Mediaalpha Inc (MAX) 2022 Q4 法說會逐字稿

Good day, everyone, and welcome to the MediaAlpha Fourth Quarter and Full Year 2022 Earnings Call. Today's call is being recorded. (Operator Instructions) I would now like to turn the conference over to Denise Garcia, Investor Relations. Please go ahead.

Thank you, Lisa. After the market closed today, MediaAlpha issued a press release and shareholder letter announcing results for the fourth quarter and full year ended December 31, 2022. 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 first quarter of 2023, which are based on assumptions, forecasts, expectations and information currently available to management. These forward-looking statements are subject to risks and uncertainties that could cause future results or events to differ materially from those reflected in those statements. Please refer to the company's SEC filings, including its annual report on Form 10-K and its quarterly reports on Form 10-Q for a fuller explanation of those risks and uncertainties and the limits applicable to forward-looking statements. These forward-looking statements are based on assumptions as of today, February 23, 2023, and the company undertakes no obligation to revise or update them.

In addition, on today's call, we will be referring to certain actual and projected financial metrics of MediaAlpha that are presented on a non-GAAP basis. This includes adjusted EBITDA, which we present in order to supplement your understanding and assessment of our financial performance. Non-GAAP measures should not be considered as a substitute for or superior to financial measures calculated in accordance with GAAP. Reconciliations of these non-GAAP measures to the most directly comparable GAAP measures are included in our press release and the shareholder letter issued today. Finally, I'd like to remind everyone that this call is being recorded and will be made available for replay via a link on the Investors section of the company's website at investors.mediaalpha.com.

Now I'll turn the call over to Steve and Pat for a few introductory remarks before opening the call to your questions.

Thanks, Denise. Hi, everyone. Welcome to our fourth quarter and full year 2022 earnings call. I'd like to make a few observations before turning the call over to Pat for his comments. We saw strong performance in our Health insurance vertical in the fourth quarter. This is driven by a sharp year-over-year increase in demand from Medicare Advantage carriers, and we remain bullish about the long-term growth opportunity with this segment. The market for Medicare Advantage is expected to continue to outpace growth of Medicare as a whole, and seniors are increasingly shopping for Medicare Advantage policies online. With carriers prioritizing direct relationships with their members, we expect health insurance companies to continue to increase their direct marketing investments, which represent tremendous long-term tailwinds for this business.

Turning to our P&C insurance vertical. We believe Q4 was the low point of this auto insurance hard market cycle, and we're optimistic that 2023 will be a better year than 2022. Driven by the resumption of marketing investment by one leading carrier, who was early to achieve rate adequacy, we expect spend in our P&C marketplace to roughly double from Q4 to Q1, which is well above typical seasonal patterns.

As the year progresses, we expect more carriers to return to growth mode as rate increases continue to be approved and as underwriting profitability is gradually [restored]. Coupled with the heightened consumer shopping behavior that will result from these double-digit pricing increases, we believe that this has the potential to create market condition to support outsized growth coming out of this hard market.

Now taking a step back, it's now clear that 2022 will be remembered as one of the most difficult years ever for the P&C insurance industry. Our ability to deliver adjusted EBITDA and free cash flow in this unprecedented market environment not only speaks to the efficiency of our marketplace model, but also to our team and culture. As a bootstrap company, doing more (inaudible) has always been in our DNA, and I couldn't be prouder of how the entire MediaAlpha team rose to (inaudible) this past year, enabling us to flatten our expense growth to meet these challenging conditions.

Looking ahead, we continue to believe MediaAlpha can be a multibillion dollar company due to the vast size of our addressable market and our highly differentiated marketplace model. We look forward to executing on this market opportunity and delivering strong top and bottom line growth in the upcoming years.

With that, I'll turn the call over to Pat before we open the call to your questions.

Thanks, Steve. We exceeded our expectations during the fourth quarter due to better top line growth in our Health vertical in favorable expenses, excluding noncash items. We remain highly disciplined in our spending and continue to identify efficiency opportunities across the business.

I'll start with our balance sheet and cash flow. During the fourth quarter, we paid down $7.4 million of debt, bringing our cumulative debt repayments over the past 3 quarters to $27.1 million. We were pleased to generate $28.2 million of full year free cash flow during what we believe was the bottom of the current P&C cycle and we ended the year with $14.5 million of cash and considerable headroom relative to our debt covenants, leaving us well positioned to invest in growth coming out of the P&C hard market.

