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Operator
Ladies and gentlemen, good afternoon. My name is Abby and I will be your conference operator today. At this time, I would like to welcome everyone to the ever quote second quarter 2023 earnings conference call. Today's conference is being recorded and all lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during that time, simply press the star key followed by the number one on your telephone keypad. If you would like to withdraw your question, press star one a second time. Thank you, and I will now turn the conference over to Brinley Johnson, Investor Relations. You may begin.
Abby
Thank you. Good afternoon, and welcome to EverQuote's second quarter 2023 earnings call. We'll be discussing the results announced in our press release issued today after the market closed. With me on the call this afternoon is Jamie Mendel, EverQuote's Chief Executive Officer, and Joseph Sanborn, Chief Financial Officer of EverQuote. During the call, we'll make statements related to our business that may be considered forward-looking statements under federal securities law, including statements concerning our financial guidance for the third quarter 2023, our growth strategy and our plans to execute on our growth strategy, key initiatives, including our direct-to-consumer agency, Our investments in the business, the growth levers we expect to drive our business, our ability to maintain existing and acquire new customers, our expectations regarding recovery of the auto insurance industry, and other statements regarding our plans and prospects. Forward-looking statements 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 to differ materially from our expectations, please refer to those contained under the heading Risk Factors in our most recent quarterly report on Form 10-Q or annual report on Form 10-K It 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 referred 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 second quarter, EverQuote reported revenue of $68 million, variable marketing margin, or VMM, of $24.7 million, and adjusted EBITDA of negative $2.1 million. We achieved a record high VMM as a percentage of revenue of 36.3%. However, our revenue results fell below our expectations, largely driven by two factors that developed in the latter half of the second quarter, as auto insurance carriers continued to wrestle with significant profitability challenges. First, a major carrier partner reduced its budget multiple times over the quarter, resulting in their lowest levels of spend in our marketplace since the auto insurance downturn began in late summer of 2021. Second, we experienced a substantial contraction in agent demand following reductions in carrier marketing subsidies for local agents. We exited the quarter with auto demand at a new low point, which we now expect to persist into the back half of the year. In response to this renewed pullback and continued uncertainty about the timing of a more sustainable auto recovery, we initiated a restructuring of the business in June. The restructuring included a large reduction in force, an exit of our health insurance vertical and its associated direct-to-consumer agency operations, and a scale-down of our DTCA operations serving the auto and home verticals. We also took actions to strengthen our balance sheet, which Joseph will cover in more detail. The combination of actions we have taken puts EverQuote in a stronger position to weather a further prolonged period of volatility in the auto insurance market. While the restructuring was catalyzed by the lower prolonger auto insurance outlook, the specific decisions we made were informed by a deeper assessment of our overall strategy. We are also restoring greater focus on our most differentiated assets to deliver deeper value to our customers. These assets include our insurance shopping traffic scale and technology, our local agent network, and our proprietary data and associated data science and machine learning capabilities, which we expect to take on greater significance as we continue to identify AI applications for insurance distribution. And in doing so, We reset our cost structure to enable significant adjusted EBITDA expansion and cash generation as the auto insurance market recovers. While we are proud of the health and Medicare business we built over the last three years, our decision to exit the vertical reflects our renewed commitment to a greater focus. As a more people and capital intensive operation, these verticals operated with materially lower capital efficiency than our other verticals. In addition, the market's constant changing regulatory environment gave us lower conviction in our ability to win. As a result of exiting Health and Medicare, our teams will have the resources to go deeper in our remaining vertical markets with a heavier focus on our P&C marketplace. We believe the P&C market will evolve in the coming years as a result of fast-changing underwriting dynamics and that EverQuote is well-positioned to partner with carriers and local agents in adapting. In PNC, we have the industry's largest local agent network and sales operation with an installed base of over 7,000 local agents to whom we can deliver more and better products to support their growth. As the largest online source of PNC insurance shopping traffic, we have a wealth of insurance distribution data. We have been steadfast in applying this data using machine learning to make our PNC operation more effective and efficient, and now with a sharper focus, We believe we can accelerate the rate at which we deploy machine learning and artificial intelligence across aspects of our business, ranging from operational efficiency to traffic bidding. Our vision remains unchanged, to become the largest online source of insurance policies using data, technology, and knowledgeable advisors to make insurance simpler, more affordable, and more personalized. While our path to get there is evolving, I'm confident that greater focus and a more capital efficient and streamlined operation will accelerate our ability to provide compelling value to our consumers, insurance provider partners, and shareholders. Our team has demonstrated remarkable resilience and adaptability to fast changing and challenging market conditions. And I have no doubt that this strengthening of our team will pay dividends and enable us to emerge with incredible success when the market recovers. Before I turn the call over to Joseph, I wanted to thank John Wagner for his nine years of dedication to EverQuote. I am also excited to welcome Joseph Sanborn to his first EverQuote earnings call as our new chief financial officer. Joseph has been working closely with our executive team and me for the past four years, serving in a variety of finance and strategy roles. He possesses deep operational experience in and understanding of our business and brings extensive strategic finance and capital markets experience to the role. Joseph, please go ahead.
