Q3 2023 EverQuote Inc Earnings Call
Good afternoon, My name is Brianna and I will be your conference operator today.
At this time I'd like to welcome you to the ever quote third quarter 2023 earnings call.
Please note that this call is being recorded all.
All participants are in listen only mode at this time.
After the Speakers' remarks, there will be a question and answer session.
If you would like to ask a question. Please press star followed by the number one on your telephone keypad.
So withdraw your question. Please press star one again.
I will now turn the call over to Burnley Johnson Investor Relations. Please go ahead.
Thank you good afternoon, and welcome to Evercore third quarter 2023 earnings call, we'll be discussing the results announced in our press release issued today. After the market closed with me on the call. This afternoon is Jamie Mendel Evercore, Chief Executive Officer, and Joseph Sanborn, Chief Financial Officer of Evercore.
During the call we will make statements related to our business that may be considered forward looking statements under federal securities laws, including statements concerning our financial guidance for the fourth quarter of 2023, our growth strategy and our plans to execute on our growth strategy key initiatives, including our direct to consumer agency our investments in the business the growth levers, we expect to 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 statements reflect our views only as.
As of today and should not be considered our views as of any subsequent date, we specifically disclaim any obligation to update or revise any forward looking statements except as required by law forward 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 or 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 <unk> ever put dot com and on the Sec's.
Website at SEC Gov. Finally during the course of today's call we refer to certain non-GAAP financial measures, which we believe are helpful to investors a reconciliation of GAAP to non-GAAP measures was included in the press release, we issued after the close of market today, which is available on the Investor Relations section of our website at investors that ever quote dot com.
I'll turn it over to Jamie.
Thank you Brendan and thank you all for joining US today Q3 was a solid quarter and followed our June restructuring with streamlined our operation around it's the most capital efficient and high ROI parks.
In doing so we've restored greater focus on our most differentiated assets. So we can accelerate the rate at which we deliver deeper value to our customers.
These assets include our P&C insurance shopping traffic scale in technology, our local agent network and our proprietary data and associated data science and machine learning capabilities.
The actions, we took yielded strong performance this quarter relative to guidance and the <unk>.
Third quarter Evercore delivered revenue of $55 million.
Variable marketing margin or Vietnam of $19 $4 million and adjusted EBITDA of negative $1 9 million.
In the auto insurance market place most direct carrier budgets remained stable and are expected to remain so through the end of the year.
However agent based carriers continue drawing down marketing support for agents as part of their efforts to slow the rate at which agents are writing new business, particularly in profit challenged geographies.
One major carrier has entirely removed subsidy support through at least the end of the year.
As we work through this challenging market, our streamline cost structure strengthened balance sheet and proven resilience as a team give us high confidence that we will be well positioned for the eventual recovery.
With each new challenge our team has found ways to respond as carrier monetization declined we rolled out new bidding technology more effectively and nimbly manage ad spend to boost efficiency.
Certain segments of agents have lost carrier subsidy support we have offset the impact by growing demand from other agents segments.
And as our auto vertical experienced challenges, we drove growth in our home and renters.
Evercore vision remains unchanged to become the largest online source of insurance policies using data technology and knowledgeable advisers to make insurance simpler more affordable and more personalized.
To bring this vision to fruition requires continued adaptability and resilience attributes. The evercore team has demonstrated in space. Most recently through progress made in Q3.
Despite continued volatility in the auto insurance market, we plan to historic pattern of consistent cash generation and driving towards profitability in 2024.
I am confident that our streamlined operation and the proven strength of our team and business model will enable us to emerge with incredible success when the market recovers now.
Now I'll turn the call over to Joseph to review our financial results. Thank.
Thank you Jamie and thank you all for joining I will start by discussing our financial results for the third quarter before providing guidance for the fourth quarter. As a reminder, evercore announced the exit of our health insurance vertical in late June and subsequent sale of associated assets within the vertical in August.