Moving to our Q1 2023 guidance. We expect P&C transaction value to nearly double compared with Q4 of 2022 driven by an improvement in market conditions in our P&C vertical in addition to normal seasonality. Although we are encouraged by these early signs of recovery, we still expect P&C transaction value to be well below Q1 2022 levels.

In our Health insurance vertical, we expect modest year-over-year growth in transaction value as we continue deepening our relationships with key carriers.

For the Life and Other verticals, we expect transaction value to decline year-over-year at a similar rate as in Q4 of 2022.

As a result of this, we expect Q1 transaction value for the company to be between $180 million to $195 million, a year-over-year decrease of 22% at the midpoint. We expect revenue to range from $106 million to $116 million, a year-over-year decrease of 22% at the midpoint.

Lastly, we expect adjusted EBITDA to be between $5.5 million to $7.5 million, a year-over-year decrease of 9% at the midpoint. We expect Q1 adjusted EBITDA margin to improve modestly year-over-year at the midpoint as we expect expenses to be roughly flat compared with Q4 of 2022. We expect quarterly expenses for the rest of this year to remain flat to up slightly as compared with Q1.

Due to the uncertainty around the timing and slope of the P&C market recovery, we are not providing full year 2023 guidance. But we believe the inherent operating leverage in our model and our ongoing expense discipline creates the potential for strong adjusted EBITDA growth moving forward.

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

(Operator Instructions) We'll take our first question from Michael Graham with Canaccord.

Thanks for the information, guys, it's a big statement that you think Q4 is the low point for P&C. I know you were one of the ones to say that this hard market might last longer than most people expected. So I think that's a good positive statement. I just wanted to ask about the -- in past cycles when you see like one carrier coming on strong here with rate adequacy as you outlined in your shareholder letter, can you just talk about like the [FOMO] involved with other carriers than sort of coming to market? And do you have any thoughts on like historically what a typical time lag has been between sort of the leaders getting rate adequacy and starting to spend more versus some of the others?

Michael, it's Steve. Let's see. It's a great question. I appreciate your commentary. Yes, I think the way this market cycle is unfolding is remarkably similar to past hard market cycles where there was one leading carrier who is very early to achieve rate adequacy and restore underwriting profitability, really front-running the rest of the market in a big way and leaning back into growth mode, not just leaning, I would say, jumping. Now what we know is that this will proceed the return of demand from a broader base of carriers. But in terms of the overall timing, I think that's when I think the parallels between the last hard market and this hard market kind of stop because really what you're going to see is each carrier being on their own time line based on the rate adequacy that they've been able to achieve and how long each of the carriers will wait until these rate increases earn through to improve their underwriting results before they then jump back into growth mode themselves.

And so the best that we can tell you is that we expect this to happen through this year with various carriers coming in at different stages of the year. We do expect this to last into '24. But in terms of just the overall timing and is it 6 months or is it 3 months that a leading carrier is going to front-run the rest of the marketplace. I mean that's really hard to predict and it's really going to depend on the individual carriers and their ability to really get their rates to a good place and where they need to be in terms of their underwriting performance before they really jump back into growth mode.

We'll take our next question from Cory Carpenter with JPMorgan.

(inaudible) question. Steve, one for you and then one for Pat. Just kind of following on that one. Some of the recent carrier results have been -- I think it fair to say disappointing when used car prices have actually started to rise this year. So just curious more recently, what you're hearing in conversations with carriers around those dynamics? And any risk that it could lead to further delays for, call it, some of the laggards? And then maybe for Pat, just on the guide, you mentioned seasonality and then also improved carrier spend. Any way to kind of parse out how much each of those is contributing to your 1Q guide?

Yes, sure. So we're seeing the same results roll in. And certainly, I think it is carrier-specific in terms of the tenor of the conversations that we're having with each carrier. There are carriers who have posted stronger results than you see them with a clear trajectory to restoring profitability, and you can easily see those carriers coming back into the marketplace in 3 to 6 months. And you see other carriers who really are indicating that 2023 or the vast majority of 2023, will be focused on getting their pricing right.

