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Operator
Good afternoon. Thank you for attending today's EverQuote First Quarter 2022 Earnings Call. My name is Tania, and I will be your moderator for today's call. Online, you will be muted during the presentation portion of the call with an opportunity for questions and answers at the end. If you would like to ask a question, please press star 1 on your telephone keypad. I would now like to pass the conference over to our host, Brinley Johnson with Blue Shirt Group. Please go ahead.
Brinley Johnson
Thank you. Good afternoon, and welcome to EverQuote's first quarter 2022 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, EverQuote's Chief Executive Officer, and John Wagner, Chief Financial Officer of EverQuote. 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 second quarter and full year 2022, 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, our recent acquisitions, our goals for integrations, and other statements regarding our plans and prospects. Forward-looking statements may be 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 of today and should not be considered our views as of any subsequent date. We specifically disclaim any obligation to update or revise these forward-looking statements except as required by law. 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 discussion of material risks and other important factors that could cause our actual results please refer to those contained under this heading, Brisk Factors, in our most recent annual report on Form 10-K, which is on file with the Securities and Exchange Commission and available on the investor relations section of our website at investor.everquote.com and on the SEC's website at sec.gov. Finally, during the course of today's call, we will 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.everquote.com. And with that, I'll turn it over to Jamie.
Jamie Mendel
Thank you, Brindley, and thank you all for joining us today. In the first quarter, we exceeded expectations across our three primary financial KPIs, despite continued headwinds in the auto insurance industry, demonstrating the benefits of progress in channel and vertical diversification. We delivered revenue of $110.7 million in and variable marketing margin, or VMM, of $34.3 million, representing year-over-year growth of 7% and 9%, respectively. We also generated adjusted EBITDA of $2.4 million. In Q1, our marketplace exhibited strength in customer acquisition and in our local agent distribution channel. On the consumer side of the marketplace, we grew volume by double-digit levels. On the provider side of our marketplace, we increased local agent budgets by over 20% year over year. We applied new data science models to drive better performance for local agents, which is extending our competitive mode in this valuable channel. And multiple large agent-based carriers have indicated that EverQuote has become their agent's largest and highest performing partner. Our direct-to-consumer agency, or DTCA, a core strategic area of investment for the company, continued to perform well in Q1 and represented over 13% of revenues in the period, exceeding our internal plans. After two acquisitions and many quarters of integration work, we now sell policies across major lines of insurance, including P&C, health, and life. This represents the very early stages of the next phase of the company's evolution to provide a rich customer experience built upon our unique position. which we believe is the only marketplace and DPCA hybrid model operating at scale across major lines of insurance. The direct carrier channel, which has historically been our largest, continues to face significant challenges. While early in the quarter we saw an uptick in carrier auto demand from December lows, we encountered further pullback in March, which was amplified in April. as carriers continue to exit unprofitable states and segments with little advance notice. In the past week, for example, one of our large carrier partners unexpectedly informed us that due to, quote, immense profitability pressures this year, end quote, they are dramatically reducing their Q2 and Q3 customer acquisition budgets. As this carrier continues to increase rates to address these pressures, We anticipate they will reverse course and restore higher budgets once they are able to better align their rates to the current loss environment. As a result, we remain substantially below the levels of carrier demand in our auto vertical that we saw in August 2021, which we believe to be the level to which we will normalize upon the market's recovery. In Q2, we expect continued strong headwinds from auto carriers. We also expect to experience lower health demand in Q2 of 2022, reflecting seasonality entering the Medicare lock-in period that follows the Q1 open enrollment period. Let me touch on what everyone wants to know. When