Total revenue for the third quarter was $55 million, which was towards the top end of our guidance range for the quarter Importantly, we delivered variable marketing margin or V. M M and adjusted EBITDA that exceeded the high end of our guidance as our operating teams continued to execute well and are deeply challenging environment.
Third quarter revenue for our auto insurance vertical was $43 1 million as we continued to experience substantially weakened demand from our insurance carrier customers.
Our third party or a local agent network was more resilient representing 58% of total revenues in Q3, but it also declined year over year, primarily driven by our largest carrier partner, reducing your agent subsidies within the quarter.
This customer also notified us in October that it was discontinuing payment of subsidies to us through at least the end of 2023.
We exited the quarter with auto revenue at a new low point since the auto insurance industry downturn began in late 2021 as a result, we do not expect the auto insurance recovery to begin until 2024.
Revenue from our non auto insurance protocols was $11 9 million in the third quarter and represented 22% of revenue.
Beginning in our reporting for Q3 as a result of our exit from health. We're reporting on two primary verticals from a revenue perspective auto insurance and home insurance, which includes renters in Q3 revenue in the home and renters insurance vertical was $10 7 million a year over year increase of 51%.
Delighting, one management focus can achieve in a less troubled market segment.
<unk> was $19 4 million for the third quarter above our guidance range <unk> as a percentage of revenue was a near record high of 35, 2% for the quarter. Following a record high in Q2, driven by three primary factors first our traffic teams continued to achieve lower customer acquisition costs and a volatile environment.
In part by being more selective in the types of consumers, we target to bring into our marketplace.
Second our significant investments in developing proprietary technology and processes to better leverage our data to acquire high performing consumers are yielding results and third we benefited from a shift in revenue mix towards a local agent network, which in the past has yielded a higher <unk> percentage. This is further evidence that our strategic focus.
And realignment is generating results.
Turning to the bottom line.
We continue to be very disciplined in managing costs and controlling what we can control in the third quarter GAAP net loss include a significant noncash charge of $19 4 million related to the sale of assets of our former health insurance vertical in August and increased to a loss of $29 2 million as previously announced.
On August 7th we sold assets of our former health insurance vertical to my plan advocate for approximately $13 2 million subject to customary post closing adjustments that transaction closed on August 1st included in this sales where commissions receivable of $30 8 million, which was expected to be collected over the next seven quarters.
Along with other assets and liabilities adjusted.
Adjusted EBITDA improved relative to the second quarter to negative $1 9 million and was more favorable than our previously announced guidance range. This was the result of over performance in Vms and reduced operating expenses within the quarter, which drove an incremental $2 million in annualized savings.
This is in addition to the nearly $20 million in annualized operating expense reduction that we achieved in the second quarter. Following our June workforce reduction of approximately 30% and exit from the health insurance vertical.
We had operating cash flow of negative $4 1 million for the third quarter. This includes $1 8 million in severance payments related to the June workforce reductions, which were paid in early Q3, although crude for accounting purposes in Q2, and less favorable timing of working capital with the exit from the health insurance vertical and the scale.
Down over our remaining DTA, which again requires significant upfront cash investment to drive growth, we expect that our adjusted EBITDA will be a close proxy for operating cash flow within any quarter going forward subject to the normal working capital adjustments.
The company ended the quarter with $39 million in cash and cash equivalents up approximately 26% from $31 million at the end of the second quarter of 2023. In addition, we have a $25 million Undrawn working capital line of credit with Western Alliance Bank, which is available until July 2025, we have no.
Plans to draw on the facility and have no other debt outstanding.
Turning to our outlook, including an update on the market conditions in the auto insurance industry.
Ultimately, we remain confident that auto insurance increases will improve financial performance for auto insurance carriers, and consequently will cause them to seek to acquire new customers for growth.
But the timing of this improvement continues to be delayed and therefore impacts our guidance for Q4.
For Q4, we expect revenue to be between 47% and $52 million.
We expect <unk> in the quarter to be between $16 5 million to $18 5 million.
And we expect adjusted EBITDA to be between negative $2 5 million and negative $4 5 million.