So in terms of the unexpected development, I don't know that, that we're seeing the same thing or we're hearing that from carriers. I think what you've seen is, over the last 6 quarters, rate increase is really outpacing increase in loss cost, which really means that the industry is finally digging out. And you're seeing other things like California starting to improve rate increases for the first time in years. And so I think overall, when you look at the broader industry, there are some negative signals coming from carriers.

But as a whole, I do see the entire industry really starting to dig out and we -- this is reflected in the tenor of the conversations that we're having with each of the carriers, which is far more constructive and growth oriented than they were in past years. And so we take that as a really positive sign. And there will be some carriers that are laggards that will probably come back into the marketplace in the first half of 2024. But I would characterize the majority of the carriers that we're talking to as expecting a return to the marketplace sometime in 2023.

And Cory, this is Pat. To answer the second question just on -- for our guide for Q1 for P&C and the sequential growth as compared to Q4, how much of that is seasonality versus recovery. I think if you look at our results over the last couple of years for Q4 versus Q1, you would see that in a typical year for us, for P&C, it would be up 10% or 15% at the low end, 30-ish percent at the high end. So you can think of that as probably being seasonality, just the consumers shop more in Q1 than Q4. And the balance of it being recovery trends, be [they] volume or price.

We'll take our next question from Meyer Shields with KBW.

A couple of, I guess, small numerical questions. The G&A expense in the quarter was higher than it had been running. And I was hoping you could talk through whether there's anything unusual in that?

Yes. And the -- I would say nothing overly unusual on that. I think there were definitely some items that fell into that, that would be excluded from adjusted EBITDA in there. And so I would say that we really think of kind of managing the business to the adjusted EBITDA number and the G&A number kind of as we -- that feeds into adjusted EBITDA has been pretty [nonconsistent] over the last couple of few quarters.

Okay. No, that's helpful. I guess on a related note, Pat. You mentioned in your prepared remarks ramping up investments. And I was hoping you could talk through sort of the time line of that, is that, I think, tied to P&C carrier spend?

Yes. So on that question, Meyer, I would say that we have been managing the business pretty tightly through the hard market. And so I think if you were to look back at where we were on April 1 after we closed the CHT acquisition, we've got fewer people working at the company now. And I think we're in a spot where we feel like we're adequately resourced now. I think as we get further into the hard market, could I see us needing a bit more help on some of the account teams? Yes, I could. Could I see us investing to unlock some capacity in some other teams? Yes, I could. But I don't think that's imminent in the next quarter or 2.

And as we think about the investment profile of the business over the next couple of years, our view is that we are very focused on running efficiently. As Steve mentioned in his prepared comments, we're a bootstrap company and efficiency is in our DNA, and we don't plan on losing that focus over time.

Okay. Perfect. And if I can sort of one more question. You mentioned, I think, Steve, that the health insurance brokers were pulling back, and I think that's very consistent with what we're seeing broadly. Do you have any sensing conversations with them, whether that's like a 1-, 2-year phenomenon? Or this is a new reality for them?

That's a great question. I'll say that -- I think right now, it's too early to tell. One encouraging sign that we saw in the last enrollment period was that click spend from the broker segment held up reasonably well. And the reason that we see that as an encouraging sign is that, that used to support their own assisted online enrollment channel, which we increasingly see as the future shopping experience for Medicare Advantage. And so that was a really encouraging sign. I think some of the early results that you're seeing have also been encouraging from the broker segment.

But in terms of where they are in terms of working through their LTV and profitability issues, I think it's a little bit too early to tell whether that's a 1-year or a 2-year thing. But what we do expect over the long term that the demand mix within our marketplace, particularly within our Medicare marketplace, will be a pretty healthy blend of direct carrier spend, which we see as a long-term secular trend as we saw within the auto insurance space and a good mix of broker demand as well. It's going to be -- that's what the distribution channel of this marketplace is going to look like going forward. And we think that, that's going to be reflected in the marketplace as well.

Yes. And Meyer, this is Pat. Again, I would just [wanted] to follow up on your G&A question. So the big driver of it being down was in -- or being up was in Q2 and Q3, we had some noncash write-offs of an earn-out related to an acquisition. And so they were noncash items, and that's why it appears as if it was up, but on a cash basis and cost of operating the business, it was pretty [nonconsistent].

We'll take our next question from Andrew Kligerman with Credit Suisse.

