Q2 2023 MediaAlpha Inc Earnings Call

Ladies and gentlemen, thank you for standing by and welcome to media Alpha Q2, 2020 feet earnings call.

All life has been placed on mute to prevent any background noise.

After the speakers for Max there will be a question and answer session. If you would like to ask a question. During this time. Please press star followed by the number one on your telephone keypad.

If you would like to withdraw.

Again, that's Darwin. Thank you Denise Garcia Investor Relations you may begin your confidence.

Thank you Josh after the market closed today media Alpha issued a press release and shareholder letter announcing results for the second quarter ended June 30th 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 third quarter of 2023, which are based on assumptions forecast expectations and information currently available to management is forward looking statements are subject to risks and uncertainties that could cause future results for events.

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 report on Form 10-Q for a color 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 August 2nd 2023, and the company undertakes no obligation to revise our update them. An addition on today's call will be referring to certain actual and projected financial metrics of India Alpha that are presented on a non-GAAP basis, including adjusted EBITDA, which we present in order to supplement your.

Our understanding an assessment of our financial performance <unk>.

<unk> should not be considered as a substitute for or superior to financial measures calculated in accordance with gap.

Reconciliation of these non-GAAP measures to the most directly comparable GAAP measures are included into our press release and shareholder letter issue today.

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 and investors Dot media Alpha Dot Com now I'll turn the call over to Stephen Pat for a few introductory remarks before opening the call to your questions.

Oh, Thanks, <unk> hi, everyone welcome to a second quarter earnings call I'd.

I'd like to make a few observations before turning the call over to our CFO pet concentrated colors.

Our second quarter results exceeded guidance due to stronger than anticipated growth in our health insurance critical.

Our health transaction value grew 10% year over year, driven by broad base strength in both under 65, Medicare segments, resulting in better than expected margins and adjusted EBITDA.

These trends have continued into the third quarter and we expect you three helps transaction value to grow year over year at a rate similar to what we saw in the second quarter bleeding.

Leading up to the all important annual and open enrollment periods from Medicare and under 65 plans respectively.

Two two results and R P and C insurance vertical we're in line with our expectations.

<unk> T M C carrier partners sharply reduced spend in our marketplace due to continued underwriting profitability concerns.

We're projecting that's Mary major carriers spend to remain depressed through the end of the year and as a result, we expect TNC transaction value in Q3 to be lower than what we saw in two two.

Taking a step back I remained please by our resiliency through this historic PNC market downturn.

Capital efficient marketplace model.

Diversified industry vertical exposure and most importantly, the extraordinary dedication of our team.

We've been able to generate a positive adjusted EBITDA and free cash flow through the entirety of the card market cycle.

Looking ahead, we believe these attributes will be too strong top and bottom line growth one therapy and see carrier partners resumed normal levels of marketing spin coming out of the hard market.

With that I'll turn the call over to pet.

Thanks, Dave I'll begin with a few comments on our second quarter financial results and other recent business and market developments before reviewing our third quarter financial guidance and opening the call up for questions.

Our second quarter results benefited from top line outperformance in our health vertical due to the broad base strength, Steve discussed earlier.

This drove especially strong adjusted EBITDA performance in Q2 relative to our guidance Ranch is our health vertical margins benefit from a higher open marketplace mix.

Cause we discussed in our shareholder letter during the second quarter, our largest shareholder White Mountains group completed a tender offer 5.9 million class a shares increasing their ownership position to 36% of our total outstanding shares.

The White mountains tender offer at $10 per share represented a 32 per cent premium to the closing price of our stock the day before the announcement.

White Mountains publicly stated they believe our shares or an attractive investment and they have no intention of changing that relationship between our companies.

Moving to third quarter guidance, we expect P&C transaction value to the client, 40% to 50% year over year due to a full quarter of the reduced spent by our largest PNC carrier partner.

In health, we expect favorable trends across the business to drive your over your transaction value growth at a rate similar to the 10% we saw it in the second quarter.

We expect to improving year over year trends in our other vertical as we laugh at the exit of our education business at the start of Q3 2022.

As a result, we expect to Q3 transaction value to be between 95 million and $110 million a year over your decrease of 30% at the midpoint.

We expect revenue to be between 65 and $75 million a year over year decrease of 21 per cent to the midpoint.

Lastly, we expect adjusted EBITDA to be between 1.5 million and $3.5 million a year over year increase of 15% at the midpoint.