Brindley
Thank you, Jamie, for the warm introduction. Good afternoon, everyone. During my nearly four years with EverQuote, I've had the pleasure of meeting many of our investors. As I step into the CFO role, I look forward to continuing our dialogue and sharing with you the progress we are making at EverQuote. I will start by discussing our financial results for the second quarter. then update you on recent actions taken since the end of Q2 before providing guidance for the third quarter. Our total revenue for the second quarter of $68 million represented a decline of 33% year-over-year and was lower than our previous guidance range for Q2 revenue. Despite the revenue shortfall, we delivered Variable Marketing Margin, or VMM, and adjusted EBITDA above the midpoint of our guidance. as our operating teams continue to execute well in a deeply challenging environment. Q2 revenue from our auto insurance vertical decreased 39% year-over-year to $49.7 million, a sequential decline of 45% from Q1. The second quarter is typically a seasonally weaker period in our auto insurance vertical. In addition, substantially weakened demand in Q2 from our largest carrier customer followed a very strong start to the year. Our third party, or local agent network, was more resilient, representing 50% of total revenues in Q2, but it also experienced a year-over-year revenue decline, primarily driven by another one of our large carrier partners reducing their agent subsidies within the quarter. As a result, we exited the quarter with auto revenues at a new low point since the downturn began in late summer 2021. Revenue from our other insurance verticals, which includes home and renters, life and health insurance verticals, decreased 11% year-over-year to $18.2 million in the second quarter and represented 27% of revenue. The decline in revenue was mostly attributable to our health insurance vertical, which we made the strategic decision to exit within the quarter, which I will cover in more detail later in my remarks. Including health, the other insurance verticals grew quarter over quarter, led by the home vertical, which continues to make steady progress. VMM was $24.7 million for the second quarter. Despite lower monetization, VMM as a percentage of revenue was a record 36.3% for the quarter, driven by three main factors. First, our traffic teams were able to quickly drive down customer acquisition costs in a volatile environment. We benefited from a shift in revenue mix towards our local agent network, which often has a higher VMM percentage. And third, we experienced double-digit growth in traffic volume as consumers continue to face large premium increases from auto insurance carriers receiving regulatory approvals for rate hikes. In short, our engine is working. We were also being disciplined in managing expenses and took multiple actions within the quarter to restructure our operations to reflect the current conditions of the market in which, in aggregate, resulted in the elimination of approximately 30% of positions across our company, including open requisitions. On June 16th, we announced plans to implement a structural reduction of over 15% in our non-marketing operating expenses, excluding non-cash items. As part of the strategic review that identified these savings, we made the decision to exit the health insurance vertical, including the Associated Direct Consumer Agency, or DTCA. Our decision to exit the vertical reflects our return to a relatively more asset-light model and renewed commitment to investing in areas where we believe we can build a long-term competitive moat. Also, as we announced today, we sold select assets of our former health insurance vertical to MyPlan Advocate, for approximately $13.2 million in cash, subject to customary post-closing adjustment and buyer's assumption of certain related liabilities. The transaction closed on August 1. Included in the sale was the $32.2 million commission receivable as of June 30, 2023, which we expected to be collected over the next seven years. We expect to take a significant non-cash charge in Q3 related to the sale of these assets. For context, the health insurance vertical represented less than 10% of our revenue in fiscal year 2022. If we had continued to operate the health insurance vertical, we expected to generate incremental adjusted EBITDA in the coming fourth quarter during the annual open enrollment period. That performance, however, would have come at the cost of significant cash consumption in the current year. Given that all traffic and selling costs on policy sales are incurred in the current period, but the majority of commissions from such sales are received over several years. In addition to the agent support roles associated with the health insurance vertical, we eliminated numerous positions company-wide, including a substantial scale-down of our DTCA serving the P&C markets of auto and home insurance. Given the cash-consumptive nature of the DTCA model, we have concluded that the current environment does not support scaling this operation at this time, even in our core P&C markets. Instead, we have elected to maintain a small agent team to focus exclusively on selling auto and