
In addition, the markets constant changing regulatory environment gave us lower conviction and our ability to win.
As a result of exiting health and Medicare our teams will have the resources to go deeper in our remaining vertical markets with a heavier focus on our P&C marketplace.
We believe the P&C market will evolve in the coming years as a result of fast changing underwriting dynamics and that evercore is well positioned to partner with carriers and local agents and adapting.
In P&C, we have the industry's largest local agent network and sales operation with an installed base of over 7000, local agents to whom we can deliver more and better products to support their growth.
As the largest online source of P&C insurance shopping traffic, we have a wealth of insurance distribution data.
We have been steadfast in applying this data using machine learning to make our P&C operation more effective and efficient and now with a sharper focus we believe we can accelerate the rate at which we deploy machine learning and artificial intelligence across aspects of our business ranging from operational efficiency to traffic building.
Our vision remains unchanged to become the largest online source of insurance policies using data technology as knowledgeable advisers to make insurance simpler more affordable and more personalized.
While our path to get there is evolving I am confident that greater focus and a more capital efficient and streamlined operation will accelerate our ability to provide compelling value to our consumers insurance provider partners and shareholders.
Our team has demonstrated remarkable resilience and adaptability to fast changing and challenging market conditions.
And I have no doubt that this strengthening of our team will pay dividends and enable us to emerge with incredible success when the market recovers.
Before I turn the call over to Joseph I wanted to thank John Wagner for his nine years of dedication to Evercore.
I am also excited to welcome Joseph Sanborn to his first Evercore earnings call as our new Chief Financial Officer.
Joseph has been working closely with our executive team and me for the past four years, serving in a variety of finance and strategy roles.
He possesses deep operational experience, then and understanding of our business and brings extensive strategic finance and capital markets experience to the role Joseph Please go ahead.
Thank you Jamie for the warm introduction good afternoon, everyone.
During my nearly four years with ever quote I've had the pleasure of meeting many of our investors as I step into the CFO role I look forward to continuing our dialogue and sharing with you. The progress we are making at Evercore.
I will start by discussing our financial results for the second quarter and update you on recent actions taken since the end of Q2 before providing guidance for the third quarter.
Our total revenue for the second quarter of 68 million represent a decline of 33% year over year and was lower than our previous guidance range for Q2 revenue.
Despite the revenue shortfall, we delivered variable marketing margin or <unk> and adjusted EBITDA above the midpoint of our guidance as our operating teams continue to execute well and deeply challenging environment.
Q2 revenue from our auto insurance vertical decreased 39% year over year to $49 7 million a sequential decline of 45% from Q1.
The second quarter is typically a seasonally weaker period in our auto insurance vertical. In addition substantially weakened demand in Q2 from our largest carrier customer followed a very strong start to the year.
Our third party or a local agent network was more resilient representing 50% of total revenues in Q2, but it also experienced a year over year revenue decline, primarily driven by another one of our large carrier partners, reducing their agent subsidies within the quarter.
As a result, we exited the quarter with auto revenues at a new low point since the downturn began in late summer 2021.
Revenue from our other insurance verticals, which includes home and renters life and health insurance verticals decreased 11% year over year to $18 2 million in the second quarter and represented 27% of revenue.
The decline in revenue was mostly attributable to our health insurance vertical which he made the strategic decision to exit within the quarter and which I will cover in more detail later in my remarks, excluding health. The other insurance verticals grew quarter over quarter led by the home vertical which continues to make steady progress.
<unk> was $24 7 million for the second quarter, despite lower monetization of <unk> as a percentage of revenue was a record 36, 3% for the quarter driven by three main factors.
First our traffic teams were able to quickly drive down customer acquisition costs in a volatile environment.
We benefited from a shift in revenue mix towards our local agent network, which often has a higher <unk> percentage and third we experienced double digit growth in traffic volume as consumers continue to face large premium increases from auto insurance carriers, receiving regulatory approvals for rate hikes.
In short our engine is working.
We're also being disciplined in managing expenses and took multiple actions within the quarter to restructure our operations to reflect the current conditions of the market and which in aggregate resulted in the elimination of approximately 30% of positions across our company, including open requisitions.
On June 16th we announced plans to implement a structural reduction of over 15% and our non marketing operating expenses, excluding noncash items.
As part of the strategic review that identified these savings they made the decision to exit the health insurance vertical including the associated direct to consumer agency our DTC.
