MediaAlpha, Inc.

Ladies and gentlemen, thank you for standing by. My name is Brent and I will be your conference operator today. At this time, I would like to welcome everyone to the Media Alpha Q4 and full year 2021 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 would like to ask a question at that time, simply press star followed by the number one on your telephone keypad. If you'd like to withdraw your question, again, press star 1. Thank you. It is now my pleasure to turn today's call over to Denise Garcia, Investor Relations. Please go ahead.

Thank you, Brent. After the market closed today, MediaAlpha issued a press release and shareholder letter announcing results for the fourth quarter and full year ended December 31, 2021. These documents are available in the Investors section of our website, and we will be referring to them on this call. Our discussion today will include forward-looking statements about our business and our outlook for future financial results, including our financial guidance for the first quarter of 2022, which are based on assumptions, forecasts, expectations, and information currently available to management. These forward-looking statements are subject to risks and uncertainties that could cause future results or events to differ materially from those reflected in those statements. Please refer to the company's SEC filings, including its annual report on Form 10-K and its quarterly reports on Form 10-Q, for a fuller explanation of those risks and uncertainties and the limits applicable to forward-looking statements. These forward-looking statements are based on assumptions as of today, February 24, 2022, and the company undertakes no obligation to revise or update them. In addition, on today's call, we will be referring to certain actual and projected financial metrics of media alphas that are non-GAAP financial metrics. 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. Reconciliations of these non-GAAP measures to the most directly comparable GAAP measures are available in our press release and shareholder letter issued today. Finally, I would like to remind everyone that this call is being recorded and will be made available for replay via a link on the Investors section of the company's website at investors.medialpha.com. Now I'll turn the call over to Steve and Pat for a few introductory remarks before opening the call to your questions.

Hey, thanks, Denise. Hi, everyone. Welcome to our fourth quarter and full year 2021 earnings call. I'd like to kick things off with a few key takeaways from our shareholder letter. First, we reached a new and exciting milestone in 2021 by exceeding $1 billion in transaction value, an increase of 25% year over year. I'm particularly proud of this achievement given the current challenges in the property and casualty insurance vertical. Second, we had our strongest quarter ever in our health insurance vertical, driven by record carrier spend in both our under 65 and Medicare insurance segments. Lastly, Despite the challenges in the P&C insurance vertical, we firmly believe that the industry is continuing its powerful secular shift towards direct online customer acquisition. As a leader in our industry, we're continuing to invest to be ready to accelerate our growth when the market recovers. Now, I have the great pleasure to introduce Pat Thompson, who joined us as our new CFO back in December. His breadth of experience across FP&A, corporate development, strategy, and analytics made him a standout candidate. And I can't think of a better, more complimentary partner to help lead us through the next phase of our growth. So with that, I'll pass it to Pat to say a few words before we open the call to your questions. Great.

Thank you, Steve. It's great to be here on my first call as MediaAlpha's CFO, and I'd like to thank the entire team for the warm welcome I've received since joining the company in December. I joined MediaAlpha from Expedia, where I spent 11 years in the online travel industry, which was one of the early industries to move online. As I've been learning more about how insurance is currently bought and sold, I believe we are in the early innings of a similar online transition. Carriers are investing heavily in marketing analytics and improving their online purchase experiences. Price comparison sites like the Zebra and Insurify are gaining adoption. Personal finance apps like Credit Karma are adding insurance to their menu of financial products. Yet the insurance industry is only allocating approximately 20% of their ad budgets to digital channels, while other industries overall allocate roughly two-thirds of their advertising budgets to digital, which is in line with consumers' time spent with digital media. I believe that no company is better positioned than MediaAlpha to capitalize on this growth opportunity. We have gained market share organically over every time horizon since our inception in 2012, becoming a $1 billion-plus platform that is the largest online ad marketplace in the insurance industry. As a two-sided platform, this scale is powerful. Suppliers want access to as many advertisers as possible. Advertisers want access to the most shoppers. More and better data enables more granular segmentation. Essentially, as we grow or improve any part of our ecosystem, the outcomes improve for all of our stakeholders. My primary objectives at MediaAlpha are to accelerate this flywheel by extending our market share gains through both organic growth and M&A, while remaining focused on driving attractive long-term even-time growth. Given these themes, we are planning to continue to make significant investments this year, which we believe will position us to accelerate our market share gains as the P&C insurance market recovers and our partners ramp their digital customer acquisition investments on our platform. We are excited to announce one strategic M&A investment today, which is our agreement to acquire a customer helper team, or CHT, for $50 million of cash plus up to an additional $20 million based on CHT's achievement of revenue and profitability targets over the next two years. CHT expands our owned and operated Medicare business and is a highly complementary asset due to our non-overlapping Medicare carrier and broker partnerships and CHT's focus on social media channels. particularly short-form video advertising. With CHT, we are doubling down on our Medicare business, which stands to benefit from the aging U.S. population, greater online shopping among new Medicare cohorts, and the increasing popularity of privately administered Medicare Advantage plans. We anticipate that the deal will close in the next two weeks and will have a minimal impact on Q1 financials. For the balance of 2022 following the closing, we expect CHT to contribute in excess of 25 million of revenue and 5 million of adjusted EBITDA. In conclusion, I couldn't be more excited about MediaAlpha's long-term growth opportunity. The insurance industry is still in the early stages of its digital transformation, and we are investing to grow our platform and market share and extend our competitive advantage. With that, operator, we are ready for the first question.

