MediaAlpha, Inc.

Hello, my name is Philip, and I'll be your conference operator today. At this time, I would like to welcome everyone to the Media Alpha Key 4 2020 Earnings Conference Call. 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'd like to ask a question during that time, simply press star and then the number one on your telephone keypad. If you'd like to withdraw the question, press the pound key. And now we'll turn the call over to your host, Denise Garcia with Investor Relations. Please go ahead.

Thank you, Philip. Our discussion today will include forward-looking statements about our outlook for future financial results, including our financial guidance for the first quarter and the full year 2021, 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 today's guidance. Please refer to the earnings release we filed with the SEC on Form 8K and the shareholder letter we posted to the investor relations section of our website today for a fuller explanation of those risks and uncertainties and the limits applicable to forward-looking statements. MediaAlpha will routinely post information that may be important to investors on our IR website, investors.medialpha.com, and we use this website address as a means of disclosing material information to the public in a broad, non-exclusionary manner for purposes of the SEC's regulation fair disclosure. In addition, we will be referring to certain actual and projected financial metrics of MediaAlpha, which are non-GAAP financial measures. These metrics include adjusted EBITDA, contribution, and contribution margin, and we present them in order to supplement your understanding and assessment of our financial performance. Non-GAAP measures should not be considered a substitute for or superior to financial measures calculated in accordance with GAAP. The most directly comparable GAAP measures, as well as reconciliations of the non-GAAP measures to those GAAP measures, are available in our fourth quarter earnings release. As a reminder, we published a shareholder letter on our IR website that we'll refer to during this Q&A session. Now I'll turn the call over to Steve.

Thanks, Denise. Hi, everyone. As you saw in our shareholder letter, we're pleased with our fourth quarter and overall 2020 results, and we anticipate a strong 2021. We're looking forward to discussing our most recent results with you, so we'll open the call to questions now.

Again, it's Star 1 to ask a question. Your first question is from the line of Frank Morgan with RBC Capital Markets.

Good afternoon. I guess I'll start with your commentary in the release where you specifically called out the strength in your health insurance verticals and the record-breaking OEP that your AEP had just occurred. So I know in the DTC brokers, the MA brokers that we spoke with, they commented a lot in their fourth quarter results about this issue. you know, the level of demand that they had gone out and created or bought. But at the same time, in a lot of this heavy spin, there was also some chunkiness around breaking news stories in the presidential election. And so I'm just curious, how would that affect your business? Is that something you can capitalize on? Is that activity a benefit to somebody like MediaAlpha, or is that a – how does that dynamic play out, and what's the opportunity there? And then I'll ask a more specific modeling question.

Yeah. Could you repeat the question? Or were you asking whether or not, I guess, the news cycle and the news of, you know, that was hitting during OEP and AEP, whether that was a benefit to us at the market?

Yeah, was that a benefit? And there was some commentary about there was a lot of chunkiness in their call volumes, and sometimes they just physically couldn't handle it. But, yeah, just generally speaking, the effect of either elections or breaking news and, you know, any of those factors that could possibly happen during an AEP or an OEP cycle Are those good or bad for your business?

Right. Well, I think we saw a couple of things. You know, one is that a lot of our supply partners We're seeing media prices go up because of the election, and so that negatively affected some of our supply partners. We did hear that. It did negatively affect some of our demand partners as well, who then increasingly had to turn to a channel like ours for customer acquisition because the media pricing in some display channels or native advertising channels had gone up because of all the advertising related to the election. In terms of the chunkiness of what the news may have created in terms of consumer demand, I'll be honest, we didn't really see that. But one way it may have manifested itself is that the tail end of OEP and EEP for us, you know, where there's always a fair bit of activity, you know, came in a lot stronger than we were projecting. And so I don't know if that goes to, you know, the observations that others were sharing with you, but certainly that aspect of what you're describing, I mean, we did see and we did benefit from.

Gotcha. Maybe a modeling question here. Certainly, when I look at the numbers for the first quarter and really all of 21, it seems like, at least relative to what we've modeled, the transaction value assumptions seem to be better, larger numbers. But the revenue, guys, seems to be generally in line with where we are. And I'm just curious, is there any kind of dynamic at work there that might explain that? Is there any changes in things like transaction value or referral? Is there a mix change or just any color around sort of the dynamic between the revenue and the transaction value? Thanks, and I'll hop off.