Our decision to exit the vertical reflects a return to a relatively more asset light model and renewed commitment to investing in areas, where we believe we can build a long term competitive moat.
Also as we announced today, we sold select assets of our former health insurance vertical to my plan to advocate for approximately $13 2 million in cash subject to customary post closing adjustment and buyer's assumption of certain related liabilities that transaction closed on August one.
Included in the sale with the $32 2 million Commission receivable as of June 32023, which we expected to be collected over the next seven years.
We expect to take a significant noncash charge in Q3 related to the sale of these assets.
For context, the health insurance vertical represented less than 10% of our revenue in fiscal year 2022.
If we had continued to operate the health insurance vertical we expected to generate incremental adjusted EBITDA in the coming fourth quarter during the annual open enrollment period.
That performance, however would have come at the cost of significant cash consumption in the current year.
Given that all traffic and selling cost on policy sales are incurred in the current period, but the majority of commissions from such sales or received over several years.
In addition to the agent support roles associated with the health insurance vertical we eliminated numerous positions companywide, including a substantial scale down of our DTC E serving the P&C markets of auto and home insurance gives.
Given the cash consumptive nature of the DTC model, we have concluded that the current environment does not support scaling. This operation at this time, even in our core P&C markets. Instead, we have elected to maintain a small agent team to focus exclusively on selling auto and home policies, we have learned that having our own agents.
<unk> valuable traffic and customer insights and expanded carrier selection for shoppers, which in turn creates a stronger marketplace that better serves our customers.
Turning to the bottom line in the second quarter GAAP net loss was $13 2 million and adjusted EBITDA was negative $2 1 million to note cost reduction efforts taken in Q2 resulted in a restructuring charge of approximately $3 8 million, which is excluded from adjusted EBITDA.
We generated operating cash flow of three 3 million for the second quarter, a year over year and sequential improvement, reflecting favorable timing of working capital tighter expense management and reduced investment in our DTC operations, we ended the quarter with cash and cash equivalents on the balance sheet of $31 million.
Subsequent to the close of Q2, we made two strategic decisions to strengthen our balance sheet and liquidity position.
As I described earlier in my remarks, we sold select assets of our former health insurance vertical for approximately $13 2 million in cash which will be added to our balance sheet second we modified our existing loan agreement with Western Alliance Bank provides significantly more flexible terms that better align with our current financial outlook given the prolonged.
<unk> of the auto carrier downturn.
As part of this modification, we reduced our line of credit from 35 million to $25 million and eliminated the undrawn $10 million term loan.
We have no debt currently outstanding on the Western Alliance debt facility, which runs through to July 2025, and have no plans to draw on the facility.
Following these two actions after the close of the quarter. We currently have total liquidity in excess of $60 million.
Turning to our outlook, including an update on the market conditions in the auto insurance industry.
We ended June with very weak auto carrier demand, resulting in a new low point since the auto insurance downturn began in late summer 2021.
We have seen these conditions persist into Q3 like many others in the industry base.
Based on discussions with our carrier partners and their public commentary on their own profitability. Our current expectation is that auto carriers will largely remain on the sidelines through year end.
While moderating inflation and falling used car prices provide reason for some optimism the exact timing of recovery continues to be uncertain.
We believe nearly all auto insurance carriers are continuing to experience low levels of profitability.
While still working to aggressively increase rates in order to achieve rate adequacy.
Although our local agent network has proved to be resilient. The prolonged nature of this downturn has resulted in more reductions of carrier support for their captive agents and we anticipate the possibility of further reductions which may impact our local agents during the remainder of this year.
We remain confident that auto insurance premium increases will improve financial performance for auto insurance carriers, and consequently will increase their demand for new consumer acquisition.
But the timing of this improvement continues to be delayed therefore impacting our guidance for Q3.
We expect revenue to be between 51 and $56 million a year over year decrease of 48% at the midpoint.
We expect <unk> to be between 16 and $18 million a year over year decrease of 47% at the midpoint.
And we expect adjusted EBITDA to be between negative $6 million of negative $4 million.
In summary, we delivered solid performance within the second quarter exceeding the midpoint of our guidance for Vms and adjusted EBITDA.
We are executing well and taking market share in a very challenging market.
We are focusing on what we can control and taking decisive action to judiciously manage expenses and our own capital.