At this time, I'd like to remind everyone, in order to ask a question, press star followed by the number one on your telephone keypad. Your first question comes from the line of Charlie Lederer with Wolf Research. Your line is open.

Hi, good afternoon. I guess my first question, as you think about your even margin with the headwinds and auto going on, Is your 1Q guide kind of where we should expect margins to be as long as that's the environment, or is there some seasonality in there? Thanks.

Yeah, and thank you for the question. I'm happy to kick it off on it. And, you know, the thing I would say on the margin for Q1, you know, that there are, you know, a number of forces at play in the business. And I would say that, you know, We're in the midst of the PNC downturn right now that I think we've elaborated on quite a bit. I think our view is that those trends are continuing and we believe they will continue through the balance of the quarter. And so as you look at the trends, I think you can see that. One thing that I would probably call out from a margin standpoint is that we continue to invest in the business from an SG&A standpoint. And both in terms of adding people to the business to power our growth and also on the professional fees side to support our IPO in being a public company going through the SOX process for the first time. I think our view is as the business recovers, we would expect to see margins start to, EBITDA margins start to improve to look, you know, something somewhat more like historical levels. You know, we definitely believe they are depressed at the moment.

Thanks. That's helpful. And then I guess, can you just expand a little bit more on the health care acquisition, how it fits into your ecosystem and how that deal came about?

Yeah, you know, I'll start with that. Well, I think the acquisition, you know, for us was super attractive. One, because of our outlook on the Medicare vertical, we're big believers in the overall secular trend in that space. with larger numbers of seniors aging in every year, these newer cohorts opting in to Medicare Advantage at higher levels than older cohorts, as well as just the general level of internet savviness exhibited by the newer cohorts of Medicare consumers, meaning that they are increasingly starting their shopping and research experiences online. In addition to that, specific to CHD, What we love about that business is what they've been able to do to leverage social media channels, social media marketing, which is an area, quite honestly, that we haven't traditionally been strong in, in order to generate high-quality customer inquiries from Medicare consumers. For us, what we're seeing in our marketplace is a growing appetite for calls from a lot of our Medicare carriers, And their ability to really tap into the social media channel, which is vast, in really innovative ways, made it a really good fit for both our owned and operated business, as well as their health insurance vertical more generally. I'll say one other thing, which is that the culture of the company, as we looked in, and the cultural fit that we saw was a really important factor. You know, they're also a self-funded company. very strong entrepreneurial spirits, a spirit that I can certainly relate to as an entrepreneur myself, having started this company by funding it ourselves. And as we scale, we really welcome this fresh injection of fresh entrepreneurial energy to the overall team. And I'm really looking forward to getting them integrated and seeing what we can do here.

And probably the other piece I would just add on that would be You know, we believe it's financially attractive as well. And, you know, I think we've stated that, you know, for the balance of 2022 post-close, we expect in excess of $25 million of revenue and $5 million of EBITDA. So, you know, roughly a 10-month basis. So we believe the multiple is attractive relative to where we're at and relative to the growth potential of the business.

Thanks for the answers. Thank you.

Your next question comes from the line of Meyer Shields with KBW. Your line is open.

Great, thanks. I wanted to start, if I can, on the health insurance side. In other words, a ton of churn in the quarter, and for a lot of the public brokers, it was a pretty difficult quarter. And I was hoping you could talk to how that impacts lifetime value estimation and your expectations for whether that level of churn is likely to continue.