home policies. We have learned that having our own agents provides valuable traffic and customer insights and expanded carrier selection for shoppers, which in turn creates a stronger marketplace that better serves our customers. Turning to the bottom line, in the second quarter, GAAP net loss was $13.2 million and adjusted EBITDA was negative $2.1 million. To note, cost reduction efforts taken in Q2 resulted in a restructuring charge of approximately $3.8 million, which is excluded from adjusted EBITDA. We generated operating cash flow of $3.3 million for the second quarter, a year-over-year and sequential improvement reflecting favorable timing of working capital, tighter expense management, and reduced investment in our DTCA operations. We ended the quarter with cash and cash equivalents on the balance sheet of $31 million. Subsequent to the close of Q2, we made two strategic decisions to strengthen our balance sheet and liquidity position. As I described earlier in my remarks, we sold select assets of our former health insurance vertical for approximately $13.2 million in cash, which will be added to our balance sheet. Second, we modified our existing loan agreement with Western Alliance Bank to provide significantly more flexible terms that better align with our current financial outlook, given the prolonged nature of the auto carrier downturn. As part of this modification, we reduced the line of credit from $35 million to $25 million and eliminated the undrawn $10 million term loan. We have no debt currently outstanding on the Western Alliance Debt Facility, which runs through to July 2025, and have no plans to draw on the facility. Following these two actions after the close of the quarter, we currently have total liquidity in excess of $60 million. Turning to our outlook, including an update on the market conditions in the auto insurance industry. We ended June with very weak auto carrier demand, resulting in a new low point since the auto insurance downturn began in late summer 2021. We have seen these conditions persist into Q3 like many others in the industry. Based on discussions with our carrier partners and public commentary on their own profitability, our current expectation is that auto carriers will largely remain on the sidelines through year end. While moderating inflation and falling used car prices provide reason for some optimism, the exact timing of recovery continues to be uncertain. We believe nearly all auto insurance carriers are continuing to experience low levels of profitability, while still working to aggressively increase rates in order to achieve rate adequacy. Although our local agent network has proved to be resilient, the prolonged nature of this downturn has resulted in more reductions of carrier support for their captive agents, and we anticipate the possibility of further reductions, which may impact our local agents during the remainder of this year. Ultimately, we remain confident that auto insurance premium increases will improve financial performance for auto insurance carriers and consequently will increase their demand for new consumer acquisition. But the timing of this improvement continues to be delayed, therefore impacting our guidance for Q3. We expect revenue to be between $51 and $56 million, a year-over-year decrease of 48% at the midpoint. We expect VMM to be between $16 and $18 million, a year-over-year decrease of 47% at the midpoint. And we expect adjusted EBITDA to be between negative $6 million and negative $4 million. In summary, we delivered solid performance within the second quarter, exceeding the midpoint of our guidance for VMM and adjusted EBITDA. We are executing well and taking market share in a very challenging market. We are focusing on what we can control and taking decisive action to judiciously manage expenses and our own capital. Though we recognize the high level of uncertainty in the near term, we have strong conviction EverQuote will be well positioned to capitalize on the market opportunity and will directly benefit from the normalization of auto insurance carrier demand. Jamie and I will now answer your questions.
Operator
Thank you. At this time, I would like to remind everyone in order to ask a question, press star and then the number one on your telephone CPAD. We will pause for just a moment to compile the Q&A roster. And we will take our first question from Michael Graham with Canaccord. Your line is open.
Michael Graham
Hey, good afternoon and thanks for taking my questions. And I want to wish John Wagner well and Joseph, congratulations. I wanted to ask two questions, guys. The first one is on just liquidity and sort of capital needs and just maybe address how you're thinking about your balance sheet and how comfortable you are with it here for the balance of the year, I guess. And then secondly, Jamie, you mentioned in your prepared remarks that you felt like in the auto vertical where you were sort of maintaining your core business that you feel like you have a good competitive moat that you're building around. Can you just maybe address some of the, you know, sort of key points and sort of the focus of, like, building or maintaining a competitive note in auto?