So we recognize the high level of uncertainty in the near term, we have strong conviction ever quote will be well positioned to capitalize on the market opportunity and will directly benefit from the normalization of auto insurance carrier demand, Jamie and I will now answer your questions.
Thank you.
At this time I would like to remind everyone in order to ask a question Press Star then the number one on your telephone keypad.
We'll pause for just a moment to compile the Q&A roster.
And we will take our first question from Michael Graham with Canaccord. Your line is open.
Hey, good afternoon, and thanks for taking my questions and I want to wish John Wagner, well and Josef Congratulations.
I wanted to ask two questions guys. The first one is on.
Just liquidity and sort of capital needs and just maybe address.
How youre thinking about your balance sheet and how how comfortable you are with us here for the balance of the year I guess and then secondly, Jamey you mentioned in your prepared remarks that.
You felt like in the auto vertical.
Where you were sort of maintaining your core business that you feel like you have a good competitive moat that youre building around can you just maybe address some of the sort of key points.
Sure.
The focus of like building or maintaining your competitive moat in auto.
Okay.
Sure why don't I I'll take the second question first and then I'll turn it over to Joseph to talk about liquidity.
Yes.
As we approach.
As we worked our way through Q2.
There was we saw a fairly dramatic drawdown in auto demand and with that I think we performed a strategic assessment with the conclusion of which was we will benefit from greater strategic focus.
And improved capital utilization and capital efficiency.
And that kind of forced the decision to reduce the <unk>.
Of course.
Health and Medicare.
And really focus on P&C specifically.
One of the big Motivators behind that was.
We were we took stock of what are truly differentiated assets.
And we believe those to be our local Asian network, where we have an installed base of 7000, plus local agents, who rely on us to grow their agency.
Traffic volume, particularly in P&C and auto and home, where we believe we are the largest source of online insurance traffic in those verticals.
A lot of the data and technology infrastructure, we've built around that.
And so we.
Worldwide.
We are making decisions about whether to go wider and less steep or less wide and more deep we decided to go wide and more deeply and to do so in P&C, where we feel we have these assets that we can really build on and around to deliver more value for customers and ultimately more value for shareholders over time.
Now I'll take your first question Mike.
For your welcome as well so in terms of our liquidity position. We ended the second quarter was $31 million in cash on the balance sheet too that we've done we mentioned two actions we've taken since the end of the quarter to further strengthen the balance sheet. One was the sale of our health assets that another incremental $13 million. We also modified our alone.
With Western Alliance Bank get to a $25 million facility again, not planning to use that facility, but we modified the terms to give us much more flexibility, reflecting the current environment and.
And so.
Adding those altogether, we are in excess of $60 million of liquidity. So we feel that has ample liquidity for the business for a prolonged auto downturn in terms of cash utilization as we look through this quarter, which you are seeing is that we're returning to a model where EBITDA will become closer and closer proxy for cash flow used in the quarter.
Adjusted for ebbs and flows of working capital between quarter and month to month.
So we feel we feel we have ample liquidity given the prolonged downturn given the actions we've taken since Q2.
Okay.
Great. Thanks, guys.
Okay.
And we will take our next question from Ravi Shanker with William Blair. Your line is open.
Good afternoon, and thanks for taking the questions and also congrats Josef on the new role.
During the prepared remarks, Jim you talked about focusing perhaps on AI applications for insurance distribution. Just curious if you could provide some more context to that.
A more traditional AI or are you looking to leverage Gen AI in some capacity.
A follow up.
Sure.
<unk>.
Our simplistic framework for thinking about this as sort of two categories of application one as an operational efficiency smart internal use cases, and then the second customer facing features.
The focus to date has been primarily on the first category and we've already begun to deploy use cases, which are starting to show signs of.
Success and build some adoption internally and so.
Recent example.
We leveraged AI capabilities to automate.
Set of activities in one of our sales function. So that improved the efficiency of that team by about 80%. We have similar examples beginning to take shape and engineering and we're working on kind of extending it outwards to build adoption internally first.
But I think one of the big opportunities that we have and again, it's part of the rationale for focusing.
More narrowly on P&C and going deeper is that we have a wealth of insurance distribution data and this market, where we can tie.
Consumer data and attributes that we've collected on millions and millions of consumers to outcomes down funnel with.
<unk> of local agents and agents and dozens of insurance carriers and I think with that data there will be opportunities to to really apply some of the new technology as it comes out.
To better match and connect consumers with the right insurance providers for them to right price our traffic acquisition as we bid for traffic up market.