Turning to industry trends, there have been encouraging signs from some carriers that they are making meaningful progress in achieving their desired levels of profitability.
As carriers returned to acquiring new consumers, we believe that their appetite for growth will vary considerably by consumer profile and geography based on where they have achieved sufficient rate adequacy as such we believe the digital leaders like Evercore will benefit given the better ability of our channel to more specifically target.
A desired consumer profile compared to most other forms of media.
We recognize however that several insurance providers are still struggling financially and then macroeconomic headwinds are likely to continue to delay some of these carriers from beginning the desired levels of profitability for several quarters.
As such we believe that the exact timing and slope of auto recovery for the coming year remains uncertain.
In summary, we delivered solid performance within the third quarter, given the environment achieving revenue at the high end of our guidance range and exceeding our guidance for <unk> and adjusted EBITDA. Our operating teams are executing well, but we remain in a volatile and challenging environment.
We have continued to focus on what we can control by taking decisive actions to judiciously manage expenses and build our balance sheet, we have strong conviction that ever could be well positioned to directly benefit and the eventual normalization of auto insurance carrier demand, Jamie and I will now answer your questions.
We will now open the line for questions as a reminder to ask a question. Please press star one.
Your first question comes from Michael Graham with Canaccord. Your line is open.
Hey, good evening and thank you guys I just wanted to.
Ask can you hear me okay.
Yes, Hi, Mike.
Okay, sorry about that.
I just wanted to ask for a little more depth on the auto part I think your comments were were super helpful.
It seems like if I could summarize what some of the other players in the sector said here through earnings. It was basically like yes. The rest of 'twenty three is not expected to be great but.
Pretty good optimism.
For a recovery in the beginning of 'twenty four.
Partially because carriers like to kind of set budgets sort of starting the calendar year. So I guess.
Sure.
I just wanted to see like is that sort of what you are still expecting or seems to.
Can you, maybe a tiny bit more cautious on that and then.
The related.
Question is on <unk>.
On your DTC business would you expect that.
To recover you know on.
Carrier business.
Yes.
I'll take a crack at that Mike.
Short answer is I think we see the world.
Pretty much in line with with how the others see it we'd start with carrier underwriting profitability.
And that continues improving and this time through the improvement in profitability appears more broad.
And perhaps more sustainable than it has at earlier points in the downturn. So you are seeing.
Many carriers, improving combined ratio meaningfully over the last quarter or two.
We're hearing.
Rate increases in the double digits regularly across a number of different carriers, whereas the loss trends are beginning to level is so one major carrier reported last week that they've taken 16 points of rate year to date.
They've seen loss trends increased by only five points right. So underwriting does appear to be improving considerably and more broadly than in the past.
When you look at it okay, well what will happen once as underwriting improves and as we turn the corner into the new year, so consistent with what you've heard from others.
We know that budgets will reset as we turn the corner into January and with that well will come a resetting budgets for the better.
And so long as underwriting continues to improve we expect to see a significant step up in 2024.
I think the part that we have a little less clarity on exactly what the shape of that will look like but we do expect to see a step up in Q1, and then a gradual but sustainable recovery trend through next year and likely into 'twenty five.
As we talk to our carrier partners I would say eight to nine of our top 10 customers have expressed plans for growth next year and so so that's what we're that's what we're anticipating.
And then to the second part of your question.
Might want to just take a minute to reorient to reframe DTA in the context of the business.
We exited the health and Medicare vertical, which had a large dci component.
And.
Reduce the size of the PNC DTA what remains is a relatively small operation.
And so its impact will be.
Low in the Grand scheme of things, but to try and answer your question directly I think it will recover at a similar pace. So we're hearing out of our carrier partners on the agency side of the business is pretty similar to what we're hearing on the direct side.
Okay, Great that's helpful. Jamie and good luck getting 2024 off to a good start.
Thanks, Mike.
Our next question comes from Jed Kelly with Oppenheimer. Your line is open.
Hey, great.
Thanks for taking my questions can you just said.
Eight of your top 10 customers are planning to increase.
Spend next year with you guys is that broad based or do you think your.