Listen, I mean, let's take a step back. You know, when we think about Medicare, I mean, first and foremost, we think about those secular trends, you know, that I talked about in the last question. We still are big believers in them, and it was a really strong performer for us this year. With respect to some of the churn that you've been hearing about from some companies who are in the space, you know, for us, we have a very diversified base of demand partners or advertisers. While we can't disclose the specific mix, it's a pretty fair split between both carriers as well as brokers, with the overall trend being towards direct spending from carriers because of the secular trend of carriers moving gradually towards direct online customer acquisition. And one evidence of that was that in this past quarter, spending from carriers both for Medicare and under 65 was at record levels for us. With respect to customer lifetime value and the ability to really assess that based on renewal rates that are coming through, for us, we really welcome the advertisers are looking more closely at that because what our channel allows advertisers to do is just really granularly assess the customer lifetime value on a publisher by publisher basis and then match that to the customer acquisition costs. And the ability for carriers as well as brokers to do that on a very granular level is really one of the hallmarks of our marketplace. And so we welcome brokers as well as carriers in their efforts to really get a better bearing on expected lifetime value. So, Meyer, I don't know if that answers your question or if there's anything more specific I can tell you.

No, I think it does. I want to think through what you said, but I think it's helpful. Follow-up, if I can, just shifting to P&C. Last quarter, you talked about how there was still a bunch of companies in the top 20 that were increasing their spend. I was hoping you could update that or give us some sort of update on that cohort.

Sure. I mean, Why don't we step back and just give you our outlook on just generally how that market's doing, right? You know, not much has changed since the outlook that we shared with everyone last quarter. It's still a super dynamic underwriting environment, particularly with respect to severity, because as we all know, inflationary pressures have persisted through 22. Now, you know, carriers are making pretty good progress with pricing increases. And we generally agree with others who are talking about a second half recovery, and I think that's directionally correct. But I think really when you peel things back a layer, you start to understand that the situation is a little bit more complicated than that. I mean, first of all, you have the basic issue of having to predict the exact timing of the of each carrier's rate approvals across multiple states. You have dozens of carriers seeking rate increases in dozens of states, and all of these states have slightly different perspectives on the types of rate increases that they're open to allowing. In addition to that, when carriers actually take the rate increases, some of the carriers who are early to take them actually become less competitive, and so their conversion rates go down. for the simple fact that their price is now higher than everyone else's. And so sometimes those conversion rates stay down until more carriers have followed suit and taken rates themselves. And then when the rate actions have been taken, how quickly they earn through to actually improve underwriting profitability will vary by carriers because each carrier has a unique mix of you know, six to 12 month policies. And it's really upon the renewal that these pricing increases take effect, right? And so you have to consider all of these factors, right? You know, when you start to think about exactly, you know, when each specific carrier will start to return to more normal levels of growth marketing investment. You know, the thing that we do know is, you know, based on our experience in the industry, is that when the market turns, One of the hallmarks of our programmatic marketplace with hundreds of supply partners is really how rapidly carriers can scale when the market turns. I mean, this happened during the last hard market cycle. This happened during the first COVID when we had a sudden massive acceleration in the migration of offline advertising dollars online. And so it's been our experience, too, that the speed and steepness of the turn to a growth environment can also be hard to predict. but obviously in this case, on the very positive.

Okay, that was very thorough. Thank you very much.

Your next question comes from the line of Daniel Grosslight with Citi. Your line is open. Hi, guys.

Thanks for taking the question. I'd like to go back to the health segment and the challenges in the eBroker channel specifically. I know you mentioned you can't really break out your exposure to the e-brokers, but I guess I'm more concerned around 2022 AEP. given if you look at what the publicly traded folks have said, you know, they're really tight trading growth down from 30, 40, even 50% to market growth, which would be around 10%. So pretty dramatic drop in lead consumption for 2022 AEP. So I'm just curious if you think that you're uh direct carrier partner consumption and your under 65 consumption can offset those pressures and you'll be able to maintain growth in kind of that 30 transaction value range for 2022 or are we going to see a little bit of a deceleration in growth uh for next year's aep uh no thanks thanks dan um well i mean what i can tell you is that we're not expecting a slowdown of our medicare business this year

You know, it's early, but we're off to a strong start in 2022 with our Medicare segment, with spend being up year over year from both carriers as well as the Medicare brokers. So, you know, with respect to, I think, the closer look that a lot of the Medicare brokers are taking with their marketing sources and the expected lifetime value from each of their marketing sources and really de-averaging and taking a granular look at that. You know, again, as I alluded to in an earlier answer, I mean, that type of development is something that we welcome because that's exactly what our marketplace was built to enable. And so we've gone through these types of cycles within the P&C space as carriers have gotten smart about really de-averaging like how they're, you know, what the value of a policy that's acquired in our channel is, right? And then applying expected lifetime value on a de-average basis to then really refine, you know, what they're bidding for these very granular, you know, consumer segments across hundreds of different supply partners. And so I think we're very well built to continue to support either the same or a higher level of investment from a lot of the Medicare brokers as they really reassess, right, what the efficient marketing channels are and which ones are the less efficient ones. And again, I'll point to what we're seeing now, again, which is early, but we've maintained a pretty strong level of spend, again, both from carriers as well as the Medicare brokers thus far this year.