will auto carrier demand return and why? To derive expectations about the timing of the recovery in auto carrier demand, we solicit direct input from our carrier partners and we closely monitor their publicly recorded profitability trends. The latest collection of data suggests that Q2 demand will likely remain significantly depressed, but that some rebound is indicated to begin by the end of the year with an expectation for full recovery in the first half of 2023. Early data points that support this projection include, number one, direct feedback from a large partner that they plan to reactivate by July, states which were previously paused. Number two, Publicly reported loss ratios improving in recent months for large customers compared to late 2021. And three, rate increases continuing to be filed and approved. As carriers increase rates to reflect the current underwriting environment, we expect they will return to normalized levels of customer acquisition spend while driving more insurance shopping as consumers react to higher renewal rates. In closing, in spite of the challenging auto insurance market, We continue to make progress towards our long-term vision to become the largest online source of insurance policies by combining data, technology, and knowledgeable advisors to make insurance simpler, more affordable, and personalized. Our strategy to diversify into more stable distribution channels of local agents and our direct consumer agency helped us deliver a quarter that exceeded expectations across all of our three primary financial KPIs. As auto carrier demand recovers, we expect that EverQuote will be well positioned to return to our historic trend, strong revenue growth and expanding adjusted EBITDA. We remain laser focused on building an industry-defining company. I continue to be incredibly proud of our team's ability to navigate changes in the industry as we build to our objective of being the one-stop insurance shop for the digital age. Now I'll turn the call over to John to provide more details on our financial results.
Brindley
Thank you, Jamie, and good afternoon, everyone. I'll start by discussing our financial results for the first quarter and then provide guidance for the second quarter and updated guidance for the full year of 2022. Our total revenue for the first quarter grew 7% year-over-year to $110.7 million and exceeded our guidance range provided last quarter. as growth in consumer volumes and demand from non-carrier customers offset reductions in monetization due to the industry-wide pullback in auto insurance advertising that has affected demand from our direct carrier customers. While the auto insurance industry's challenges were evident in a nearly 20% year-over-year reduction in carrier revenue, all other distribution channels besides carrier grew year over year as we benefited from the diversity of our distribution. Strong DTCA and third-party agent revenue growth also contributed to a 4% year-over-year increase in revenue from our auto insurance vertical, growing that vertical to $87.7 million, again, despite reductions from our auto insurance carriers. With regard to carriers within the auto insurance vertical, we did see improvement in pricing and demand early in Q1, a quarter when historically carrier budgets are reset. And as expected, revenue from carriers grew in Q1 as compared to Q4, as did pricing. But as Jamie mentioned, carrier demand waned as the quarter progressed, with a reversal of much of that improvement late in the quarter. This retrenchment has persisted into Q2, as carriers continue to evaluate consumer acquisition targets in light of claims losses and rate changes. Revenue from our other insurance verticals, which include home and renters, life and health insurance, increased 19% year-over-year to $23 million for the first quarter. These non-auto insurance verticals represented 21% of our first quarter revenue and were positively impacted by our health insurance vertical and specifically by DTCA policy sales. During Q1, health DTCA revenue increased nearly eightfold from the prior year, reflecting that operational improvements we made in DTCA last year paid off in a strong open enrollment period for Medicare Advantage coverage this year. Variable marketing margin, or VMM, defined as revenue less advertising expense, was $34.3 million for the first quarter. an increase of 9% year-over-year and above our guidance range provided last quarter. Our VMM within the quarter reflected VMM in the upper 20s in our marketplace, blended with higher VMM contribution from DTCA. Turning to our bottom line, GAAP net loss was $5.7 million in the first quarter, and adjusted EBITDA was $2.4 million, exceeding our guidance range provided last quarter. Our favorable VMM performance translated directly into adjusted EBITDA as we continue to forecast and manage operating expenses tightly. With regard to cash flow, you'll recall