Q3 2024 SelectQuote Inc Earnings Call
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Hello, all and thank you for your patience today's call will begin approximately two minutes time.
Operator: Hello all, and thank you for your patience. Today's call will begin in approximately two minutes. Hello all, and welcome to Selectquote's Fiscal Third Quarter Earnings Conference Call. All lines have been placed on mute to prevent any background noise.
Operator: [music].
Speaker Change: Hello, and welcome to select <unk> fiscal third quarter earnings Conference call.
Operator: All lines have been placed on mute to prevent any background noise.
Operator: After the Speakers' remarks, there will be a question and answer session.
Operator: After the speaker's remarks, there will be a question and answer session. If you'd like to ask a question during this time, simply press star followed by the number one on your telephone keypad. If you'd like to withdraw your question, it's star followed by the number two. It's now my pleasure to introduce Matt Gunter, Selectquote Investor Relations. Mr. Gunter, you may begin your conference.
Matthew Scott Gunter: If you'd like to ask a question. During this time simply cuesta followed by the number one on your telephone keypad.
Matthew Scott Gunter: If you'd like to withdraw your question its tough let by the minimum buchi.
Matthew Scott Gunter: It's now my pleasure to introduce Mike Gunter select quite Investor Relations. Mr. Gunther you may begin your conference.
Matthew Scott Gunter: Thank you and good morning, everyone and welcome to select quotes fiscal third quarter earnings call before we begin our call I would like to mention that on our website. We have provided a slide presentation to help guide our discussion.
Matthew Scott Gunter: Thank you and good morning everyone, and welcome to SelectQuote's fiscal third-quarter earnings call. Before we begin our call, I would like to mention that on our website, we have provided a slide presentation to help guide our discussion. After today's call, a replay will also be available on our website.
Matthew Scott Gunter: After today's call a replay will also be available on our website.
Matthew Scott Gunter: Joining me from the company are our Chief Executive Officer, Tim Danker, and Chief Financial Officer, Ryan Clement. Following Tim and Ryan's comments today, we will have a question and answer session. As referenced on slide two, during this call, we will be discussing some non-GAAP financial measures. The most directly comparable GAAP financial measures and a reconciliation of the differences between the GAAP and non-GAAP financial measures are available in our earnings release and investor presentation on our website.
Matthew Scott Gunter: Joining me from the company I have our Chief Executive Officer, Tim Danker, and Chief Financial Officer, Ryan Clearnet.
Matthew Scott Gunter: Following Tim and Ryan's comments today, we will have a question and answer session.
Matthew Scott Gunter: As referenced on slide two during this call we will be discussing some non-GAAP financial measures. The most directly comparable GAAP financial measures and a reconciliation of the differences between the GAAP and non-GAAP financial measures are available in our earnings release and Investor presentation on our website.
Matthew Scott Gunter: And finally, a reminder that certain statements made today may be forward-looking statements. These statements are made based upon management's current expectations and beliefs concerning future events impacting the company and therefore involve a number of uncertainties and risks, including but not limited to those described in our earnings release, Form 10-Q for the period ended March 31st, 2024, and other filings with the SEC. Therefore, the actual results of operations or financial condition of the company could differ materially from those expressed or implied in our forward-looking statements. And with that, I'd like to turn the call over to our Chief Executive Officer, Tim Danker. Tim?
Matthew Scott Gunter: And finally, a reminder that certain statements made today may be forward looking statements. These statements are made based upon management's current expectations and beliefs concerning future events impacting the company and therefore involve a number of uncertainties and risks, including but not limited to those described in our earnings release.
Timothy Robert Danker: <unk> 10-Q for the period ended March 31, 2024, and other filings with the SEC.
Matthew Scott Gunter: Therefore, the actual results of operations or financial condition of the company could differ materially from those expressed or implied in our forward looking statements.
Timothy Robert Danker: Good morning, and thanks to everyone for joining us. It was an exciting quarter for Selectquote on a number of fronts, and I'll begin today's call by summarizing our accomplishments across three main categories. First, our senior Medicare Advantage business continues to leverage the foundational changes we made more than two years ago. The business continues to drive strong policy production, with stable and attractive unit economics. This quarter marks the ninth in a row that it's over-delivered against our internal expectations. Specifically, we generated $204 million in revenue within our senior business at a 30% EBITDA margin.
Matthew Scott Gunter: And with that I'd like to turn the call over to our Chief Executive Officer, Tim Danker, Tim.
Timothy Robert Danker: Good morning, and thanks to everyone for joining it was an exciting quarter for select quote across a number of fronts and I'll begin today's call summarizing our accomplishments across three main categories first our senior Medicare advantage business continues to leverage the foundational changes we made more than two years ago. The business continues to.
Timothy Robert Danker: The result is one of the highest senior revenue for an OEP in Selectquote's history, which is a great accomplishment considering the conservatism built into our LTV assumptions over the past two years. Delivering this top-line performance at attractive margins, despite modest year-over-year increases in operating and marketing expense, is a testament to our focus on operating efficiency. Additionally, our success in healthcare services continued in the third quarter with better than expected membership growth. Our membership now exceeds 75,000, which is well beyond our forecast set at the beginning of the year.
Timothy Robert Danker: Drive strong policy production with stable and attractive unit economics.
Timothy Robert Danker: <unk> marks the ninth in a row that it's over delivered against our internal expectations.
Timothy Robert Danker: Typically we generated $204 million in revenue within our senior business at a 30% EBITDA margin.
Timothy Robert Danker: <unk> is one of our highest senior revenue for now.
Timothy Robert Danker: And for like what's history, which is a great accomplishment considering the conservatism built into our LTV assumptions over the past two years delivering this top line performance at attractive margins. Despite modest year over year increases in operating and marketing expense is a testament to our focus on operating efficiency.