And to improve providers efficiency and their spend with us. So there are a whole bunch of use cases that we see out there and we're just beginning to step our way through it but we see a huge opportunity given the unique data that we have to emerge as a leader in the space.
Great and then maybe just on the.
Sort of the EBITDA burn at this point just philosophically you have continued prolonged our longer than expected.
Tough macro environment with your carrier partners would there be a certain level that you would want to manage the burn to or would you, perhaps look to sort of balance that out with potentially tap.
Tapping the loan facilities. Thank you.
Yeah.
So.
Let me, let me start I'll start and you can you can bill.
I think we as we.
I made some of the decisions that we did this quarter, we had a couple of financial objectives, one was to reduce our cash breakeven.
Revenue level.
And so we did that successfully we dramatically improves the capital efficiency of the business.
By taking the actions that we took.
And I think in doing so.
Down the revenue level that would be required to generate breakeven or better cash flow by 35% to 40%.
Then.
We have the consideration around profitability and adjusted EBITDA based on a set of assumptions about the auto recovery.
And for the last 18 to 24 months, Ralph we've seen these peaks and troughs right and right now we happen to be at the lowest trough of the downturn just sort of volatile period, but as Joseph mentioned in his remarks, we do expect recovery too.
As we get into 2024 and so what we've done is we made a cut that we felt was appropriate but that enables us to continue to invest in certain parts of the business, where we see significant opportunity in <unk>.
Our renewed area of focus within P&C.
And we're going to continue to operate with sort of.
Very significant.
Discipline on the operating expense line as we progress through the year and watch for the market to begin to recover so we feel very good about our liquidity position I think we have the ability.
To maintain modest investments in areas, where we feel it will be important but we will continue to manage our expenses very very tightly as we progress through the balance of this year and as we get into next year I do think.
Yes.
Just adding on to Jamie. So thank you is we're going to as Jamie said, we're going to continue to manage expenses carefully in the disciplined way we want to make sure. We made these decisions around strategic focus exiting our health business in focusing more deeply on P&C part.
Part of the rationale on the level of cuts. We took was to make sure we were well positioned for auto recovery.
I think that is critical we've been going through this storm for quite some time, we want to come out of it as a strong leader in the space and so we think with the reductions we took sets us up to have the resources continue to be invest to position us for that the second part is we're also mindful of continuing to manage expenses and adapting them appropriately to the environment now what I would say is that our goal is.
As a team is to the first half of 2024, we will be cash flow breakeven in EBITDA positive in the first half of calendar year 'twenty four.
Great that's really helpful. Thanks, Jamie Thanks Joseph.
Okay.
And we will take our next question from Cory Carpenter with Jpmorgan. Your line is open.
Thank you just two questions for you.
You sold parts of the health business, that's still repeat and others just curious.
What do you have left and how are you thinking about the wind down of that.
And then just with that in mind any context, you can give us in terms of what youre assuming for the other vertical.
<unk> from a revenue contribution perspective.
Sorry <unk>.
Just any color on why <unk>, Nike <unk> and margins to decline sequentially in <unk> will be helpful. Thank you.
Third one Corey.
The acquisition guidance <unk> EBIT.
36%.
Margins in <unk> about 32% three east just curious the drivers there.
Sure. So let me start with the exit of the health protocols. So just to go over.
What we decided we exited the health vertical on June 30th, meaning there was no health revenues in our business going for US we exited the vertical completely at that point.
So that's the first piece I would tell you and I know the press release as we sold select assets I think we sold almost every select ask there is maybe there is a desktop computer left but that is to appeal to the lawyers and the accounts. We sold all the assets and was the principal loss was $32 2 million.
Contract <unk>.
Commission receivable contract asset we had on the balance sheet that represented.
The estimate of the cash flows we expect to receive over the next seven years, we sold after the $13 2 million in cash in addition to that as part of the transaction. We sold some we helped transition some employees and find employment opportunities with my plan advocate, which is obviously a nice thing for our employees and gave us a smoother transition for them, which we were.
So that's with regards to the health business and the exit and again there is no revenue from the health vertical coming into Q3, what you will see in Q3 as we finalize the accounting on the sale of the lease assets, which took place on August one in Q3 that would be a noncash charge reflecting.
The sale of the contract asset.