Okay, that's helpful. And then on CHT, are you able to break out what percent of their business is done with the carriers directly versus the third-party brokers?

Yeah, and I'm happy to take this one, Dan. That is not something we're disclosing at this time.

Gotcha. Okay. Okay. And the last one for me on the other revenue, can you break out how much of that is due to travel and any expectations for travel to pick up in 2022 as the pandemic wanes?

Yeah, and I can also take that one. Dan. We don't break out how much of it is, you know, travel versus education versus financial services, but it's, you know, a chunk of all three and none are the vast majority of the overall. And, you know, the thing I would say on travel is, you know, COVID really hit that business, you know, hard for the market, but us in particular. And, you know, we've seen know some growth off the bottom you know in 2021 and we're still seeing that today so that the growth rates are pretty good but it's off of a pretty low base and i think it's you know a business that you know kind of you know time will tell what it gets back to is the travel market fully normalizes got it appreciate the color thanks guys again if you would like to ask a question press star 1 on your telephone keypad

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

Hey, it's Brian Smiley on for Corey. Thanks for taking my question. You know, you mentioned that 22 shaping up to be an investment year. Can you just parse out, you know, what your key growth priorities are into the new year? And then specifically, what are the next steps in scaling the agents business? And just thinking about health, do you see further potential for M&A going forward? Thanks.

yeah thanks um so where so your first question about where we're investing um you know i'll say first and foremost we're always investing in our people and technology right we have from day one we continue to do that now um i know you're hearing a lot of you know uncertainty from us about you know what the near term is going to bring right in the pnc vertical um but what that you know what relies is just an overwhelming confidence in having been this business for now close to a decade of what the long-term trends will be and how these types of markets, again, while difficult to predict in the near term, are very easy to predict what happens in the long term if you've been through these types of cycles before. And so for us, a lot of the investment is really about continuing to invest in the people, technology, and our products to really best serve our partners. Now, to get more specific, organically, we're investing on really enhancing our owned and operated capabilities. And obviously, inorganically, you see this with our acquisition of CHT. We're also investing in product development to better support improved consumer shopping experiences for a lot of our supply partners who are increasingly looking to offer a better rate-based consumer experience for their customers. And we're always investing in deeper integrations, but also have now a focus on building down funnel partnership capabilities with carrier partners, which is of particular need for a lot of new carrier partners, both across PNC, but also in health and life insurance, of carriers who are newer to direct-to-consumer marketing, who would benefit from more integrated down-funnel solutions. Now, let me shift here and talk a little bit about the agent business. You know, we still see the agent business, i.e., working directly with agents to sell them leads and calls. We still see that as a really interesting opportunity, certainly over the long term, and we continue to invest. We've narrowed our focus a bit based on what we're seeing in this marketplace and what we've learned from this marketplace over the past year. I think more importantly, in the current market environment, we're just super focused on laying the foundation and improving the foundation of our core business, the core carrier business, to put ourselves in the position to really accelerate our market share gains and our competitive position upon the return of the market. Because we've seen this before. We've done this before in past cycles. We know the types of investments that we have to make, types of integrations and recommendations that carriers are more open to now. And so we're really busy just laying that foundation because ultimately, when the market turns, the growth is all going to be from the carriers really returning to their normal growth-oriented levels of spend. And that's where we see the greatest area of investment right now in the middle of this market cycle.

Great. And I can hop in on the M&A portion. And so just to give you a little bit of color on how we're thinking about M&A generally, Historically, Media Alpha has always had a very high bar regarding M&A. And the CHT deal is the third deal that we've ever done and the largest one we've done from a purchase press perspective. And, you know, so the thing I would say is like our bar is high and it will remain high and it will buy things that we understand that we like and that we think can add value. I would also say that I have experience of being at a company for a long time that generated significant returns from M&A, and I've also seen companies that have destroyed a lot of value from it. So to the extent that we find good businesses that are complementary to us, that fit into our strategy, and that we can buy them at an attractive price so that it's financially attractive, we're going to go hard after those assets. And if we're not finding anything that meets those criteria, we won't be going hard at it. So, you know, I think we'll, you know, kind of be pursuing the path we're on right now. And, you know, we'll see how it plays out over time.

Thanks for taking my questions, Ken. Thank you.

There are no further questions at this time. Ladies and gentlemen, thank you for your participation on today's call. This now concludes today's conference call. You may now disconnect.