Timothy Robert Danker: <unk> our success in healthcare services continued in the third quarter with better than expected membership growth yet again, our membership now exceeds 75000, which is well beyond our forecast at the beginning of the year.
Timothy Robert Danker: We are extremely pleased with the growth achieved in the segment but are even more excited by the embedded profit potential and immediate cash flow benefit the business provides our overall company. Third, as we've spoken about, we continue to advance down the path of improving our funding costs and overall leverage through the securitization of our receivables balance, which at quarter end stood at over $1 billion. I'll provide a general overview of how a securitization structure would help improve returns and cash efficiency for Selectquote in a minute, but we're excited about the progress we've made since our last call and look forward to sharing more information about the potential transaction when we can.
Timothy Robert Danker: We are extremely pleased with the growth achieved in this segment, but are even more excited by the embedded profit potential and immediate cash flow benefit the business provides our overall company.
Timothy Robert Danker: Third as we've spoken about we continue to advance down the path of improving our funding cost and overall leverage through the securitization of our receivables balance which at quarter end stood at over $1 billion.
Timothy Robert Danker: I will provide a general overview of how our securitization structure would help improve returns and cash efficiently recycled in a minute, but we're excited about the progress we've made since our last call and look forward to sharing more information about the potential transaction when we can.
Timothy Robert Danker: In sum, Selectquote has never been better positioned to continue executing on our goal of becoming a comprehensive health care services provider to a large and growing range of Americans. We're excited to see our operational improvements bear increasingly tangible results. Given we expect to drive positive operating cash flow in fiscal 2024, which will compound in the years ahead, we believe 2024 will be remembered as an evolutionary milestone to ultimately deliver the returns we know our model can generate for shareholders.
Timothy Robert Danker: And some like what has never been better positioned to continue executing on our goal of becoming a comprehensive health care services provider to a large and growing range of Americans. We're excited to see our operational improvements bear increasingly tangible results.
Timothy Robert Danker: Given we expect to drive positive operating cash flow in fiscal 2024, which will compound in the years ahead. We believe 2024 will be remembered as an evolutionary milestone to ultimately deliver the returns we know our model can generate for shareholders.
Timothy Robert Danker: If we turn to slide four, let me give an update on the operating stability we continue to see in our senior Medicare Advantage business. For the second straight year and a different type of NA selling season, Selectquote has maintained the cost and operating efficiency improvements at the core of our strategic redesign. Our operating expense per policy remains nearly 30% below the levels from our 2021 vintage, driven primarily by the shift away from FlexAgent.
Speaker Change: If we turn to slide four let me give an update on the operating stability, we continue to see in our senior Medicare advantage business.
Timothy Robert Danker: For the second straight year and a different type of then a selling season blackboard is maintaining the cost and operating efficiency improvements.
Timothy Robert Danker: Core of our strategic redesign or.
Timothy Robert Danker: Our operating expense per policy remains nearly 30% below the levels from our 2021 vintage driven primarily by the shift away from flex agents, our core senior agents as you will remember our approximately two times more efficient compared to less tenured agents. We've maintained a strategy not just the overweight this population with <unk>.
Timothy Robert Danker: Our core senior agents, as you will recall, are approximately two times more efficient compared to less tenured agents. We've maintained a strategy not just to recruit this population of agents but to train them earlier and arm them with increasingly advanced tools.
Timothy Robert Danker: <unk>.
Timothy Robert Danker: Train them earlier and arm them with increasingly advanced tools. This.
Timothy Robert Danker: This clearly benefits Selectquote's operating efficiency, but better yet, the alignment with policyholders is where everyone wins. That is best evidenced by our stable persistency in LTV. Happy policyholders keep their policies, which is a win for them, Selectquote, and our carrier partners. Given our laser focus on high-quality growth, Selectquote has also realized efficiency benefits and reduced our marketing cost-per-approved policy. On average, these costs are down more than 30% in each of the past two years compared to 2021.
Timothy Robert Danker: This clearly benefits quite close operating efficiency, but better yet the alignment with policyholders, where everyone wins that is best evidenced by our stable persistency in LTV happy policyholders keep their policies, which is a win for them.
Timothy Robert Danker: And our carrier partners.
Timothy Robert Danker: Given our laser focus on high quality growth liquid has also realized efficiency benefits and our marketing costs per approved policy.
Timothy Robert Danker: On average these costs are down more than 30% in each of the past two years compared to 2021.
Timothy Robert Danker: Again, we believe this strong performance is sustainable and scalable in a range of M.A. selling seasons, not because we have a crystal ball about policy features or competition, but instead because we are purposefully targeting the leads we pursue. This helps manage our marketing costs and improves the overall quality and throughput of the policies we sell. Lastly, as we've noted in recent quarters, the process improvements we've made in our senior business, combined with the synergistic growth of our SelectRx business, have made a meaningful difference in the revenue multiple we're driving on our customer acquisition costs. For the third quarter, our revenue to CAC again eclipsed four times, which is now more than double where it was two years ago.
Timothy Robert Danker: Again, we believe this strong performance is sustainable and scalable in a range of MH selling seasons, not because we had a crystal ball and policy features our competition, but instead, because we are purposefully targeting and the leads we pursue.
Timothy Robert Danker: This helps manage our marketing costs and improves the overall quality and throughput of the policies we sell.
Timothy Robert Danker: Lastly, as we've noted in recent quarters the process improvements, we've made and our senior business combined with the synergistic growth of our select Rx business has made a meaningful difference in the revenue multiple we're driving on our customer acquisition costs for the third quarter, our revenue to CAC again eclipsed four times, which is now more than double.
Timothy Robert Danker: Where it was two years ago.
Timothy Robert Danker: On the next page, let me spend a few minutes on the dynamics of a potential securitization deal and why it isn't attractive funding option for our business.