Jamie Mendel
Sure. Why don't I – I'll take the second question first, and I'll turn it over to Joseph to talk about liquidity.
Joseph
You know, as we approach – you know, as we worked our way through Q2, there was –
Jamie Mendel
you know, we saw a fairly dramatic drawdown in auto demand. And with that, I think we performed a strategic assessment with the conclusion of which was we will benefit from greater strategic focus and improved capital utilization and capital efficiency. And that kind of forced the decision to, you know, reduce the workforce, exit health and Medicare, and really focus on P&C specifically, one of the big motivators behind that was we took stock of what are our truly differentiated assets. And we believe those to be our local agent network, where we have an installed base of 7,000 plus local agents who rely on us to grow their agency. Traffic volume. particularly in PNC and auto and home, where we believe we are the largest source of online insurance traffic in those verticals. And then a lot of the data and technology infrastructure we've built around that. And so, In a world where we're making decisions about whether to go wider and less deep or less wide and more deep, we decided to go less wide and more deep and to do so in P&C where we feel we have these assets that we can really build on and around to deliver more value for customers and ultimately more value for shareholders over time.
Brindley
I'll take your first question, Mike. Thank you for the welcome as well. So in terms of our liquidity position, we ended second quarter with $31 million in cash on the balance sheet. Two that we've done, we mentioned two actions we've taken since the end of the quarter to further strengthen the balance sheet. One was the sale of our health assets at an incremental $13 million. We also modified our loan with Western Alliance Bank to a $25 million facility. Again, not planning to use that facility, but we modified the terms to give us much more flexibility reflecting the current environment. And so you Adding those all together, we have an excess of $60 million of liquidity, so we feel that is ample liquidity for the business for a prolonged auto downturn. In terms of cash utilization, as we look through this quarter, what you're seeing is that we're returning to a model where EBITDA will become a closer proxy for cash flow used in the quarter, obviously adjusted for ebbs and flows of working capital between quarter end and month to month. So we feel we have ample liquidity given the prolonged downturn, given the actions we've taken since Q2.
Michael Graham
Okay, that's great. Thanks, guys.
Brindley
Bye.
Operator
And we will take our next question from Ralph Shekhar with William Blair. Your line is open.
Ralph Shekhar
Good afternoon. Thanks for taking the questions, and also congrats, Joseph, on the new role. During the prepared remarks, Jim, you talked about, you know, focusing perhaps on AI and applications for insurance distribution. Just curious if you could provide some more context to that as it sort of more traditional AI, or are you looking to leverage gen AI at some capacity? And then I have a follow-up.
Jamie Mendel
Sure. So our simplistic framework for thinking about this is sort of two categories of application. One is in operational efficiency. It's more internal use cases. And then, you know, the second in more customer-facing features. The focus to date has been primarily on the first category. And we've already begun to deploy use cases which are starting to show signs of success and build some adoption internally. And so in a recent example, we leveraged AI capabilities to automate a set of activities in one of our sales functions that improved the efficiency of that team by about 80%. We have similar examples beginning to take shape in engineering, and we're working on kind of extending it outwards to build adoption internally first. But, you know, I think one of the big opportunities that we have, and again, it's part of the rationale for focusing more narrowly on P&C and going deeper, is that we have a wealth of insurance distribution data in this market where we can tie consumer data and attributes that we've collected on millions and millions of consumers to outcomes down funnel with thousands of local agents and dozens of insurance carriers. And I think with that data, there will be opportunities to really apply some of the new technology as it comes out to better match and connect consumers with the right insurance providers for them. to right price our traffic acquisition as we bid for traffic upmarket, and to improve providers' efficiency in their spend with us. So there are a whole bunch of use cases that we see out there, and we're just beginning to step our way through it, but we see a huge opportunity given the unique data that we have to emerge as a leader in the space.
Ralph Shekhar
Great. And then maybe just on the EBITDA burn at this point, Just philosophically, you know, you have a continued prolonged or longer than expected tough macro environment with your carrier partners. Would there be a certain level that you'd want to manage the burn to? Or would you perhaps look to sort of, you know, balance that out with potentially tapping the long facility? Thank you.