Gaining share and then this is what is your call it second straight quarter.
Sure.
Mid 30%, 35% Dnm margins can you just expect can you just give us a sense on how you expect <unk> margins to trend.
Hi.
A better demand environment.
It materializes next year. Thank you.
Okay.
Sure. So John I think as we look at the market share data that we use over the arc of the downturn, we believe we've taken some share.
In the last quarter, probably relatively stable relative to the period before it.
But overall, we feel very good about our market condition in the state of relationships with with the carriers.
Some of the growth initiatives that we have planned with them as we turned the corner into next year.
With respect to the <unk> question.
You are right that we've been operating at historically high levels of <unk> in these last couple of quarters.
We have managed to.
Drive our AD spend efficiency up quite a bit with as we respond to changes.
And demand we've also rolled out new bidding technology, which has enabled us to increase our <unk> margin more structurally and so it's a combination of those two things one of which will likely persist one of which may normalize.
As more competition for traffic comes back into the market in the recovery. So it's hard to say exactly where <unk> will land.
Eric Lee.
We have always optimized for BMD.
And the historical optimal point for BMD dollars has been at slightly lower levels of <unk> margin percentage than we're seeing now.
But that would come with considerably more vms at higher volume.
So I think.
If we had to sort of set expectations, it's probably somewhere between where we've been historically and where we are today is where you see things start to settle in a recovery scenario.
Got it and then just as a follow up it looks like guidance implies that the non variable marketing expenses around $21 million does.
Is that the right way to think about a baseline going into next year.
This is the right way to think about our baseline and just to put that in context that is down modestly from where we were in Q3, and obviously certainly down if we were in Q2. So you have about $20 million of annualized cost out of the business and the restructuring in Q2, we took further cost out in Q3, another 2 million annualized and so you see for.
This year that would be where we'd see starting next year I guess I put one additional point on that is as you start next year. You also have the traditional started a year increase related to annual comp increases and reset of fringe benefits, but that would be the one change I think going into next year, we're going to continue to judiciously manage expenses and you have seen that discipline throughout this.
Second half of this year and that will continue but you will have those resets that go in the normal course of Q1.
Thank you.
Thanks, Jed Jed.
Our next question comes from Dan <unk> with B Riley Securities. Your line is open.
Yeah, Hey, guys. Thanks for taking the question so.
Just to turn to home and renters to turn away from auto for a second bringing present growth rate. There I know the dollars are still kind of smaller but any any investment you made to drive that growth. How sustainable you think that is and then just like how big do you think that that can be over time.
Yes so.
Late last year, we dedicated a team to that vertical to home and renters. I think what we're seeing is the impact of just greater focus resource concentration and dedicated leadership there.
And that team's done a great job trying to.
Yes.
Growth path for that vertical we managed to grow agent demand quite a bit we felt that consumer traffic footprint in parallel and the.
The product of that is the growth that we're experiencing now.
We certainly think there is more room for that vertical to continue growing we're going to continue to invest in and support its growth.
The home market is not immune to some of the hard market dynamics that auto is facing and so this is the kind of growth we're generating.
Hard market cycle, and so as that market improves over the course of the next year, we would expect to see some continued growth alongside it.
Great. Thanks, and then just a follow up back to auto I think historically your largest carrier customer in the marketplace business.
Well it was pretty far ahead of everyone else just in terms of using technology to acquire customers online right through marketplaces like yours, maybe just talk about like the other carriers.
Whether the last year or two has made them realize they need to be using marketplaces, like yours and digital channels to acquire customers and whether theres been sort of a market shift in their willingness and ability as well to use them throughout this cycle.
Yes, I would say that the hard cycle has pushed.
<unk> up the <unk>.
Sophistication curve with respect to tapping into marketplaces like ours.
One of them one of them.
Most pronounced benefits, particularly in a hard market is the ability to target with greater precision than you can in more sort of mass market channels and so we have seen carriers, who have historically been call. It targeted.
Increasing their ability to target the types of consumers.
Worked for them at a given moment in time.