Timothy Robert Danker: On the next page, I will spend a few minutes on the dynamics of a potential securitization deal and why it is an attractive funding option for our business. Securitization can help improve the Selectquote balance sheet in three key ways. First, the proceeds would allow us to repay a considerable portion of our existing term loans. The second benefit would be the potential to extend maturities on our existing term loans beyond 2025. Given these two benefits, the aggregate debt load and maturity ladder for Selectquote could be materially improved, and we believe there could be more opportunity to further improve our overall capitalization and cost of capital. That further improvement is the third step to improving our balance sheet, which would take place in the future through debt pay-down and refinancing.
Timothy Robert Danker: Securitization could help improve the <unk> balance sheet and three key ways.
Timothy Robert Danker: First the proceeds would allow us to repay a considerable portion of our existing term loan.
Timothy Robert Danker: The second benefit would be the potential to extend maturities on our existing term loans beyond 2025.
Timothy Robert Danker: Given these two benefits aggregate debt load and maturity ladder for select club could be materially improved and we believe there could be more opportunity to further improve our overall capitalization and cost of capital that.
Timothy Robert Danker: That further improvement as the third step to improving our balance sheet, which would take place in the future through debt Paydown and refinancing.
Timothy Robert Danker: Beyond the balance sheet benefits, there are operational benefits from a potential securitization. Specifically, securitization can accelerate cash flows for our Medicare Advantage business and drive better returns and cash efficiency, which are at the heart of our overall value proposition to shareholders. On this slide, we've presented an illustration of how a potential securitization of new policy tranches could positively impact the cash flows of a single Medicare Advantage policy compared to our current model.
Timothy Robert Danker: Beyond the balance sheet benefits there are operational benefits from our potential securitization, specifically securitization can accelerate cash flows for our Medicare advantage business and drive better returns and cash efficiency, which are at the heart of our overall value proposition to shareholders.
Timothy Robert Danker: On this slide we've presented an illustration of how a potential securitization of new policy tranches could positively impact the cash flows of the single Medicare advantage policy compared to our current model as you can see the key benefit would be the pull forward of our payback and the policy creation and securitization.
Timothy Robert Danker: As you can see, the key benefit would be the pull-forward of our payback and policy creation. In securitization, we would anticipate a marked acceleration compared to our historical payback of just over two years. The upfront cash flow from this potential funding structure could further improve our returns on new policies. To be clear, a securitization structure would not impact LTVs or our cost to sell a policy but instead simply delivers cash returns sooner. In addition, while a securitization would be structured at a loan to value below the sum of cash flows, Selectquote would maintain the policy and the residual value once the bonds have been repaid.
Timothy Robert Danker: Anticipate a marked acceleration compared to our historical payback of just over two years.
Timothy Robert Danker: The upfront cash flow from this potential funding structure could further improve our returns on new policies to be clear our securitization structure would not impact the ltvs or our cost of solar policy, but instead simply delivers a cash return center.
Timothy Robert Danker: In addition, while our securitization will be structured as a loan to value below the sum of cash flows.
Timothy Robert Danker: Would maintain the policy and the residual value once the bonds have been repaid.
Timothy Robert Danker: The final key benefit this cash efficiency would have for our model is a growing ability to self-fund our business with forward securitization. To be very clear, the use of securitization funding would not change our strategic imperative to prioritize profitability and returns over growth. Just because securitization would provide additional equity to grow MA policies, our discipline in how we would approach the MA business would not change.
Timothy Robert Danker: The final key benefit this cash efficiency would have for our model is a growing ability to self fund our business with forward securitizations to be very clear the use of securitization funding would not change our strategic imperative to prioritize profitability and returns over growth.
Timothy Robert Danker: Because securitization would provide additional liquidity to grow in MA policies, our discipline in how we would approach the ammo business would not change.
Ryan M. Clement: In parallel with debt reduction, we believe securitization funding could accelerate how Selectquote leverages its holistic model to further differentiate and broaden its growth and profit opportunities with new value-added services for Americans within a shifting health care ecosystem. On the next page, I'll briefly speak to our consolidated results for the third quarter. As mentioned, we're very pleased with the stability in both policy growth and margin for our core senior business. Similarly, we again saw strong membership growth for our SelectRx business and healthcare services, which increased over 12,000 this past quarter alone.
Timothy Robert Danker: In parallel with that reduction, we believe securitization funding could accelerate how cycle. It leverages, our holistic model to further differentiate and broaden our growth and profit opportunities with new value added services for Americans within a shifting healthcare ecosystem.
Ryan M. Clement: On the next page I'll briefly speak to our consolidated results for the third quarter.
Ryan M. Clement: As mentioned, we're very pleased with the stability in both policy growth and margin for our core senior business. Similarly, we again saw strong membership growth for our select Rx business and health care services, which increased over 12000.
Ryan M. Clement: Past quarter alone as.
Ryan M. Clement: As we've discussed in recent quarters, the rapid growth of our membership comes at near-term dilution to our overall EBITDA margins, which you can see here on the year-over-year comparison. That said, it's margin pressure we've been happy to incur based on the embedded economics that exist in our SelectRx and broader healthcare services segment. To be clear, we remain confident that our healthcare services business has the ability to generate double-digit EBITDA margins, which on the basis of revenues we are producing, will become significant as the model matures.
Ryan M. Clement: As we've discussed in recent quarters, the rapid growth of our membership comes at near term dilution to our overall EBITDA margins, which you can see here on the year over year compare.
Ryan M. Clement: That said its margin pressure, we've been happy to incur based on the embedded economics that exists in our select Rx and broader health care services segment to be clear, we remain confident that our health care services business has the ability to generate double digit EBITDA margins, which on the base of revenues, we are producing becomes significant.
Ryan M. Clement: The model matures before I turned to Ryan I'll conclude by reiterating my message that <unk> has never been better positioned with a strong operating foundation to pursue the large market and value creation opportunity that we know is ours to take with that let me turn the call over to Ryan to detail our financial results.