that our marketplace produces cash that is well correlated with adjusted EBITDA. While in DTCA, we recognize revenue at the time of the policy sale and collect the cash associated with that revenue over the life of the policy, creating a cash requirement initially but also a future cash annuity. We believe DTCA is a compelling area of investment as it aligns with our vision for the consumer shopping experience and has demonstrated its potential for high growth and profitability. For Q1, DTCA's higher revenue contribution and our current lower adjusted EBITDA operating point led to a use of cash of $3.8 million in the quarter. We expect to continue to use cash in operations as we grow DTCA and while our auto insurance vertical is facing reduced demand from carriers. We ended the quarter with cash and cash equivalents on the balance sheet of $46.1 million, reflecting the closing of a $15 million private placement investment by Recognition Capital, an entity which is owned by David Blunden, chairman of the board of directors and a longtime investor in the company. This investment strengthens our balance sheet and provides us with additional confidence in our liquidity and resources. Turning to our outlook and building on Jamie's comments regarding the market conditions within the auto insurance industry. Though early Q1 reflected stronger auto insurance demand from carriers, much of that demand reflected the annual reset of carrier budgets in Q1 and didn't yet reflect the start of an industry return to acquisition spending at previous levels. Auto insurance industry trends continue to point to a hardening market for auto insurance in the near term, with rate increases for consumers and lower spending on new consumer acquisition from carriers. Within our marketplace, carrier demand has been inconsistent, with carriers tuning bids up early in Q1 but lowering bids later in the quarter and, in some cases, eliminating their bids entirely for consumers in some segments and in some states. Overall, increases in carrier demand early in Q1 did not persist into Q2, and we've seen a second pullback in carrier demand to lower levels similar to Q4 2021. We continue to believe we are in the middle of a multi-quarter cycle for auto insurance, but our view has shifted to expect a second trough in auto insurance demand in Q2. and a more gradual recovery in auto carrier demand beginning in the second half of 2022 before an expected full recovery in 2023. Through Q1, our third party and first party agents demonstrated resilience and, combined with the performance of our health insurance vertical, allowed us to grow revenue and remain adjusted EBITDA positive. Though we expect to continue to benefit from consistent and growing demand from our agent network, Our health insurance vertical exits the open enrollment shopping season in Q2, and we expect it will operate at seasonally lower rates until the start of the annual enrollment season in Q4. This health insurance vertical seasonality combined with a deeper and prolonged pullback in auto insurance carrier demand will impact our financial performance during the middle quarters of this year. For Q2, We expect revenue to be between $92 and $97 million, a year-over-year decrease of 10% at the midpoint. We expect VMM in the quarter to be between $24 and $27 million, a year-over-year decrease of 24% at the midpoint. And we expect adjusted EBITDA to be between negative 7 and negative $4 million. For the full year, we are adjusting our prior guidance lower to incorporate a lower level of auto insurance demand and a more gradual industry recovery in the second half of the year as follows. We expect revenue to be between $400 and $420 million, a year over year decrease of 4% at the midpoint. We expect VMM to be between $110 and $120 million, a year over year decrease of 8% at the midpoint. and we expect adjusted EBITDA of between negative 15 and negative $5 million. In summary, we delivered results better than our guidance for the first quarter, but expect a slower recovery in auto insurance carrier demand, which we've reflected in our outlook. While there is no doubt that we are impacted by this difficult cycle in auto insurance, we continue to execute well in areas of strategic focus and believe we will be well positioned as auto insurance carriers begin to normalize their acquisition spending. Jamie and I will now answer your questions.
Operator
Thank you. If you would like to ask a question, please press star followed by 1 on your telephone keypad. If for any reason you would like to remove that question, please press star followed by 2. Again, to ask a question, press star 1. As a reminder, if you're using a speakerphone, please remember to pick up your handset before asking your question. We will pause here briefly as questions are registered. The first question is from the line of Michael Graham with Canaccord. Your line is open.