Jamie Mendel
So let me let me start. I'll start. You can you can build. You know, I think we as we made some of the decisions that we did this quarter, we had a couple of financial objectives. One was to reduce our cash break even revenue level. And so we did that successfully. We dramatically improved the capital efficiency of the business by taking the actions that we took. And I think in doing so, you know, we've brought down the revenue level that would be required to generate break-even or better cash flow by 35% to 40%. Then we have the consideration around profitability and adjusted EBITDA based on a set of assumptions about the auto recovery. And for the last 18 to 24 months, Ralph, you know, we've seen these peaks and troughs, right? And right now we happen to be at the lowest trough of the downturn of this sort of volatile period. But as Joseph mentioned in his remarks, like we do expect recovery to build as we get into 2024. And so what we've done is, you know, we made a cut that we felt was appropriate, but that enables us to continue to invest in certain parts of the business where we see significant opportunity in our renewed area of focus within P&C. And we're going to continue to operate with sort of very significant discipline on the operating expense line as we progress through the year and watch for the market to begin to recover. So we feel very good about our liquidity position. I think we have, you know, the ability to maintain modest investment in areas where we feel it to be important. But we will continue to manage our expenses very, very tightly as we progress through the balance of this year. And as we get into next year, I do think we'll, you know, want to, yeah.
Brindley
So just adding on to Jamie, so thank you, is we're going to, as Jamie said, we're going to continue to manage our expenses carefully in a disciplined way. You know, we want to make sure, we made these decisions around strategic focus, eggs in our health business, and focusing more deeply on P&C, part of the rationale and the level of cuts we took was to make sure we were well positioned for auto recovery. We think that is critical. We've been going through this storm for quite some time. We want to come out of it as a strong leader in the space. And so we think with the reductions we took sets us up to have the resources continue to be in best position for that. The second part is we're also mindful of continuing to manage expenses and adapt them appropriately to the environment. Now, what I would say is that our goal as a team is that for the first half of 2024, we will be cash flow break-even and EBITDA positive in the first half of calendar year 24.
Ralph Shekhar
Great. That's really helpful. Thanks, Jamie. Thanks, Joseph.
Operator
And we will take our next question from Corey Carpenter with JP Morgan. Your line is open.
Corey Carpenter
Thank you. Joseph, I see questions for you. It sounds like you sold parts of the health business but still retained others. Just curious, you know, what do you have left and how are you thinking about the wind down of that? And then just with that in mind, any contact you can give us in terms of what you're assuming for the other vertical in 3Q from a revenue contribution perspective? And then, sorry, third, just any teller you can give on why you expect VMM margins to decline sequentially in 3Q would be helpful. Thank you.
Brindley
That third one, Corey?
Corey Carpenter
The V&M guide is 3Q. I think you did 36% in margins, and in 2Q, you got to do about 32% in 3Q. So just curious, the driver's there.
Brindley
Sure. So let me start with the exit of the health vertical. So just to go over what we decided, we exited the health vertical on June 30th, meaning there was no health revenues in our business going forth. We exited the vertical completely at that point. So that's the first piece I would tell you. I know that Presley says we sold select assets. I think we sold almost every select asset. Maybe there's a desk or computer left, but that is to appeal to the lawyers and the accountants. We sold all the assets. The principal asset was the $32.2 million commission receivable contract asset we had on the balance sheet. That represented the estimate of the cash flows we expect to receive over the next seven years. We sold that for the $13.2 million in cash. In addition to that, as part of the transaction, we helped transition some employees and find employment opportunities with my plan advocate, which is obviously a nice thing for our employees and gave us a smoother transition for them, which we were pleased with. So that's with regards to the health business and the exit. And again, there's no revenue from the health vertical coming into Q3. What you will see in Q3, as we finalize the accounting on the sale of the assets, which took place on August 1st, In Q2, there will be a non-cash charge reflecting the sale of the contract asset for $13.2 million, given the contract asset was expected to receive over time. So that will be a charge that will appear