Ryan M. Clement: Before I turn the call over to Ryan, I'll conclude by reiterating my message that Selectquote has never been in a better position with a strong operating foundation to pursue the large market and value creation opportunity that we know is ours to take. With that, let me turn the call over to Ryan to detail our financial results and updated outlook for 2024.
Ryan: Updated outlook for 2020 for Brian.
Ryan: Thanks, Tim I'll begin my remarks with additional details on our strong results for selected senior Medicare advantage business on slide seven.
Ryan M. Clement: Thanks, Tim. I'll begin my remarks with additional details on the strong results for Selectquote's Senior Medicare Advantage business on slide 7. As Tim mentioned, the key takeaway is the stability of our financial results this season compared to last. Stable and repeatable financial results were our primary aim when we redesigned our strategy two years ago, and results like these continue to validate our strategy. We drove a strong OEP with $204 million of revenue in the third quarter, representing double-digit growth compared to last year.
Ryan M. Clement: The key takeaway is the stability of our financial results this season compared to last.
Ryan M. Clement: Cable and repeatable financial results, where our primary aim when we redesigned our strategy two years ago and results like these continue to validate our strategy, we drove a strong OE with $204 million of revenue in the third quarter, representing double digit growth compared to last year.
Ryan M. Clement: As Tim noted, we had another successful quarter for profitability with a 30% even amount. We credit the operating efficiency and the resulting profitability to the higher mix of tenured agents, enhanced desktop tools to ensure best policy fit, and a more focused approach to lead targeting. Put simply, we believe Selectquote's approach in the market is fundamentally different, and our nine consecutive quarters of strong results are evidence of that. If we flip to slide 8, let's look at Selectquote's OEP through the lens of policies and LTD. First, we grew approved Medicare Advantage policies by 12% during the quarter.
Ryan M. Clement: As Tim noted, we had another successful quarter for profitability with a 30% EBITDA margin.
Ryan M. Clement: Credit the operating efficiency and the resulting profitability to the higher mix of tenured agents.
Ryan M. Clement: Enhanced desktop tools to ensure best policy fit and more focused approach to lead targeted.
Ryan M. Clement: Simply we believe selective approach in the market is fundamentally different and our nine consecutive quarters of strong results is evidence of that.
Ryan M. Clement: If we flip to slide eight let's review select clinics through the lens of policies and LTV.
Ryan M. Clement: This was made possible through a blend of strong close rates with our core agents, as well as the focused lead sourcing we referenced before. This also outpaced overall industry growth, which is a testament to Selectquote's strong customer acquisition and retention. As we spoke to you last quarter, the Medicare Advantage policy features were competitive this season, and we grew policy count without sacrificing quality. This is all the more impressive when considering the strength of the market in 2023 and the comparisons we were up against.
Ryan M. Clement: First we grew in approved Medicare advantage policies by 12% during the quarter. This was made possible through a blend of strong close rates with our core agents as well as the focus leads or thing we referenced before this also outpaced overall industry growth, which is a testament to select strong customer acquisition engine.
Ryan M. Clement: We spoke to last quarter. The Medicare advantage policy features where competitive this season and we grew policy count without sacrificing quality. This is all the more impressive when considering the strength of the market in 2023 and the comparisons we were up against.
Ryan M. Clement: In fact, our LTV increased to $995 per policy, which is up 3% from a year ago and is now up 7% from the low recognized in fiscal 2022. The increase in LTV has been made possible by stable policyholder behavior, which we largely credit to our core agent mix and the resulting improvement in quality policy matching with our customers. Turning to slide nine, I'll detail our health care services segment and SelectRx specifically.
Ryan M. Clement: In fact, our LTV increased to $995 per policy, which is up 3% from a year ago and is now up 7% from the low recognized in fiscal 2022.
Ryan M. Clement: The increase in LTV has been made possible by stable policyholder behavior between largely credit to our core is it mix and the resulting improvement in quality policy matching with our customers.
Ryan M. Clement: Turning to slide nine I'll do.
Ryan M. Clement: Detail, our healthcare services segment and select our X specifically.
Ryan M. Clement: As Tim mentioned, growth remains robust, and our platform surpassed expectations again, both on member growth and revenue. Specifically, our members grew to 75,000, which is 20% higher than a quarter. Similarly, revenue of $124 million in the third quarter grew rapidly, driven both by new members but also by the maturation of members we have added over the course of the year. Third quarter revenue growth of 76% compared to a year ago is a significant increase and one that we are proud of.
Ryan M. Clement: Tim mentioned growth remains robust and our platform surpassed expectations again, both on member growth and revenue specifically our members grew to 75000, which is 20% higher than a quarter ago. Similarly revenue of $124 million in the third quarter grew rapidly driven both by new members, but also by the math.
Ryan M. Clement: Duration of members, we have added over the course of the year.
Ryan M. Clement: Third quarter revenue growth of 76% compared to a year ago is a significant increase and one that we're proud of.
Ryan M. Clement: That said, we acknowledge a growing need to balance our growth with profitability and healthcare services, and I'd like to take a minute to give context both on our third quarter EBITDA results and also on our near-term strategy for this segment as a whole. As you can see, our health care services EBITDA of $2 million remains muted, primarily as a function of onboarding the over 12,000 members that signed up for SelectRx this past quarter. This was the largest quarterly member increase on record.
Ryan M. Clement: That said, we acknowledge the growing need to balance our growth with profitability and health care services and I'd like to take a minute to give context, both on our third quarter EBITDA results, but also on our near term strategy for this segment as a whole.
Ryan M. Clement: As you can see our healthcare services EBITDA of $2 million remains muted primarily as a function of onboarding. The over 12000 members that signed up for select Rx. This past quarter. This was the largest quarterly number increase on record.