Follow-up on the last questions. So the -- in Health, the trend with the brokers. We cover a few companies that have these Med Advantage brokers, and they're hurting a lot on these customer acquisition costs. Is that the spot that's really just making it too difficult for them? Is it customer acquisition costs? Is it getting your bid? Like when they have to bid on something in your channel, is it just too expensive for them? What's kind of holding them back from being more impactful?

Yes. I think that's a great question. So I don't think it's related to customer acquisition costs per se. I think some of the issues that they've been having is really getting a better grasp of what the expected lifetime value is of the policies that they were acquiring because at the end of the day, when you're in performance marketing and in growth marketing, what you need to do is understand the expected value of a policy that you sell and then match that to that customer acquisition cost so that you could have a target return on ad spend. And so -- if you don't have a granular understanding of really exactly duration of the policy and what the expected value is that you're going to extract for that consumer that you're selling a policy to, then you're going to have a hard time really dialing in to customer acquisition costs so that your ROI positive with your ad spend.

And so I think it's really the fact that these brokers are getting a better handle on expected LTV, how these differ based on different marketing channels that they have and then leveraging the granular controls and the programmatic controls that you would have in a marketplace like ours to really be able to match what you're willing to pay to acquire that consumer with what you expect that consumer -- well, the value that you can expect to gain from that consumer. And it's really that matching is what they need to get right.

And so I think as they get a better understanding of really what the expected retention rates are of their consumers and how these differ based on different marketing channels, we fully expect them to be able to come back into the market and leverage a programmatic channel like ours to match what they're willing to pay, with that expected value. And so it is related to customer acquisition costs in some ways, but it's really about the ability to match that to the expected LTV. And I think that's really the nut that they're trying to crack.

Okay. Yes, that is a tough nut to crack on. Thanks for that thorough explanation, Steve. And then maybe just digging a little deeper on the P&C transaction value. As you were talking about the players, most of them coming back in 2023. (inaudible) on a state-by-state basis. Do you see some companies that may be disinclined to be in certain states, say those on the coast versus some other states? I mean, are you seeing some pickup that's mixed among carriers? Maybe you could talk a little bit about that.

I think that's a great question. I think in a normal market environment, that's what you would see that there are some states in which profitability is challenged, [they'll] pull back in marketing in those states and really go heavy in states where they actually have established profitability and have a high confidence in their rates. And what you'd expect to see coming out of a market like this is that carriers start to lean back in those states where they have a high degree of confidence in the rates that they've achieved. Now I think one of the things that we're seeing in this marketplace that may be a little different than what we saw in the last hard market cycle is that we're seeing less of that kind of behavior.

And the indications that we're getting from carriers is that their profitability has been challenged severely for the last couple of years, and that when they come back, they expect to come back in full and they'll come back as the rates start to earn through and actually impact their underwriting profitability and that they're not going to front-run rate adequacy -- well, full rate adequacy by cherry picking certain states where they already have rate increases to start to gradually get back into the marketplace. And so I think what we're going to expect to see as the year progresses is that carriers will really need to establish broader profitability in order to then come back into the marketplace as a whole as opposed to starting to ease back into the market in those states where they feel good about their rates. Does that make sense, Andrew?

Our next question comes from Daniel Grosslight with Citi.

Congrats on the quarter. Let's stick with the Health segment here. So there's been some chatter out there in the Medicare Advantage market about a potential slowdown given a less generous [advance] notice for plan year '24. Obviously, a lot is up in the air. But I'm curious if you're hearing anything from your partners on that and if there are any leverage you can pull if you see a macro slowdown in Medicare Advantage?

Yes. I think that's a great question. I mean I think it's -- the short answer is it's too early to tell. These proposed rates, I think, came out fairly recently, like I think a couple of weeks ago, and they won't be finalized until April. And so as you know that there's a healthy debate with the large health insurance companies in CMS on really the adequacy of the rate increases that they can expect for 2024. We've been in dialogue with our partners about that. And I think, universally, I think the sentiment is that it's really too early to tell.

Yes. Okay. And you mentioned that Health growth is accretive to contribution margin in your shareholder letter. I was wondering if you could quantify how much better Health contribution is than the rest of the business? And what are some of the drivers of that accretion?

Yes. The -- I think in our financials, I think you can kind of tease out some of those numbers. But the big difference, I would say, is that -- on the Health side, we have a much higher open marketplace mix and we have effectively a higher take rate on the open marketplace side. So revenue equals transaction value, and we have -- the contribution as a percentage of transaction value is almost 3x the rate of the private marketplace. And so the mix is more favorable within the Health side. And so the take rate is quite a bit higher. And so that's one of the reasons why Q4 is our biggest quarter because it's our biggest revenue quarter and it mixes to help.