in the quarter, and we're finalizing the treatment of that right now, and we'll give that guidance when we do in the next quarter. In terms of the other insurance verticals, I'm going to give you some insight on Q2 to help you think about it, the health vertical more broadly. So First, last year, the health vertical represented just under 10% of total revenues for the company. If you look at how that fell across the year, the largest portion of that comes in Q4 during the annual enrollment period for health care. If you look to this year, the first half of this year was also less than 10% since the annual enrollment period is in Q4. Within this Q2, we had $18 million approximately in revenues. revenue from the other insurance verticals. Of that, about 35-ish percent, 40-ish percent came from health. So I guess that is the guidance I can give you in terms of the facts on Q2. We're not guiding specifically for the other insurance verticals. What I would say is the principal driver of the other insurance verticals is the home vertical, which I commented on in my remarks as having steady progress. As we talked about in our Q1 call, we put additional resources behind that from a leadership perspective to sort of you know, reignite that vertical. And we've been pleased with making steady progress. We had double-digit growth there in Q2 in the home vertical. And then lastly, on VMM margins to decline in Q3, maybe a little color on that. You're seeing our VMM margins, you know, you look at the guide sort of, you know, in the low 30s, 30, 31.5, 32.5% range. And I think that really reflects the Q2 we were pleased, very pleased with getting a record VMM margin. We're not assuming that will be sustainable. A couple things that drove that, I think, was particularly our teams adapted very well to involve our environment, and we were able to take advantage of that and get near-term benefits. The sustainability of that, I think, would be a question in our minds. We did not factor that into our guidance. The other piece I would say is that we also had larger DTCA in Q2, both in health But also on our P&C side, as Jamie mentioned, we've scaled back our P&C vertical, DTCA, as well as the health, existing health. Both of those were drivers that contributed to higher VMM. So that's why you see us going back to one more of a normal level we had, really factoring out the DTC operation. And I guess the last point I'd say on VMM margins, we continue to have a goal of going towards the long term of, you know, getting into the 40th percent range. We continue to make steady progress, and you'll see us continue to do that over time. But we wanted to sort of recalibrate, reflecting that Q2, although high, we don't want to view that as the starting point for the rest of the year.
Joseph
That was very helpful. Thanks for answering all three of them very thoroughly.
Corey Carpenter
Appreciate it.
Joseph
Happy to, Corey. Thank you.
Operator
And as a reminder, it is star one if you would like to ask a question. And we will take our next question from Dan Day with B. Reilly Securities. Your line is open.
Dan Day
Yeah, thanks for taking the questions, guys. So a little more detail just on the pullback to subsidies and agent channel. So how much visibility do you have in terms of how long that'll last? Is it any better than the carrier marketplace spending? How aggressive have those reductions been? And really, is it just like one or two carriers, or is it fairly broad-based so far?
Joseph
Yeah, sure. Thanks, Dan. So the
Jamie Mendel
Agent subsidies are primarily, you know, they're relatively concentrated in a small number of carriers. The big change in Q2 was one of the larger of those carriers cut back subsidies in a number of states, representing a good portion of their agent demand. And so, in those states, we saw agents who had less subsidy dollar support from the carrier pull back in terms of their demand. With respect to the expectation going forward, I think it's similar to what we expect for the rest of the marketplace, which is that the balance of 2023, we do not expect to see recovery in those subsidy dollars. I do think as we look ahead to 2024, the messaging we're receiving is that we will likely see some of those dollars return, but it wouldn't be like a light switch in the sense that they return to early 2023 levels right at the beginning of 2024. It will likely follow some path of the carrier being able to get sufficient rate to be comfortable with their profitability on a state-by-state basis over the course of 2024.
Dan Day
Got it. Thank you. And then just a follow-up. So the decision not to fully exit DTCA in home and health, just you talked a little bit about it, just, you know, what you like about that business, maybe just a little more detail on that, why to keep sort of a smaller presence there. And then longer term, like, do you see this as just a temporary scale back of that, and maybe you'll add more P&C agents when their recovery happens, or... Is it sort of just what it is at this point? Sure.