Ryan M. Clement: The onboarding costs associated with these new members match the stable and attractive margins we earn on prescription sales. As new member onboarding moderates in the future, we maintain that our healthcare services business can generate double-digit EBITDA margins. Next, I'll briefly summarize our Life Not on Home segment, which also had a stable quarter for both revenue and adjusted EBITDA, which were $50 million and $7 million, respectively. Similar to prior quarters, the Auto and Home Division's strong performance was once again driven primarily by a combination of strong agent productivity and higher industry-wide premiums.
Ryan M. Clement: The onboarding costs associated with these new members, Matt the stable and attractive margins, we earn on prescription sales as new member Onboarding moderate in the future, we maintain that our healthcare services business and generate double digit EBITDA margins.
Ryan M. Clement: Next I'll briefly summarize our life not at home segment, which also had a stable quarter for both revenue and adjusted EBITDA, which were $50 million and $7 million respectively.
Ryan M. Clement: Similar to prior quarters, the auto and home Division strong performance was once again, driven primarily by a combination of strong agent productivity and higher industry wide premiums.
Ryan M. Clement: The life division grew revenues by over 10%, fueled in particular by a strong quarter for the final expenses. As a reminder, these business lines continue to benefit Selectquote's overall cash. Lastly, let me review our updated fiscal 24 outlook on slide 11. As Tim mentioned, we are raising our revenue expectations to $1.25 to $1.3 billion, which at the midpoint represents growth of 27% year-over-year. This is the second consecutive quarter we have increased our top-line outlook and is primarily driven by the rapid adoption we have seen in our Selector X member.
Ryan M. Clement: The life Division grew revenues by over 10% fueled in particular by a strong quarter for the final expense business.
Ryan M. Clement: As a reminder, these business lines continue to benefit for liquids overall cash efficiency.
Ryan M. Clement: Lastly, let me review our updated fiscal 'twenty four outlook on slide 11.
Ryan M. Clement: As Tim mentioned, we are raising our revenue expectations to 125 to $1 3 billion, which at the midpoint represents growth of 27% year over year. This is the second consecutive quarter, increasing our top line outlook is primarily driven by the rapid adoption, we've seen in our select our ex membership.
Ryan M. Clement: For SelectRx specifically, we would note that our fiscal fourth quarter is in a seasonally slower period for member growth than AEP or OEP. While we still expect member growth into our fiscal year-end, the pace will be modest compared to the past quarter. We also raised our outlook for adjusted EBITDA, which is now between $100 million and $110 million. At the midpoint, this represents growth of 41% year-over-year. As I spoke to you, we're happy to raise our profit outlook despite the additional onboarding expense driven by our rapid SelectRx growth. With that, let me turn the call back to the operator to take your question.
Ryan M. Clement: They selected our X specifically, we would note that our fiscal fourth quarter is at a seasonally slower period for member growth in AEP, but we still expect member growth into our fiscal year and the pace will be modest compared to the past quarter. We also raised our outlook for adjusted EBITDA, which is now $100 million to $110 million.
Ryan M. Clement: At the midpoint this represents growth of 41% year over year as I've spoken to we are happy to raise our profit outlook. Despite the additional onboarding expense driven by a rapid select Rx growth with that let me turn the call back to the operator to take your questions.
Speaker Change: Thank you.
Operator: Thank you. Please press star followed by the number one if you'd like to ask a question and ensure your device is unmuted locally when it's your turn to speak. Our first question comes from Ben Hendrix with RBC. Please go ahead; your line is open.
Ryan M. Clement: Questor, followed by the number one if you'd like to ask a question and answer all your devices Amit lately when it's your attempt to smoke.
Operator: Our first question comes from Bob <unk> with RBC.
Operator: Go ahead your line is open.
Benjamin Hendrix: Hey, Thank you very much.
Benjamin Hendrix: Hey, thank you very much, and congratulations on the results. I wanted to get into more detail on slide five, the securitization and the pull-forward of the payback period. It seems like a very compelling structure here, but I was kind of wondering, kind of, for this with, now it seems like your debt levels would be directly linked to sales in any given year now. I just wanted to know how you think about balance sheet management and your leverage.
Benjamin Hendrix: Congratulations on the result.
Benjamin Hendrix: Get to more detail on slide five the securitization and the pull forward of the payback period, it looks like a very.
Benjamin Hendrix: Compelling structure here, but just wondering kind of but now.
Benjamin Hendrix: Now it seems like your debt levels would be directly linked to sales in any given year now I just wanted to ask how you think about balance sheet management and your leverage profile of the company going forward under the structure.
Speaker Change: Thanks, Ken.
Ryan M. Clement: Thanks, Ben. Yes, I mean, with respect to securitization, we do see it as a flexible structure where, as we produce more policies, we can securitize those policies and access the proceeds. So, as a result, it does create an environment where we can de-lever and pay down the term debt. But it also creates an environment where it is self-funding in nature. And so on a go-forward basis, we would expect to securitize policies as we produce them, kind of on a perpetual basis.
Speaker Change: Yes, I mean with respect to securitization, we do see it.
Ryan M. Clement: A flexible structure, where as we produce more policies.
Ryan M. Clement: We can we can securitize those policies and access their proceed.
Ryan M. Clement: As a result, it does create an environment, where we can delever and pay down the term debt.
Ryan M. Clement: But it also creates an environment, where it is self funding.
Ryan M. Clement: In nature and so on a go forward basis, we would expect to securitize policies as we produce them.
Ryan M. Clement: Kind of on a perpetual basis.
Ryan M. Clement: And I appreciate the commentary about being able to retain all your retail commissions and that seems definitely like a positive problem. This is Doug.
Ryan M. Clement: And I appreciate the commentary about being able to retain all your tail commissions, and that seems definitely like a positive. The problem is, does this amplify the downside in an event, and I know you guys have done a really good job of increasing the quality of your commissions receivable and, you know, and having, you know, a really strong confidence there, but could this amplify any downside risk of negative tail revenue?
Ryan M. Clement: Amplify on the downside in an event and I know you guys have done a really good job of.