Thanks, Mike. This is Stephen. You're right to point that out. There's a bit of a mixed shift between open marketplace and private marketplace transaction value that's reflected in the Q1 and 2021 guidance. Just a reminder that that business model and that deployment exists, and we created it to support our at-scale supply partners who want to work directly with demand partners. And we've seen a few of our partners kind of get to that scale, and we facilitate those types of relationships. It helps us continue to grow the top line and continue to grow the contribution margin dollars. It does create a bit of a shift between transaction value and gap revenue. And recall that gap revenue from private marketplace transactions converts to gap revenue at a fractional rate. our take rate.

Your next question is from the line of Corey Carpenter with JPMorgan.

Hey, thanks for the question. Steve, maybe one for you, and then I'll have a follow-up for you. Just hoping you could expand a bit on some of the trends you saw in the fourth quarter in the P&C vertical and just how you're thinking about the sustainability of that as the economy starts to reopen and more miles are driven in 21.

Hey, Corey. Thanks. Yeah, so what we saw in the fourth quarter for our P&C vertical was just the continued strength of the demand in that vertical. As you know, if you follow the sector at all, fourth quarter is typically a seasonally down quarter. And so to see demand go up in Q4 and T&C, certainly for us was not something that we were anticipating, but obviously very happy to see. And I think that speaks volumes for just the strength in the demand that we saw in the market in 2020. In 2021, I mean, what we're expecting is that the new baseline that's been set in 2020 will remain and that the growth will be back to more historical growth levels. You know, I think what 2020 did, you know, particularly for the property and casualty insurance space has really accelerated the adoption of direct-to-consumer online channels. And you've heard that elsewhere. You've heard us talk about that. But what we've seen is that as a lot of the offline channels have come back, offline marketing channels and customer acquisition channels like TV and sports marketing, we've seen the level of investment in our channel continue to go up from a lot of the carriers who made, you know, accelerated their investment into our channel with shelter in place back in March and April of last year. And so for us, we think that that's a very good sign that the growth that we saw in 2020 will stick around and form a new baseline upon which we'll grow. And I think that's what our forecasts reflect.

Thank you. And then, Igor, in the shareholder letter, you mentioned you expect to invest aggressively this year. So just hoping you could expand a bit on some of your key investment priorities. I think you mentioned employee hiring and then maybe just some of the puts and takes and how that impacts margins this year.

Sure. The hiring plan is, as you'd expect from us, is about product and technology investments. I would say, you know, relative to many other companies, those will still look modest because the operating leverage in our business continues to be high. We're also investing in the agent channel, and that requires more headcount, sales-oriented headcount. But again, what we're seeing is that our sales and marketing costs relative to revenue, right, will remain in that healthy 2% range. From an overall margin perspective shift, we don't see our headcount plans and hiring plans really affecting the EBITDA margin. What you're seeing there in 2021 is reflective of public company costs increasing year over year. In 2020, we had two months of that.

In 2021, you'll see the full-year effect of that. Thank you. Thanks, Corey.

Your next question is from the line of Mike Zaremski with Credit Suisse.

Hi, guys. This is Charlie. I'm for Mike. I guess first, can you tell us whether there were any new carrier additions in the fourth quarter that maybe helped growth or any other dynamics you could call out?

Hey, Charlie. No, no one notable who are new in Q4. I mean, remember that, you know, we're already working with all of the major carriers in all of the insurance sectors that we're in. And so for us, you know, the growth is really coming from, you know, growth from existing partnerships and the day-to-day focus that we have in delivering value to our existing partners.

Got it. And then I guess just on the contribution margin, Is there, is this kind of like a good run rate to think about now? Or are there, I guess you mentioned the private versus open shift. Is there anything that would impact the contribution margin in 21?

Hey, Charlene. I think this is a good run rate to think about. And our guidance reflects all the kind of puts and takes that we expect to impact contribution margin. Remember, part of the driver of that is going to be mix, and mix of supply and mix of vertical. So in Q4, you saw that contribution margin increase sequentially to 16.2% from 14.3%. Part of that is... What we're modeling is the mid-15% range for contribution margin. We think that's appropriate.

Got it. Thank you. That's helpful. Thanks, guys.

Thanks, Charlie. Your next question is from the line of Michael Graham with Canaccord.