Jamie Mendel
So just to clarify, we exited DTCA entirely in health and Medicare, which, you know, we exited the verticals, and with that our DTCA operations, and that represented the majority of our agent headcount. And then within P&C, which is the other DTCA operation that we have, we significantly reduced the agent headcount. And we did so because of our renewed commitment to capital efficiency in the business. And so if you go back to the rationale for getting into the DTCA in the first place, there was strategic rationale, and then there was some growth that it was meant to generate. And we made this decision at a time when the auto insurance market was in a healthier place. conditions on the ground have changed, and so we're revisiting some of those assumptions. Where we are today, we have a basically scaled-down P&C DTCA operation today. So we have agents who are selling auto and home insurance. The strategic rationale that existed, you know, back when continues to exist today and get proven out and that is that these agents can provide incremental coverage to the marketplace they can provide options to consumers who come in when we don't have a good third-party option for them they can generate a lot of insight about what happens with consumers down funnel so we get a lot of real-time data on you know quality of traffic and ltv profile of consumers that we can use to improve our overall traffic operations And it serves as a bit of an internal customer, which we treat as this like innovation lab as we try and improve our offering for third party agents as well. So the majority of those things can be accomplished with a smaller footprint. And that's what we're trying to hold on to. I think the piece that the notion that we are letting go of is DTCA as a standalone growth driver, because that's not consistent with our renewed focus on capital efficiency. And so I would expect that its current incarnation, which is a much smaller agent base, will be the state in which it persists for the foreseeable future.
Dan Day
Understood. Thanks, guys. I'll turn it over. Thanks. Thank you.
Operator
And we will take our final question from Jed Kelly with Oppenheimer. Your line is open.
Jed Kelly
Hey, great. Thanks for taking my question. Just looking at you know, sort of the, I guess, non-variable market expenses implied in the guide. I think it's around like $22 million in third quarter. Is that the proper run rate to assume going forward? And then, Joseph, just circling back on your free cash flow break-even comments around the first half of next year, sort of what kind of gives you confidence to put that type of guidance out there? Thanks.
Brindley
Sure. So I think first, so thanks, Jed, for the question. So I think first in terms of the operating expense level, I think you've got a reasonable ballpark on that. If you look, put that in context for where we ended Q2 and what the guidance we've given, you know, we said it was going to be 15% reduction in structural costs, and you're seeing us doing that in Q3. So I think that's first. And then as we look to next year, you know, as we think about the business, we think there's We do believe there will be some auto recovery in the course of next year, in the first half of next year. As Jamie touched on, we have dramatically lowered the cash flow break-even point of the business to the actions we've taken. We've done it by 35% to 40% versus where we were from the start of the year. So what that means, practically speaking, is very modest recovery from current levels, even below where we were earlier in the year. allows us, below where we were in Q2, allows us to feel confident of getting to cash flow EBITDA break-even. And as I said, the difference between EBITDA and cash flow right now, very similar. You know, the differences are modest and really is working capital, you know, quarter. So versus when we had DTCA, we had a heavy cash investment situation. up front, but we've realized that over time. As we've gone to more of an asset-light model, great emphasis on capital efficiency and return on capital, you're seeing that stronger connection between adjusted EBITDA being a proxy for cash flow in a period.
Jed Kelly
Great. And then just to follow up, just, you know, I think every insurance marketer has been going through this. Jamie, where do you see the competitive landscape shaking out when this recovery happens? I mean, do you think everyone will benefit or, you know, do you think there'll be much fewer players or do you see a period of consolidation? Just how do you see things shaking out when we do eventually get to a recovery? Thanks.
Joseph
Yeah, thanks, Jeff.
Jamie Mendel
So, you know, I think we've, while it's been a challenging period for everyone, you know, we have performed relatively well. in that by all measures, if you just sort of track insurance revenue from companies in the competitive set, we have gained market share through the downturn. And we feel very good about our competitive position. As you look ahead, I think the recovery will certainly, will lift all, the rising tide will lift all boats. It's hard for me to speculate on whether or not there will be consolidation. But, you know, I feel very good about EverQuote's competitive position as we come out of the downturn having gained market share and now especially having added focus and emphasis on the auto insurance market. I think we will continue to build on our edge with these local agents and in doing so emerge in a fairly differentiated position relative to the rest of the market.
Joseph
Thank you. Thanks, Jen.
Operator
And there are no further questions at this time. I will now turn the call back to management for closing remarks.
Jamie Mendel
Thanks all for joining us today. So, you know, as the auto insurance market volatility persists, we took significant action this quarter to strengthen our position for further prolonged downturns. We dramatically improved our capital efficiency, we strengthened our balance sheet, we streamlined expenses, and we bolstered our focus in areas where we can build on and around our most differentiated assets. I'm confident that the changes we made will accelerate our ability to provide compelling value to our customers, insurance provider partners, and our shareholders moving forward. Thanks for your time.
Operator
Ladies and gentlemen, this concludes today's call. We thank you for your participation. You may now disconnect.
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