Ryan M. Clement: Creasing, the quality of your commissions receivable and happening.
Ryan M. Clement: I have really strong confidence there, but could this amplify any downside risk of negative tail revenue.
Ryan M. Clement: I mean ultimately.
Ryan M. Clement: Ultimately, you know, with respect to our cash flows, to the extent persistency were to come in worse than anticipated, we would not recognize those cash flows. So, I don't know that, like, the risk is amplified. It is, you know, obviously, we are securitizing, and obviously, when you are securitizing policies, those policies are based on actuarial studies, and they're not securitized at a loan-to-value that is 100% but actually at a pretty significant reduction from 100%. So, kind of, there are mechanisms in place to de-risk the overall structure. We do believe that securitization is an attractive form of financing for the business and for shareholders, and it makes a lot of sense.
Ryan M. Clement: With respect to our cash flows.
Ryan M. Clement: To the extent persistency were to come in worse than anticipated, we would not recognize those cash flows. So I don't know that like the risk is amplified.
Ryan M. Clement: It is obviously, we are securitizing and obviously when you are securitizing.
Ryan M. Clement: Policies.
Ryan M. Clement: Policies are based off of actuarial studies and they are not.
Ryan M. Clement: Securitized and a loan to value.
Ryan M. Clement: That is 100%, but actually at a pretty significant reduction from 100% so kind of there are.
Ryan M. Clement: Mechanism that place to Derisk the overall structure.
Ryan M. Clement: We do believe that securitization is an attractive form of financing for the business for shareholders.
Ryan M. Clement: A lot of sense.
Speaker Change: Great. Thank you just one last one on the regulatory environment and the commission rules that we've seen come through can CMS just wanted to get your latest interpretation there and how.
Timothy Robert Danker: Great, thank you. Just one last question on the regulatory environment, the commission rules that we've seen come through from CMS. Just wanted to get your latest interpretation there and, you know, and how you believe it, you know, it relates to your business lines.
Timothy Robert Danker: Hi.
Timothy Robert Danker: How do you believe it.
Speaker Change: <unk> to your to your business line. Thanks.
Timothy Robert Danker: Yeah.
Timothy Robert Danker: Thanks. Good morning, Ben. This is Tim. Thanks for joining us.
Timothy Robert Danker: Good morning, Ben. This is Tim.
Timothy Robert Danker: Good morning, Matt This is Tim.
Tim: For joining thanks for your question yes.
Timothy Robert Danker: Thanks for joining us. Thanks for the question. Yeah, our interpretation of the final rule really seems to delineate that there are different rules that apply to different participants in the industry. So specifically, Selectquote, we're considered a third party marketing organization or TPMO under the new language that came out. We believe it's CMS's intention to exclude TPMOs from the fee limitations related to broker comp. So we've been actively engaged with our carrier partners on this issue.
Tim: Our interpretation of the final rule.
Timothy Robert Danker: Really seems to delineate there are different rules that apply to different participants in the industry.
Timothy Robert Danker: Specifically select what were considered a third party marketing organization our PMO.
Timothy Robert Danker: Based upon the new language that came out we believe that CMS is intention.
Timothy Robert Danker: To exclude <unk> from the fee limitations related to broker comp so.
Timothy Robert Danker: We've been actively engaged with our carrier partners on this issue they have.
Timothy Robert Danker: They have reiterated the critical role we play in M&A distribution, the value that we provide beneficiaries, and kind of underscored some of the differences in our model versus others. So the bottom line of all this is, we don't see this materially impacting our business.
Timothy Robert Danker: Our reiterated the critical role we play in EMEA distribution the value that we provide beneficiaries.
Timothy Robert Danker: And kind of underscored some of the differences in our model versus others. So.
Timothy Robert Danker: Yes.
Timothy Robert Danker: In light of all of this is we don't see this materially impacting our business.
Speaker Change: Thank you very much.
Speaker Change: Thanks Pat.
Speaker Change: Thank you and again as a reminder, if you'd like to ask a question one on your telephone keypad.
Operator: Thank you. And again, as a reminder, if you'd like to ask a question, it's star 1 on your telephone keypad. Our next question comes from Pat McCann of Noble Capital Markets. Please go ahead.
Operator: Our next question comes from Pat Mccann of night book up to market.
Pat McCann: Please go ahead.
Pat McCann: Hey, congrats on the quarter and thanks for taking my questions.
Pat McCann: Hey, congratulations on the quarter. And thanks for taking my questions. My first question is about the pharmacy business. You mentioned during the presentation the focus on improving margins as we go forward. I was wondering if you could talk a little bit about some of the levers you pulled to do that.
Pat McCann: My first question is about the pharmacy business you mentioned during the presentation.
Pat McCann: The focus on on improving margins.
Pat McCann: Go forward I was wondering if you could talk a little bit about some of some of the levers you pull to do that.
Speaker Change: Yes, I can start from a business standpoint, and then have Ryan kind of take it from a just general economic standpoint.
Robert Clay Grant: Yeah, I can start from a business standpoint and then have Ryan kind of take it from a just general economic standpoint. It's a business, obviously, that we don't book in the same way that we book our senior business.
Ryan: It's <unk>.
Ryan: Business, obviously that we don't book in the same way that we book, our senior business and as a customer gets more tenured they add more drugs for customer and more scripts as we as we get to more of a full box. There turn actually reduces then the unit economics on the box is actually get better and better and I think we've seen that play out as we've kind of made more money.
Robert Clay Grant: And as a customer gets more tenured, they add more drugs per customer or more scripts as we get to more of a full box, their churn actually reduces, and the unit economics on the boxes actually get better and better. And I think we've seen that play out as we've kind of made more money during, I'd say, periods where we aren't growing quite as fast. And then, like last quarter, we grew really, really quickly on the back of AEP.