The $13 2 million given the contract asset expected to receive over time, so that will be a charge that will appear in the quarter and we're finalizing the treatment of that right now and we'll give that guidance weak due in next quarter.
In terms of the other insurance vertical as we will give you some insight on Q2 to help you think about it that the health vertical more broadly so first last year. The health vertical represent just under 10% of total revenues for the company.
If you look at that if you look at how that fell across the year.
The largest portion of that comes in Q4 during the annual enrollment period.
For healthcare if you look to this year. The first half of this year was also less than 10% since the annual enrollment periods in Q4 within this Q2, we had $18 million approximately in.
Revenue from the other insurance verticals of that about 35%, 40% came from health.
So I guess that is the guidance I can give you in terms of the <unk>.
So in Q2, we're not guiding specifically for the other insurance verticals, what I would say is the principal driver of the other insurance verticals is.
Is the home vertical which I commented on in my remarks is having steady progress as we talked about in our Q1 call. We put additional resources behind that from a leadership perspective to sort of re reignite that vertical and we've been pleased with the making steady progress we had double digit growth there in our Q2 and the home vertical.
And then lastly on DMM margins to decline in Q3, maybe a little color on that Youre seeing our <unk> margins. If you look at the guide sort of.
In the low $30 $30, 31, 532, 5% range and I think that really reflects the Q Q2, we were pleased with very pleased with getting a record <unk> margin, we're not assuming that will be sustainable couple.
A couple of things that drove that I think was particularly our teams adapted very well to involve our environment and we're able to take advantage of that and get near term benefits. The sustainability of that I think would be a question in our minds, we did not factored into our guidance. The other piece I would say is that we also had larger DTC a in Q2 both.
In health, but also in our P&C side as Jamie mentioned, we've scaled back our P&C vertical DTA as well as the health <unk> health. Both of those were drivers that contributed to higher DMM. That's why you see us going back to one more of a normal level, we had that.
It really factoring out the DTC operation.
And I guess, the last point I would say on BMS margins. We continue to have a goal of going towards the long term of getting into the 40% range. We're continuing to make steady progress and you'll see us continue to do that over time, but we want we wanted to sort of recalibrate, reflecting this Q2, although high was.
Don't want to view that as the starting point for the rest of the year.
That was very helpful. Thanks for answering all season very thorough I appreciate it.
Alright, thank you.
And as a reminder, the star one if you would like to ask a question.
And we will take our next question from Dan <unk> with B Riley Securities. Your line is open.
Yes, thanks for taking the questions guys. So.
A little more detail just on the pullback to subsidies and agent channel. So how much visibility do you add in terms of how long that will last is it any better than the carrier marketplace spending.
How aggressive have this reduction has been really is it just like one or two carriers.
Fairly broad based so far.
Yes sure.
Thanks, Dan so.
Agent subsidies are primarily.
They are relatively concentrated in a small number of carriers the.
The big change in Q2 was.
One of the larger of those carriers.
Cut back subsidies and a number of states representing a good portion of their agent demand.
And so in those states, we saw agents, who had less subsidy dollars support from the carrier pullback in terms of their demand.
With respect to the expectation going forward I think it's similar to what we expect for the rest of the marketplace, which is that.
The balance of 2023, we do not expect to see recovery in those subsidy dollars.
I do think as we look ahead to 2024.
The messaging, we're receiving is that we will likely see some of those dollars in return, but it wouldn't be like a light switch in the sense that they return to early 2023 levels right at the beginning of 2024, it will likely follow some path.
The carrier being able to get sufficient rate to be comfortable with their profitability on a state by state basis over the course of 2024.
Yes.
Got it. Thank you and then just a follow up so the decision.
To fully exit the TCA in home health, just you talked a little bit about it.
No.
What you like about that business, maybe just a little more detail on that.
Why do you keep sort of a smaller presence there.
And then longer term do you see this as a temporary scale back that maybe you'll add more PNC agents.
When the recovery happens or is it.
Sort of just is what it is at this point.
Sure.
So just just to clarify we exited DTA entirely in health and Medicare, which we exited the verticals and with that our DTC operations and that represented the majority of our agent head count.
And then within P&C, which is the other DTC operation that we have we significantly reduced the agent head count.
And we did so because we because of our renewed commitment to capital efficiency in the business and so if you go back to the rationale for getting into this into the DTA in the first place.
There was the strategic rationale and then there was there was some growth that it was meant to generate and we made this decision at a time when the auto insurance market.