Michael Graham
Hey, thanks a lot for all the detail on the auto macro, guys. I just wanted to kind of drill in a little more to, you know, the comment you made about observing the state by state, you know, price regulation and sort of the approvals there. We've had feedback that, you know, when carriers are sort of, you know, priced too low, they don't want to advertise for obvious reasons, you know, it's adding to, you know, lack of profitability. And then in the early days of getting, you know, price increases approved, if they're sort of the first ones in a state, it doesn't make that much sense to advertise because at that point in time, they're overpriced relative to competitors. And so it really takes, you know, most of the carriers in a state to kind of get approved. And so I was just wanting to, you know, have you kind of just give a little more color on in terms of, you know, where you think we are with some of those, you know, state by state processes, if you could.
Jamie Mendel
Yes. Thanks, Mike. This is Jamie. So that's right. I think that that's accurate. What we're observing is, you know, there were earlier movers and later movers in the cycle, both with respect to pulling back on on advertising spend and with respect to filing rates. And so what will happen is your earlier movers will get their rates approved. and now they are profitable in a given state, but they may not be competitive in that state. And so they need to wait for some of the other carriers to raise their rates as well before they, you know, before they fully unleash budget in that given state. So the way that this sort of is manifesting in the recovery that we're, you know, that we're watching unfold is Large carrier X, a major customer of ours, was an earlier mover. They get their rate increases through. And what they're reaffirming for us is that, hey, by middle of the year, call it July, we're going to be reactivated in all of our states. And what you should expect from us is we'll reactivate all states with sort of varying levels of pricing or bids. And we'd expect to ratchet those bids up over the second half of the year so that we exit the year with more normalized levels as our competitiveness improves while others catch up and increase their rates. Does that make sense, Mike?
Michael Graham
It does. Yeah, that's helpful. And I can appreciate that dynamic. And I also just wanted to ask John if I could, for any more color you can provide on sort of the mix of guidance on the revenue side between Q3 and Q4, just any high level comments on how you expect the second half to trend from a linearity perspective.
Brindley
Sure. So we've reflected what we have seen early in the quarter, as well as information that's very recent on the quarter as to what we would expect in Q2. I think at the low end of the guidance range, we've assumed fairly similar performance going through Q3. And then, of course, Q4, we would see an increase in performance related to the annual enrollment period within health. And also, in the back half of the year, we do, as Jamie mentioned, we do expect some of the carriers to continue to be turning on. So there, you know, I think what we're seeing is the carriers are in different stages in their cycles, but there are certainly those. And I think Jamie's example of a large carrier who has indicated to us that they will turn on all states in the second half is indicative of one of the carriers that is kind of going through the cycle faster. So we do think there's some uptick as we move through the back half of the year.
Michael Graham
Okay, thanks a lot. Really appreciate it. Thanks, Mike.
Operator
Thank you. Thank you, Mr. Graham. The next question is from the line of Ralph Sheckhart with William Blair. Your line is open.
Graham
Good afternoon. Thanks for taking the question. I'm just curious what the behavior has been from carriers that have largely repriced right at this point or have commented that it's sort of, you know, largely behind them. Just, you know, are you seeing this – same sort of headwind activity, just trying to get a sense of how broad-based this is across your carrier base.
Jamie Mendel
Yeah, so let me try to take that one, Ralph. At this point, if we look across basically all the top carriers rank order in terms of spend a year ago, and we look at them today, how many have significantly pulled back their spend with us as they moved to increase their rates. And the answer is now all of them. That wasn't the case coming into the year. There were still a couple of large carriers who were somewhat holding out. They were refiling their rates, but they were holding out on pulling back their acquisition spend to see if they could sort of get through to the other side. And that's some of what we saw in March, April, and now May, is that those holdout carriers have pulled back on their acquisition spend to the point where we now can look at our entire carrier base, and it does start to look like, you know, all of the air is out of the tires. And, you know, we expect it to start sort of coming back in as we progress through the second half of the year.
Graham
Okay, great. And then just one – Just on the demand side and the marketplace side, can you maybe talk about that activity as rates are being put on consumers, what that activity looks like with consumers? Are they coming to the platform to shop for better rates? Just any color you can provide that would be helpful.