Robert Clay Grant: I would say periods, where we aren't growing quite as fast and then like last quarter. We grew really really quickly on the back of AEP and you see the economics reduce just a little bit but over time that gets more and more stable and more and more profitable per box and thats, how we really see that that played out our unit economics on.
Robert Clay Grant: And you see the economics reduce just a little bit. But over time, that gets more and more stable and more and more profitable per box. And that's how we really see that playing out.
Robert Clay Grant: The lifetime of a box has actually gotten significantly better because we've reduced our turn we've increased the percentage that have full boxes.
Robert Clay Grant: Our unit economics on the lifetime of a box have actually gotten significantly better because we've reduced our churn, we've increased the percentage that have full boxes, and just gotten better operationally. I'd say the other area that we'll really focus on operationally is just, as we've gotten economies of scale, one, we get to buy scripts at a lower price, right? And then two, more importantly, actually, is the automation efficiency we can gain within the facilities and factory itself.
Robert Clay Grant: Just gotten better operationally I would say the other area that will really focus on operationally is just as we've got in economies of scale, one we get to.
Robert Clay Grant: Yes.
Robert Clay Grant: By scripts that are at a lower price right and then two more importantly, actually is the automation and efficiency, we can gain within the facilities and factory itself.
Robert Clay Grant: And we are hyper-focused on that right now as we get bigger and bigger and we get more tenured. So that's why we have such confidence in where we're going from an economic standpoint and feel really, really good about where we are. But it's just the maturity of the business.
Robert Clay Grant: We are hyper focused on that right now as we get bigger and bigger and we get more tenured. So that's why we have such confidence on where we're going from a economic standpoint.
Robert Clay Grant: And feel really really good about where we are but it's just the maturity of the business and ultimately as those customers play out.
Speaker Change: Great and then and then <unk>.
Ryan M. Clement: Great, and then there is health care.
Speaker Change: Oh, sorry go ahead.
Speaker Change: Yeah, No I was going to call out obviously youre on boarded 12000, plus customers, which is we were incredibly pleased with and there is a short term cost associated with that enrollment and on boarding.
Ryan M. Clement: Yeah, no, I was going to call out, obviously, we onboarded 12,000 plus customers, which is, you know, we were incredibly pleased with. There is a short-term cost associated with that enrollment and onboarding, but drug margins are strong, and we believe that we're building a business with a lot of embedded value. This is a recurring business model. We recognize revenue as those drugs are being shipped out. So, as Bob alluded to, as customers mature, more and more are going out with full boxes, and we'll see, you know, the margin progression. Hey, Pat, I might.
Ryan M. Clement: But drug margins are strong and we believe that were building a business with a lot of embedded value.
Ryan M. Clement: There is a recurring business model, we recognize revenue as those drugs are being shipped out so as Bob alluded to.
Pat McCann: As customers mature more and more going out with full boxes, and we will see the margin progression.
Bob: Hey, Pat I might pile on one more thing one more thing Pat just to pile on here.
Ryan M. Clement: You know, we've we've grown the business to the point of, you know, cash flow generation. I've done that for four consecutive quarters. That was really a goal that we set out for the business, going to reach that inflection point. We're definitely happy to take that consumer demand. I mean, the third quarter was very strong for us. But we're going to balance that with managing margins and profitability, as we would expect, and we'll provide more visibility in our fiscal 25 guide here in August.
Ryan M. Clement: Hey, Pat, I might pile on this one more thing. One more thing, Pat, just to pile on.
Speaker Change: We've grown the business to the point of.
Pat McCann: Cash flow generation I've done that for four consecutive quarters that was really a goal that we set out for the business kind of reached that inflection point.
Speaker Change: Definitely happy to take that consumer demand I mean third quarter was very strong for us, but we're going to balance that with managing margins and profitability. We would expect and we'll provide more visibility in our fiscal 'twenty five guide here in August, but just to double down on what Ron said I mean, we do believe that.
Ryan M. Clement: But just to double down on what Ryan said, I mean, we do believe that, on a long-term basis, we can progress margins into the low to mid teens on a significant, as you can see, growing amount of revenue and feel like we're building a lot of embedded profit potential in that business right now.
Ryan M. Clement: On a long term basis, we can progress margins into the low to mid teens on a significant as you can see growing amount of revenue in and feel like we're building a lot of embedded profit potential in that business right now.
Ryan M. Clement: Yeah.
Speaker Change: Great. Thanks for all the information there and then I.
Pat McCann: Great, thanks for all the information there. And then I guess I wanted to stay with healthcare services here for a second, just because I know that you're looking at ways to broaden your offerings there. Of course, the SelectRx business is the key asset at this point, but I'm wondering, you know, could you talk about any areas you're looking at to expand that segment of the business?
Pat McCann: I wanted to stay with health care services here for a second.
Pat McCann: Just because I know that you are looking at ways to broaden your offerings there.
Pat McCann: Of course, the the select Rx business is the key asset at this point, but I am wondering could you talk about any.
Pat McCann: Any areas you are looking at two to expand that.
Pat McCann: That segment of the business.
Speaker Change: Yeah, absolutely we are constantly kind of on that look and are launching into some new areas that we're not going to share too much at this time, but.
Robert Clay Grant: Yeah, absolutely. We are constantly kind of on the lookout and are launching into some new areas that we're not going to share too much at this time. But, you know, most of them or all of them are very adjacent to our pharmacy business and focus on complex, multiple chronic customers that we feel are very underserved today, especially in more rural areas. So we feel really strong about the research we've done and ultimately what we are doing as to what those adjacent services are and that they'll add, you know, not only a ton of value to the consumer but also a ton of value to our carrier partners as we can drive costs down through better healthcare literacy, better connections, you know, all of those things.
Robert Clay Grant: But most of them or all of them are very adjacent to our pharmacy business and focusing on complex multiple chronic customers.