Two three operating expenses after adjusted EBITDA add backs are expected to be approximately $1.5 million lower than Q2 levels driven by both a full quarters impact of the may workforce reduction and continued expense discipline.

Moving to other noteworthy items during Q2, we incurred approximately $1 million fees related to the ongoing F. T. C inquiry and we expect to incur a similar amount in Q3.

We continue to believe we have been and remain fully compliant with all laws and regulations and we are cooperating with the F. T C. As they continue their inquiry.

In addition, we have amended our founders employment agreements at their request to provide for roughly 90% of Stephen Eugene salaries to be paid in restricted stock rather than cash representing in approximately 1 million dollar annual benefit to adjusted EBITDA. This.

This amendment reflects our founders belief that our stock represents an attractive investment given the longterm growth potential of our business.

We are focused on reducing financial leveraged through a combination of net debt reduction and adjusted EBITDA improvement driven by strong execution in our ongoing efforts to tightly manage expenses as we await Vietnam, it'll rebound and R P and see vertical.

With that operator, we are ready for the first question.

At this time I would like to remind everyone. If you would like to ask a question. Please press star followed by the number one on your telephone keypad. Your first question comes from the line of Corey Carpenter with J P. Morgan Your line is open.

Thanks for the question Steven a shareholder letter you mentioned you remain bullish on Medicare advantage gross over the longterm.

In recent months, we've seen a number of your competitors exit the space. So maybe two questions. First you know what are you seeing that makes you optimistic in an area, where others seem to be thrown talent and then second any update on your interpretation of the potential impact from the Medicare advantage policy changes.

You.

Sure Yeah to answer the first part of your question I think I think really the differences in perspective is entirely due to.

Due to the different places bottle that we have when you look at the health insurance business that Everquote had lendingtree.

Lending tree had unlike their P. M C business, which is similar to ours and that is media driven.

Their health insurance does this is for both entirely or almost entirely based on a direct to consumer agency model, whether it's selling policies directly to consumers now.

The the issues with that kind of that business model I think had been well documented.

<unk>, it's a very capital intensive business, because you incur the upfront capital a customer acquisition costs, which you then expect to recoup over the lifetime of that policy as a renewal for a several year period.

<unk>.

You know, we have a media marketplace model, where the revenues from the clicks leaves and calls that are transacted in our marketplace hit in the current period.

Played into both of you, but doesn't cash in the camera's period and so on so I think really their views on the Medicare advantage market and that opportunity really it's from their perspective is brokers and agents and not from their position at the media marketplace.

That does that make sense.

Yes, that's helpful on the first part okay.

The second part now just to clarify what are you talking about the the new C. M S marketing regulations.

Yes, I think the last time, we talk to you you expected minimal impact.

<unk> hotmail needs, but we're still kind of.

Uhm.

Interpretation was potentially still could change that with you I think that was your last name Sir absolutely <unk>, Yeah, I think yeah. So absolutely you'll be calling correctly that we were optimistic about it then I think we actually already been more optimistic about it now, but a few things have happened since that period.

The ball when the final regulations came out in April what are the pros conditions in the draft regulations that restricted the ability of one third party marketing organization to sell marketing leads to another third party marketing organization and based on the definition of a T. T M O, which basically meant anyone who's not an insurance carrier.

That would have restricted some of the activities and our overall channel, namely selling leads to brokers are selling leads to other Lee generators, and so that prohibition would like to remove from the final regulations and so that was one piece of good news and then subsequent to that.

Well, we've had a positive interpretations, namely the applicability or the non applicability of the 48 hour waiting period to inbound calls and so that's also been clarified by C. M. S. And so you know for US because calls are an important part of our overall marketplace that was certainly good news and I think if you are.

Listening to the sentiment from the broker channel in particular, I think they're seeing.

They're echoing some of the positive sentiments about the limited impact that they expect to see from these new C M as marketing regulations in the upcoming enrollment period.

According to your job properly.

One thing I would add on that is you know I think there is still a bit of uncertainty around leads and kind of outbound dialing and whether the 48 hour rule is applicable for that.

The the thing I would say is that at least for us in the Medicare space or a very small portion of our overall business and so we're we're still waiting on clarification of that and you know what we'll see how it shakes out but it shouldn't have a a big impact on us either way.

Okay. Thank you.

Thank you for it.