Jamie Mendel
Yeah, I think that the increase in rates across the board does appear to be driving more shopping activity. So in our customer acquisition we have seen strong performance so far this year. I think we mentioned double digit growth year over year in terms of quote request volume. And that's been somewhat balanced across our owned and operated channels growing as well as our verified partner network growing. So the demand does appear to be up as a result of the rates increasing and you know, as they continue, rates continue to move upwards, it should only provide a tailwind in the form of more shopping volume.
Graham
Okay, that's helpful. Thanks, David. Thanks, Rob.
Operator
Thank you, Mr. Shekhar. The next question is from the line of Jed Kelly with Oppenheimer. Your line is open.
Shekhar
Hey, it's actually Sam on for Jed. Thanks for taking my question. Just wondering, You can dig into what you said. I'm mentioning, you know, you expect full or somewhat normalization in the first half of 23. Just wondering how your outlook for the recovery has changed since the last call and if you're seeing any impact from competition or whether this is more industry related.
Brindley
Sure. So I guess if you look at how we've changed in terms of our outlook, first I would say I take the second part of that farce and say it's absolutely industry related. And I think you've already heard our past comments echoed by carriers and other competitors in the distribution area. We're one of the first to release here, so we're kind of on the vanguard, but I think you'll hear the story repeated. I think what's changed in our outlook is that we still expect improvements starting in the second half of the year. What really has changed is that, you know, we expected Q1 stronger demand coming from the carriers. And indeed, we saw that stronger demand, stronger pricing. What we didn't expect is to see that some of those gains given up late in the quarter and for that to extend into Q2. So I think we expected that the gains we would make in Q1 that are largely associated with the budget cycle and new dollars coming to us, that we would see those come back. you know, really retrench in the way the carriers were looking at the dollars. So what we've reflected now in our outlook is that we think Q2 is the second trough of demand and that we start to build off of that. So I think, you know, when you look at that as compared to our outlook prior, we thought Q2 would be stronger, and we thought that the build in the second half of the year would be stronger. We've now taken kind of a more moderate view on the build in the second half and then extending into 2023 with a full recovery.
Shekhar
Very helpful. Thank you. Thanks, Sam.
Operator
Thank you. The next question is from the line of Aaron Kessler with Raymond James. Your line is open.
Aaron Kessler
Hi, this is Alex on for Aaron Kessler. You know, maybe just Want to ask about maybe your guidance and and if anything's changed for your expectations for agent hiring with maybe a pullback and an auto, if that's kind of changed anything of how you invest for the DCA.
Jamie Mendel
So the the hey, Alex, this is Jamie. The performance of DTCA continues to meet or exceed our expectations across the board. And it had a really strong Q1. And in fact, in many ways, it was a big part of why you didn't see what otherwise could have been a much more challenging set of circumstances in the first quarter of this year. So I think the strategy to invest there as a more stable and diversified distribution channel, has been borne out really through some of the challenges we've faced recently. And our appetite to continue investing remains strong. I think we are continually evaluating how we weigh that level of investment against the performance of the marketplace. At the end of the day, the marketplace has historically funded a lot of investments in DTCA and other new opportunities. And so I think as we look at the new shape of the recovery, there are some trade-offs that we'll evaluate with respect to the rate at which we ramp the DTCA this year. But we continue to invest behind it. It continues to improve in terms of its unit economics and its performance. And so we just try to keep that balance in mind.
Aaron Kessler
Okay. And as I think about, I guess, the cash flow coming through, I know you said it would be negative as you invest. You know, it looks like the health vertical had, what, close to $10 million in Q1, which would, I guess, offset the cash flow coming in from Q4. Is that correct?