Robert Clay Grant: We feel like a very underserved today, especially more rural base. So we feel really strong about the research that we've done and ultimately what we are doing as well as to what those adjacent services are that they'll add not only a ton of value to the consumer but also a ton of value to our carrier partners as we can drive cost down through better health care and literacy better.
Robert Clay Grant: And we believe that those will also have strong impacts on retention, just like we've seen in the Rx business. So we feel really good about, you know, kind of where we are, but more importantly, where we're going as we expand the things we can do for customers.
Robert Clay Grant: <unk> all of those things and we believe that those will also have strong impacts on retention just like we've seen in the Rx business. So we feel really good about kind of where we are but more importantly, where we're going as we expand the things we can do for customers.
Speaker Change: Yes, I would just add to that Pat I mean, Bob has done a really good job leading this for the company.
Timothy Robert Danker: Yeah, I would just add to that, Pat. I mean, Bob's done a really good job leading this for the company. You can see the rapid growth in terms of Rx. I think it underscores, right, there's real consumer demand. We've got customers with real needs. We're leveraging our core capabilities and customer acquisition, customer engagement, and logistics to drive immediate value into healthcare, as Bob said, but the great thing is we've got a lot of consumers that have a lot of underlying needs that we think that we can impact. We've got the data, the process, and the engagement to be able to act on those. So, we think this is a great first chapter and many more to come.
Timothy Robert Danker: You can see the rapid growth in <unk>.
Timothy Robert Danker: Arms of Rx I think it underscores alright, theres real consumer demand and we've got customers with real needs, we're leveraging our core capabilities and customer acquisition customer engagement and logistics.
Timothy Robert Danker: We think driving immediate value in health care, so more to follow as Bob said.
Timothy Robert Danker: But the great thing is we've got a lot of consumers have a lot of underlying needs that we think that we can impact we've got the data the process and the engagement to be able to act on that so we think this is a great first chapter.
Timothy Robert Danker: And many more to come.
Speaker Change: Great and if I could just ask one more question sort of a general question, if you're looking back at the annual enrollment period and the open enrollment period.
Pat McCann: Great, and if I could just ask one more question, sort of a general question, if you're looking back at the annual enrollment period and the open enrollment period that we're coming out of and then with, you know, CMS rules. Thinking about the upcoming AEP and OEP, do you have any, you know, could you comment at all on sort of the shopping environment that we're coming out of versus what you might expect we would go into and what implications that might have for your performance going forward in the senior segment?
Pat McCann: That we're coming out of and then.
Pat McCann: With CMS.
Pat McCann: CMS rules.
Pat McCann: Thinking about.
Pat McCann: The upcoming AEP and OUP.
Pat McCann: Do you have any.
Pat McCann: Could you comment at all on sort of the shopping environment that were coming out of versus what you might expect we would go into and what implications that might have.
Pat McCann: For your your performance going forward on the senior segment.
Speaker Change: Yes, it was interesting everybody or most people thought it would kind of be a soft environment last year.
Robert Clay Grant: Yeah, you know, it was interesting. Everybody, most people thought it would kind of be a soft environment last year. Yet some carriers made some key investments that really, you know, helped, and that created a really, what we think is, a strong environment for us. We believe that the same thing will kind of hold true this next year, even though there's a general kind of pullback and there are some profitability, you know, questions from carriers.
Robert Clay Grant: Yet some carriers made some key investments that really.
Robert Clay Grant: Helped in.
Robert Clay Grant: That created a really what we think is strong environment for us.
Robert Clay Grant: We believe that the same thing will kind of hold true. This next year, even though theres, a general kind of pull back and there are some profitability questions from carriers last time, we saw that happen.
Robert Clay Grant: You know, last time we saw that happen, carrier stability from some of the main players that have been there for a long time kind of took market share back, while some carriers that grew pulled back a little bit. And that created a little bit more of a, you know, I'd say higher close rate environment for us. So we feel really, really good about that and feel strong about where that'll take us, even though we do think there'll be a general kind of pullback by some carriers that are struggling a little bit with unit profitability in the short term.
Robert Clay Grant: <unk> carrier stability from some of the main players that have been there for a long time kind of they took market share back while some carriers that grew pulled back a little bit and that created a little bit more of a.
Robert Clay Grant: Say higher close rate environment for us. So we feel really really good about that and feel strong about where that will take us even though we do think there'll be a general kind of pullback by some carriers that are are struggling a little bit on unit profitability in the short term.
Robert Clay Grant: Okay.
Speaker Change: Great. Thanks, so much guys Thats all Ive got.
Pat McCann: Great. Thank you so much, guys. That's all I've got.
Speaker Change: Thank you Pat.
Speaker Change: Thank you we have nice I have a question so I'll turn the call back over to Kim Dang Kessler for any closing comments.
Operator: Thank you. We have no further questions, so I'll turn the call back over to Tim Danker for any closing comments.
Timothy Robert Danker: Alright, well, thanks again to everyone for joining today I hope you can tell from our comments, we are very excited about the future for slight growth.
Timothy Robert Danker: Great. Well, thanks again to everyone for joining us today.
Timothy Robert Danker: I hope you can tell from our comments that we are very excited about the future for Selectquote. We feel we are very well positioned to drive shareholder value, both immediately and in the years ahead, both in our insurance distribution platform and healthcare service businesses. So we look forward to sharing more in the quarter ahead as we start planning for our next fiscal year. We want to thank you again for your support, and we look forward to talking to you soon. Have a good day!
Timothy Robert Danker: We feel we're very well positioned to drive shareholder value both immediately and the years ahead, both in our insurance distribution platform and healthcare service businesses. So we look forward to sharing more in the quarter ahead as we start planning for our next fiscal year I want to thank you again for your support and we look forward to talking to you soon.
Timothy Robert Danker: Have a good day.
Speaker Change: This concludes today's call. Thank you for joining you may now disconnect your lines.
Operator: This concludes today's call. Thank you for joining us. You may now disconnect your line.
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