Hey, good evening, guys, and congrats on the great strong finish to the year. A quick follow-up on one of the earlier questions first, please, which is, you know, this dynamic of transaction value growing faster than revenue seems to be most pronounced in Q1, and, you know, just based on your guidance, and then it looks like it moderates as we go through the year. Do I have that right, and is there a story to tell there, anything to focus on?

Mike, this is Sigrun. You've got that right. So the dynamic there is, you know, as partners reach a certain scale, right, and we're agnostic to whether they're working with us through our open marketplace or private marketplace. As they scale, you know, we'll facilitate those relationships, and we've seen a bit of mixed move to the private marketplace. And that's a reflection of the demand-side environment, right? And that demand-side environment, we expect to remain strong. And what that does is then drives new supply partners into the ecosystem, which will largely be open marketplace. So it'll then moderate and kind of come back to a 70-30 split between open marketplace transaction value and private marketplace transaction value. key top-line metric. That represents the growth investment and customer acquisition from all of our partners, and it reflects our share in the broader market.

Okay. That's helpful, Tigran. Thank you. And then a broader question, if I could, your guidance for pretty rapid growth in Q1, I'm looking mostly at transaction value and then a much lower growth rate for the full year kind of leads me to believe that there should be a good opportunity to outperform that guidance is my interpretation. But as we look at the growth rates you had for some of your verticals exiting this year, 76% in P&C and 46% in health and 27% in life, could you maybe just at a high level talk about when you thought about the guidance for this year, growth rates in those verticals, like, you know, relative to how they did sort of exiting this year? Do you, you know, do you expect them all to slow down, you know, the same amount or some to kind of grow faster? Are there any, you know, high level thoughts you can share around, you know, the verticals as we go through the year?

Yeah. Hey, Michael. It's Steve. At a high level, I think what you're seeing in our numbers and our forecast is starting to overlap periods when we did see a rapid acceleration of investing dollars going from offline marketing channels to online. That was in part or in large part due to COVID. And so, as I mentioned earlier, I think we do expect growth to normalize and we're expecting a very good year and and we expect growth to normalize from the baselines that were set in 2020 um but at a high level i think that's really what you're seeing in terms of the growth rates on a quarter by quarter basis okay thank you so much guys have a good night thanks michael your last question is from the line of daniel grosslight with city

Hi, guys. Congrats on a strong end to the year, and I really appreciate the economy of these calls. I guess going back to the health segment question, I'm curious what's built into the guidance in 2021 as we think about ADP for plan year 22, given we might see a return of more face-to-face sales in the agent force. Help us think through next year's ADP.

Next year, are you talking about the 2020? You're talking about 2021?

2021 AD for planned year 2022.

Yeah, understood. Listen, I mean, yeah, I think there'll be some of that, right? But what we've seen are online-only processes for some Medicare products. We've seen the growth of, you know, online applications and online shopping processes for from the new cohorts who are aging into Medicare, and we're seeing that at higher levels than the older cohorts. And we're seeing a greater propensity for these newer cohorts to opt for, you know, Medicare plans or privately administered Medicare plans, most notably Medicare Advantage. And so I think you're right. I mean, there will be some reversion. back to face-to-face shopping, but I do think that a lot of the positive trends, the secular trends will continue, and we're expecting for a very good AEP this year. Got it. Okay.

And then as we think about the other segment, it seems like folks are itching to start traveling again, and the vaccine rollout is going well. Keith, is that what's assumed in travel for 2021?

I would say at a high level. Little. You know, it's really because, you know, we do see the numbers on our side picking up. You know, if you look at the TSA stats, you'll see our numbers going up, you know, in line with what you're seeing in terms of U.S. domestic air travel. But I think it's still too early to say exactly what the timing of that return is going to be, whether, you know, what the second half of this year is going to look like and whether it will take six months or nine months for things to get back to normal or whether it will take 24 months.

Okay. But safe to say a reversion to normalcy isn't baked into your 2021 guidance.

That's right. I think that's it. Yeah.

Okay. And then lastly, I saw the rollout of the new agent channel on your website. It looks like an interesting product. Can you just talk about what you're assuming for contribution in that channel, the agent channel for 2021, and which segments that will largely show up in.

And so, no, we're not anticipating strong financial contribution from that business this year. We're focused on innovation, product innovation. We're working with a few hundred agents already. We're focused on getting their feedback and really finding a new way to serve this important market. In terms of, you know, when you start to see that impact layer in, where you'll see it first is in the PNC.