Yes. Makes sense. And then one just housekeeping question. There was a big increase in accounts receivable this quarter. I know it's related, but I'm curious if you can talk about what drove that? And you're a little bit little on cash now. Obviously, you're very efficient with that. But do you anticipate you'll have to draw on your revolver and kind of what your working capital needs are in '23?

Yes. And on the AR side, I think that Q4 is a big quarter for us on the Health side. And so we have a number of folks that spent big in the final days of AEP and OEP, and so those were built at the end of the month. And so we had some AR from that. We've had since no collection difficulties. From a revolver standpoint, just kind of walk through the chronology of it, we drew $25 million on it on April 1 to fund an acquisition. We've paid off $20 million of that over the course of 2022. We still have $5 million outstanding on it, and we do not anticipate needing to draw on that going forward.

We'll take our next question from Mike Zaremski with BMO.

Moving back to the Property & Casualty side of the business, curious, are you seeing your revenues more concentrated than in the past with a smaller subset and do you expect that to continue in the near term? And if so, just curious, does that mean that transaction values per lead will remain a bit depressed because you would need more just participants -- meaningful participants in the marketplace to come back into kind of lift out transaction value levels as well?

Yes. And Mike, this is Pat. I can take that one. So the -- on the concentration on the P&C side, it has become more concentrated in Q1 versus Q4. And that is caused by one carrier pivoting to growth mode and spending more on that. So the #1 spender in Q4 was a lower percentage than they were in -- than they will be in Q1. Will that trend continue? I would say it will continue for a while until other carriers start to come back in a big way and then we'd expect to see the concentration start to decline.

And the real question is one of timing, which is when do other carriers start to come back in a big way? But when that happens, we have a high degree of confidence that the concentration will start to be a bit more dispersed.

On the second part of your question regarding transaction value per lead, the thing I can say is that it is up meaningfully in Q1 versus Q4. And I think the big reason for that is -- 2 big reasons. One is one advertiser is generally more active and bidding more. And secondly, it's coverage, which is some states may have been off or with very low bids and they've taken those up pretty considerably or turned it back on, which has had a positive impact to the overall marketplace.

And I think -- carriers in our marketplace, I think, recognized because of the marketplace model and because of the supply partnerships that we have, that as pricing goes up, they'll get more volume, even if they're the highest given bidder for a given consumer segment. And our past experience has been that, it's absolutely, a competitive market environment will drive up pricing and we expect to see those competitive dynamics revert back to a more normalized situation as the year progresses.

But it's been also that our experience that you only need a small number of major carriers to be back in place to really replicate the competitive dynamics you need to start to get every advertiser really paying based on their expected return on ad spend independent of competitive considerations.

Got it. That's helpful. And second question is sticking with P&C. Just curious if any changes in the marketplace in terms of home insurance and bundling? Or that's still obviously a long-term growth driver? Just curious if anything is changing on that front?

Yes. I think this is more of a speculation that you're seeing in the marketplace more than anything else that we're seeing in our marketplace. It's that -- because these pricing increases that consumers will be faced with are pretty unprecedented. I mean these pricing increases are the highest that the industry has seen in about 40 years. And because of the magnitude of these increases in the auto insurance segment, that's the bundlers, which are often referred to as the [Robinsons], which is a very profitable and desirable segment for the entire industry, may be up for grabs because people who are normally bundling their auto and home policies and willing to stick those together or wanting to keep those 2 together, may actually break those apart and shop for a separate auto insurance carrier because of the magnitude of the rate increases that they're seeing.

And so I think that will be a really interesting dynamic right, to see unfold because that Robinsons segment is typically one that doesn't shop around very much, which is one of the reasons that they're so attractive to P&C carriers. And if the pricing increases that we're seeing now, which really, again, are unprecedented, really starts to put this segment back into the marketplace to shop for auto insurance rates and they show a willingness to really break apart this auto home bundle. I think that will really lead to a very interesting dynamic and some pricing increases as this very highly desirable consumer segment really comes into play for the first time.

And thank you, ladies and gentlemen, that does conclude our call. Thank you for your participation, and you may now disconnect.