Brindley
Yeah, you're looking at a quarter in which we had negative operating expenses and, you know, overall the business had positive adjusted EBITDA, but DTCA has the cash use. So as you go forward, you know, as there's pressure on adjusted EBITDA, especially in these middle quarters, you would expect a higher use of cash. And then as we come into Q4, you'll see higher contribution from DTCA, but also we think an improving story within the marketplace. So you kind of track a combination of DTCA contribution, which is a use of cash, but also marketplace EBITDA, which can, as the recovery takes place, can become a source of cash. But we continue to think that, you know, for the balance of the year, we're going to be a net user of cash in a way that is, you know, consistent with what you've seen in Q4 and Q1, and actually accelerated due to the EBITDA profile as we go through the end of the year.
Aaron Kessler
Okay. Appreciate that.
Operator
Thank you, Mr. Kessler. Again, to ask a question, press star 1. The next question is from Corey Carpenter with JP Morgan. Your line is open.
Kessler
Great, thanks for the questions. I have two, just one more on the auto carrier stuff. Just want to make sure we understand what's changed in recent weeks on the carrier side. Is the message from carriers just that states have taken longer to pass through price increases, basically implying it's more of a state-specific issue delaying the recovery? Or could there also be other macro variables at play here, like perhaps used car pricing or some of the situation that's happening in Europe that's also taking longer to play out? on the DTCA business, could you just talk about how you think about the sustainability of growth from here? Any target on how big you think this could be as a percentage of your business over time? Thank you.
Jamie Mendel
Thanks, Corey. So, I'll take the first question. With respect to what's driving the delay in recovery, I don't think there's been any change in terms of, you know, certain states holding out or not approving rates as, you know, as we or the carriers expected earlier in the year. The broad macro considerations are certainly a part of why the loss environment has gotten to where it is in the first place, right? And you mentioned the used car market inflation and used cars being a big part of it. I think the thing that surprised us was that there would be this sort of second wave of carriers who kind of held out on adjusting their acquisition spend until March or April or May of this year, right? We knew they were all experiencing similar profitability issues. We knew they were all increasing rates. And we sort of anticipated that they would uniformly over some period of time, if they were going to pull back on acquisition spend, they would have made those decisions before the spring of this year. And so the fact that they were two or three meaningful sized carriers who really waited quite a bit longer than the rest to really reduce their acquisition spend. That was the thing that caught us off guard that they would be so, that would happen so much later in the cycle.
Brindley
The second one on really what the potential of DTCA is in the long term. So, I think we think about DTCA and other verticals as diversity within our distribution. that really the combination of those could grow to be greater than 50% of what we do. So really the marketplace distribution could become over time, the minority and DTCA and the other verticals outside of auto could become the majority. So I think you've started to see that with how DTCA is performed. DTCA has proven it can be a high growth lever for the business and one that we control more so than some of the marketplace dynamics.
Kessler
Very helpful. Thank you both. Thanks, Corey.
Operator
Thank you, Mr. Carpenter. There are no additional questions waiting at this time. I will now turn it to the management team for any closing remarks.
Jamie Mendel
Thank you. All right. Well, thanks, everyone, for joining us today. Our Q1 performance just further validated our strategy. You know, the diversification in verticals and distribution channels really enabled us to grow and deliver positive adjusted EBITDA despite unprecedented headwinds in the auto insurance market. It's unfortunate that, you know, in Q2 these headwinds have intensified. Seasonality will also dampen the offsetting effect of our diversification in health and Medicare as we exit the open enrollment period. And that sets us up for a challenging middle part of the year. But nonetheless, we continue to expect an auto industry recovery beginning in the second half of this year, which we anticipate will continue into 2023. Throughout the downturn, we've continued making progress, progress with local agents in our direct consumer agency. And that positions us really well for strong performance when the auto industry does in fact recover. You know, despite the market's current challenges, Our team remains laser-focused on execution. We're energized, and we continue building the one-stop shop for insurance in the digital age. Thank you all.
Operator
That concludes the EverQuote First Quarter 2022 earnings call. Thank you for your participation. You may now disconnect your lines.
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