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

You guys. Thank you I just wanted to ask about the P and C. Vertical I know you mentioned you you felt it was gonna be weak for the balance of the year and I. Just wanted to ask you. If you had any reason for.

For optimism for you know the beginning of next year's or anything going on just maybe a little more color. There and then you know related to that I. Just wanted to see if you could share anything about you know how this downturn is impacting your ability or your you know focus on like product development and innovation is it giving you more time to kind of get ready for the upturn.

Or you know are you resource constrained I guess, maybe not able to kind of invest as much as you want just would be interested in how you're handling. This this from a long-term planning perspective.

Yeah, absolutely. So I think you know there's a relatively short answers. The first question, which is not much has changed with regard to our sentiments since the last time, we talk you know I think.

You're seeing and I'll just I'll just echo this right, which is it. It just continues to be a really challenge you underwriting environment I mean, you're seeing some good signs used car pricing. For example has stabilized you're seeing some of the states that were slow to approve race now approving larger rate increases for example, I think you just saw that all state.

Filed for 35 per cent increase in California, you're.

You're starting to see some good signs, but you know overall you know as you've been seeing from actually allowed us the carriers releases that happened today as well as the monthly reports that had been coming out over the last few months that the underwriting environment at the same cost inflation has remained persistently high so really no amendment to our perspective on one.

Broad based recovery of the P. N C. Mark you will happen you know certainly I don't we don't think it's gonna happen this year.

So no pivoting to the second part of your question. It's a great question I think that.

Overall, the carrier focus on efficiency has enabled us to really make headway with a lot of product development efforts to extract greater efficiency from this channel and so you know one obvious example is working with our carrier partners who are buyers to also then monetize nine.

Converting traffic and so in a time like this when when every marketing dollar matters.

You know I think that there's been great adoption or strong adoption on on the part of Terrier Asexually. This advertising program to help recoup the money that they're spending to get customers to their site and so you know that's not necessarily intubation. That's certainly an adoption of an innovative business model that we've had since our inception.

But what it signals is that the carriers are very open to ideas to expect greater fiction sees from their marketing and that makes it arrived environment for us to be able to innovate and iterate with the partners to create new products, new implementations et cetera. So that we can extract you know greater efficiencies going into.

To the stock market period, so overall, because our innovation is also based on.

Just get a roof approaches with our partners right and not one big initiative that we invest a lot of money into it just not something that's required in our space. You know what we've done is we've been able to retain the capabilities to maintain this kind of innovation and again, it's been a net positive in terms of the carriers receptivity to these new ideas and to iterate with us.

To come up with new ways to do things in this space.

Alright, great. Thanks for all the color scheme.

Oh, Thanks Micheal.

Your next question comes from the line of Luis <unk> with Citigroup. Your line is open.

Hey, This is Louise <unk> just a quick question do you have any update of how Medicaid reiterations has been packed into health business.

Yeah cause on Medicare Redeterminations, an impact on that that help business you know the the thing I would say is that you know I think some of the Redeterminations. There you know there's been a series of back and forth around that you know would say that you know I think the numbers probably shuck out on that.

The higher side of you know what was being discussed which was you know I think generally positive for us and you know I think that the thing we would say the the Medicare pieces that you know these are fundamentally programs that are really attractive you know the carrier is like the.

Business, because there's a lot of premium dollars, there and they they make money off of it.

And you know I think in that the Redetermination range, you know if they're if they're feeling good about it.

The you know there are wind from a consumer standpoint, because you've got zero premiums in certain cases zero co pays you know great formularies and you know it's a market that we have you know really helped kind of come online in terms of marketing and it's you know product. It has 50 per cent adoption that adoption is gonna be continue.

I'm going to go up into the right and you know we feel like it's a pretty attractive place to play over the the intermediate to longterm and you know, we're we're pretty bullish on what it could look like in the years to come.

Does that answer your question Lewis.

Yeah.

Great.

Your next question comes from the line of <unk> Shields with K D. W. Your line is open.

Mm. Thanks question, I guess coming from off the Covid talk a little bit today about some regents or maybe some some sectors of policyholders, where they think that they're adequately price. When we looked to your third quarter back have guidance does that contemplate any sort of partial recovery and let's give you could talk to.

A broad recovery not likely.

Yeah and admire this is Pat I can I can tackle that question and you know would say that.

You know as as we look at the the landscape of stand on P and see the largest carrier spent a lot in Q1, you know cut through you know a lot of Q2 and you know would say the transit been you know probably reasonably stable for for a couple of months with them.