Got it. Okay. That's it for me. Thanks, guys. Yeah. Thanks.

Your next question is from the line of Corey Carpenter with JP Morgan.

Hey, sorry. I just wanted to squeeze one more in. Maybe I wanted to go a little more on the agency channel. I mean, maybe could you just talk at a high level about the opportunity you're going after there? And then, you know, as we think about the next year, I know you're not expecting much revenue, but just in terms of rollout, what could it look like? Kind of what are the key learnings so far? And what are some of the, you know, upcoming milestones for that business? Thank you.

Yeah. Well, the high level story there, Corey, is that as much as we talk about direct-to-consumer, as much as we talk about insurance carriers and T&C going direct and other sectors going direct, well over half of auto insurance policies are still sold through agents right now. And so it is an important market. It is an important distribution channel. It'll remain so. It's just a channel that we haven't worked with. As you know, some of the other publicly traded companies in our space, they have roughly 40% or so of their insurance revenue coming from the work directly with agents. And so, you know, the reason that we're getting into it is because we think that there's room for innovation here and to do things differently and to make the same kind of have the same kind of transformative effect with our approach to the space that we had when we first entered into the space working directly with insurance carriers. And so, you know, in terms of in terms of milestones, you know, really for us, what we're focused on is just building a better product. Having a better experience that agents have, giving them more control over exactly how they're connecting with consumers. Right now, I think if you ask anyone in the space, that consumer experience is not good. And so I think if you're looking for directionally what kind of innovation that you're going to see from us, it will all start with having a better consumer experience because any agent, who buys leads from a current lead generator will tell you that a good consumer experience results in a good referral and a bad one results in a bad one and right now there's just way too much bad consumer experience right now for the leads and calls that are being generated and sold to agents helpful thank you

Your next question is from Mike Zaremski with Credit Suisse.

Hey, thanks. I jumped on late, but I have one question as a follow-up to Corey's on the agent channel. Curious if you can give us any color on the TAM of the current agent lead channel. Is that, you know, our Are there a lot of competitors there that are doing this, or is this a small space currently that is mostly kind of greenfield opportunity that you guys are going to try to open up, or is it both?

No, I think the best way to think about the baseline is, right, Tam, is to look at the publicly traded companies in our space, companies like the LendingTrees Insurance, never quote, and apply that percentage I mentioned, about 40% or so of the revenue coming from P&C insurance as being from agents. And then you do have a number of large private companies who are focused on this space. And so it's a big part of the marketplace. I mean, I think you can look at it as if, you know, half or so or more than half of insurance policies are still being sold through agents. I think you can think about the total address market opportunity in those terms in terms of just how much marketing spend there is in P&C insurance.

Okay. And just following up, is there – You know, I think we understand your analytics are probably better than a lot of your peers. But, you know, when the agent, you know, let's just say you put a quote in from an Allstate agent. When an agent is considering lead options, I think price is one factor. When you say that your leads might be more expensive, more price competitive versus your competitors? Or is there kind of any kind of special sauce to kind of why your lead generation software might be a little bit better than others?

I would say, well, I'll answer the price question first, which is, I think that one difference is that the agents are going to have full control over exactly what they want to pay. And that's not always the case right now. Usually in this space, they're price takers. And we're just not big believers in that as a long-term business model. In terms of what we'll do differently, I think what you'll see is that because we don't have the burden of being an incumbent in this space and having revenue and generating revenue, a lot of revenue from a business model that's based on a suboptimal consumer experience. I think that you'll see us innovating and providing for a way to refer and connect interested shoppers with agents in a much more consumer-friendly way. And that's going to naturally lead to, I guess, higher quality referrals or leads and And in that case, and then if there are enough agents there to create a competitive marketplace, then they'll bid whatever they feel is appropriate for every lead coming through. I can tell you right now that lead pricing is not the issue. It's the quality of the leads and what they get. You should not have to sift through 100 leads and call 100 consumers that you're accessing through this model now to get one policy or two policies.

no that's fair we've heard many agents talk about you know the leads just didn't didn't didn't pan out um but you know they wasted money i guess would be the uh absolutely absolutely all right well thank you very much and looking forward to learning more throughout the year yeah thanks mike good luck

And there are no further questions. That does conclude today's conference. Thank you for participating. You may now disconnect.