In a healthier place and of course conditions on the ground have changed and so we are revisiting some of those assumptions.
Where we are today, we have a basically scaled down P&C and <unk> operation today. So we have agents, who are selling auto and home insurance.
The strategic rationale that existed.
Back when continues to exist today, and yet proven out and that is that these agents can provide incremental coverage to the marketplace that can provide options to consumers who come in when we don't have a good third party option for them.
They can generate a lot of insight about what happens with consumers down funnel. So we've got a lot of real time data on quality of traffic and LTV profile of consumers that we can use to improve our overall traffic operations.
And it serves as a bit of an internal customer, which we treat as less like innovation lab as we try and improve our offering for third party agents as well.
So the majority of those things can be accomplished with a smaller footprint.
And that's what we're trying to hold on to I think the piece that.
The notion that we are letting go of DTA as a standalone growth driver because thats not consistent with our renewed focus on capital efficiency and so I would expect that its current incarnation, which is a much smaller agent base.
We will be the state in which it persists for the foreseeable future.
Understood. Thanks, guys I'll turn it over.
Thank you.
Yes.
And we will take our final question from Jed Kelly with Oppenheimer. Your line is open.
Great. Thanks for taking my question, just looking at sort of the I guess non variable marketing expenses implied in the guide I think it's around like $22 million in third quarter is that the proper run rate to assume.
Going forward and then Josef just that just circling back on your free cash flow breakeven comments around the first half of next year.
What kind of gives you confidence to put that type of guidance out there. Thanks.
Sure. So I think first off so thanks Jess for the question. So I think first in terms of the operating expense level I think you've got a reasonable ballpark on that if you look put that in context for where we ended Q2 and what the guidance. We've given we said it was going to be 15%.
Reduction in structural costs, and you're seeing us doing that in Q3.
So I think Thats first and then as we look to next year.
As we think about the business. We think there is we do believe there'll be some auto recovery and in the course of next year in the first half of next year as Jamie talked touched on we have dramatically lowered the cash flow breakeven point of the business of the actions. We've taken we've done it by 35% to 40% versus where we were when we started the year. So what that means practice speaking is very.
Modest recovery from current levels, even below where we were earlier in the year.
Laos us below where we were even more.
In Q2 allows us to feel confident of getting to cash flow cash flow EBITDA breakeven and as I said, the different seen EBITDA and cash flow right now very similar.
The differences are modest and I believe as working capital.
<unk>.
Hi.
So versus when we had <unk>, we had a heavy cash cash investments.
Frankly, we would realize that over time as we've gone to more of an asset light model great emphasis on cat on capital efficiency and return on capital you're seeing that stronger connection between adjusted EBITDA being a proxy for cash flow in a period.
Great and then just a follow up.
I think every insurance market or is this thing going through this.
Jamie where do you see the competitive landscape shaking out.
When this recovery happens I mean, do you think everyone will benefit or.
Do you think there'll be much fewer players or do you see a period of consolidation just how do you see things shaking out when we do eventually get to a recovery.
Yeah, Thanks, Jeff So.
I think we've.
While it's been a challenging period for everyone.
Have performed relatively well in that.
By all measures if you could just sort of track insurance revenue from companies in the competitive set we have gained market share through the downturn.
And we feel very good about our competitive position.
As you look ahead I think the recovery will certainly.
We will lift all.
Rising tide will lift all boats.
It's hard for me to speculate on.
Whether or not there'll be consolidation, but I feel very good about evercore its competitive position as we come out of the downturn, having gained market share and now, especially having added.
Focus and emphasis on the auto insurance market.
I think we will continue to build on our edge with these local agents and in doing so.
Emerge in a fairly differentiated position relative to the rest of the market.
Thank you.
Thanks, Ed.
And there are no further questions at this time I will now turn the call back to management for closing remarks.
Yes.
Thanks, all for joining us today.
So as the auto insurance market volatility persists, we took significant action this quarter to strengthen our position for further prolonged downturn, we dramatically improved our capital efficiency, we strengthened our balance sheet streamlined expenses and we bolstered our focus in areas, where we can build on and around our most <unk>.
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I am confident that the changes we made will accelerate our ability to provide compelling value to our customers our insurance provider partners and our shareholders moving forward.
Thanks for your time.
Ladies and gentlemen, this concludes today's call. We thank you for your participation you may now disconnect.
Okay.
Yes.
Yes.
Okay.