The you know the bucket of everybody else. You know has been you know kind of pretty stable since the start of the year and you know we get positive news out of some in negative news out of others, but there is.

The the puts and takes it been you know pretty balanced and you know you know it wouldn't be surprised if there is some carriers that go hey, we've taken enough right and we feel good about the state or we feel good about premium customers or you know hey people that are homeowners. We you know we want to lean in a bit on it and there are others that you.

May be trying to buoy short term profitability through reductions in so it would say our guidance you know.

We we we typically guide to what we have a high degree of confidence in and so that's you know this quarter and you know we know the trends we've been C N for awhile.

Probably set generally expect us to kind of continue for the balance of the corner.

Okay tell me about it and then.

Go ahead please.

I'll just add one thing, which is that we do and I think we mentioned this before I mean, just how extraordinary this hard might get cycles day, and I think you're gonna need to see an.

Improvement in the overall combined ratio at these rate increases are going through you know before Terry with like all state really lean into those possible pockets just because you know whether you are in a hard market are solved mark you need a new policies do tend to perform you know slightly worse than existing policies into an concur that new policy. Your growth tax you know I think that.

There isn't a ton of appetite to do that while they are overall results are where they are.

Yeah, no that makes perfect sense.

Looking forward should we assume that free cash flow on a quarterly or annual basis is Ah.

A good proxy for debt reduction.

Yeah.

This is Pat I would say you know in the in the near to medium term you know it it it it will be.

And you know I think we you know we are in a spot where you know we are focused on putting the free cash flow towards net debt reduction in that could either be building, our cash balance paying the revolver are starting to chip away at the at the term loan beyond the mandatory amortization and so you know I think we're in a spot where that'll be the focus and to the extent that changes will.

<unk> I'll be communicating it quarterly results at some point in the future.

Okay perfect. Thanks, so much.

Thanks <unk>.

Your next question comes from the line and then Hendrix with our B C capital market. Your line is open.

Thank you very much you guys.

In terms of just general changes failure or spending.

Yeah, I mean, you know.

I think we'll have a better idea of this in Q3, because that's when the actual budget discussions happen you know both of the characters and with the brokers.

So I I think overall I think the Senate and it has been generally positive certainly there's been some headwinds you know with higher than expected utilization rates alright, but there's also been some tailwinds or positive news, namely that that's the ability and the potential for impact of the new C. M S marketing regulations.

So I I would say overall you know what we're hearing from our partners is generally positive.

I think overall the trend towards there being a heavier mixed up carrier demand partners and dollars from Terriers versus brokers I'll be <unk>.

Continue we expect to see that trend continue but in terms of just more specificity into how that sentiment like to send them that you mentioned today from the from the Humana quarterly earnings Paul you know will translate into budgets for the upcoming E. P. N O P. I think we'll have more clarity into that in Q3.

Gotcha. Thank you and then finally, just pushing it seems like you've got some pretty significant platform changes, which will cost savings and guidance and then also we've got the with the White Mountain state cause this for shadow any broader platform or strategic shifts that we can think about long.

Your time in the future.

<unk>.

Yeah, and then this is Pat and would say you know the the short answer to that question is now where you know I think we've.

You know we are a <unk> we've been a growth company in the past. We've you know we've been you know we've suffered at the hands of just hard market along with pretty much everybody in the P. M C space.

We you know we are extremely bullish about the long term prospects for the industry and particularly for our business and you know I think we you know, we obviously tightened our belts to try to buoy results in this tough environment, though you know we believe the the innovation engender and the delivery engine.

Are untouched and you know we continue operating the business you know efficiently and effectively we're really excited to see you know what we think we can deliver is hits the market improves.

Quite frankly think it's gonna be an awful lot fun to to be a part of and you know, we're we're really bullish about the the longterm future of the business and I think White Mountains, you know as a as an investor you know they've been on that we've been on the journey together for about 10 years and they are you know value driven in longterm.

Focused just like we are and you know we take their their investment as the sinus you know faith and confidence that that good times are a common our goal is to repay their faith in all the investors faith in the the ears to comes to market recovers.

Great. Thanks, guys I appreciate the color.

Excellent <unk> like.

There are no further questions. This does conclude today's conference call. Thank you very much for joining you may now disconnect.

Please wait the conference will begin shortly.

[music].

And.

Okay.

[music].