And I think that will persist.
In terms of their.
I would say the progress has sort of sits on a spectrum.
And our job is to help the carriers that providers sort of at the lower end of that spectrum to help them either get better or to do the work for them and so we've seen some adoption of a product that we have that actually helps carriers do the bidding where they can just kind of talk to us about and express their preferences for specific.
<unk> profiles geographies, Kpis and will use our technology, our data or machine learning to effectively do the bidding on their behalf and helped drive more volume at their kpis.
So I would anticipate more adoption of that technology coming out of the hard market cycle is I think carriers have gained some appreciation for what's possible in a channel like ours.
Great. Thanks, guys I appreciate it.
Thanks, Dan.
Thanks, Dan.
Our next question comes from Cory Carpenter with Jpmorgan. Your line is open.
Hey, this is Andy Fae on for Cory Carpenter I, just have two quick ones.
Is there any commentary on kind of how consumer traffic has trended throughout the quarter.
Our carrier price increases flowed through and then on the second you touched on it before the prior question, but what are some of the higher level of drivers of the home and renters insurance market. We should look out for next year that will continue to drive growth. Thanks.
Thanks, guys.
On the traffic front I would say that that <unk>.
Tumor shopping volume has been relatively stable now stable at historically high levels of the rate cycle continues to drive more shopping behavior.
But we expect that to continue to remain at elevated levels for as long as the rate cycle persists, which is likely to be well into next year at a minimum.
Now with respect to home.
I mentioned, a couple of the growth drivers that have.
Enabled some of the growth that we've achieved over the last year does include growth in demand from local agents, particularly as it's become a bit harder for them to underwrite.
Auto as a result of carriers tightening their underwriting restrictions and.
And continuing to build out our traffic footprint in parallel in that vertical I think theres, probably continued room for growth along both of those dimensions and then <unk> got you lay around the fact that home is still in a relatively hard market, meaning a lot of the carriers that have historically had demand for.
Insurance shoppers.
Are.
Pulled out of the market if not.
Operating with a very narrow footprint and so we would expect that as they continue to take rate over the next year that we'll see some recovery in carrier demand.
Through natural course, as we expect to happen with auto as well.
Thanks.
Alright, Thanks, Nick.
Our next question comes from Ralph <unk> with William Blair. Your line is open.
Good afternoon, Thanks for taking the question Jamie.
Give us some perspective, you can about some of the market share shifts you might be seeing I think historically, you've talked about gaining share in what the eventual recovery at some point.
With the carriers as they take rate how is evercore could it be positioned coming out of this down cycle, let's say versus.
Versus the broader competition. Thanks.
Yes sure.
No.
Sure.
We like I said earlier, we feel very good about the market position.
We've got.
Strong close relationships that through which we are working on growth plans for next year I would say there is a number of carriers, where we have.
Exclusive opportunities to partner with them on key growth initiatives for next year and so as a result of these things I would expect we'll continue to.
Maintain share into next year I would say if there is.
One area, where we look at it.
And we may see some headwinds as we've mentioned previously assumed that agent channel, where we know that agent demand has.
Contracted a bit recently as some of the carriers have closed subsidy support.
So as a result.
The distribution profile that we have which is more agent dominant.
It may create some.
Some share headwinds for next year, but like has happened without the direct carriers. It's just a matter of them working through repricing and we would expect to see that kind of work out over the next year as well.
Great. Thank you.
Thanks, Rob.
There are no further questions at this time I will now turn the call back to management for any closing remarks.
Thank you well thanks, all for joining us today.
We continue to build confidence that auto insurance carriers are making strides towards healthier underwriting and that as they do more marketing spend will return to our marketplace.
As it does we will benefit from our streamlined cost structure, our strengthened balance sheet and our team's proven resilience and adaptability.
These things position us extremely well for a strong run ahead as the market recovers and we resumed the secular shift of insurance online.
Thanks, all for the time today.
This concludes today's conference call you may now disconnect.
Okay.
Yes.
Yes.
Yes.
Thank you.
Okay.
Yes.