MediaAlpha, Inc.

Good afternoon. My name is Emma, and I will be your conference operator today. At this time, I would like to welcome everyone to the Media Alpha Q1 2022 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 during this time, simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question, again, press the star one. Thank you. Denise Garcia, Head of Investor Relations, you may begin your conference.

Thank you, Emma. After the market closed today, Media Alpha issued a press release and shareholder letter announcing results for the first quarter ended March 31st, 2022. These documents are available in the investor 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 second 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, May 5th, 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 MediaAlpha that are presented on a non-GAAP basis. 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 as a substitute for or superior to financial measures calculated in accordance with GAAP. Reconciliations of these non-GAAP measures to the most directly comparable GAAP measures are included in our press release and the shareholder letter issued today. Finally, I'd like to remind everyone that this call is being recorded and will be made available for replay via a link on the investor 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 first quarter 2022 earnings call.

I'd like to kick things off with a few key takeaways from our shareholder letter. In the quarter, we generated $239 million in transaction value and $7.1 million in adjusted EBITDA. both of which were in line with their expectations. We continue to face significant headwinds in our P&C insurance vertical due to the decreased marketing spend by auto insurance carriers as they work through inflation-related underwriting profitability issues. While the near-term timing of the market recovery remains difficult to predict, we remain confident in the unmatched stability of our marketplace to support the auto insurance industry's return to a growth focus as carriers' profitability improves. we had another strong quarter in our health insurance vertical with year-over-year transaction value growth of 20%. We continue to see outstanding long-term opportunities in this vertical, particularly in Medicare. There are over 10,000 Americans becoming Medicare eligible every day, and these new cohorts are shopping online and opting for privately administered Medicare Advantage plans at a higher rate than their older counterparts. As a result, Medicare Advantage enrollments are expected to surpass 37 million in 2026, up from 24 million in 2020. As health insurance carriers increasingly look to acquire these Medicare customers directly, we're excited to help our partners capture a growing share of this $1 trillion market opportunity. Lastly, we're excited to announce that we closed our acquisition of CHG on April 1st. With CHG, we're now better able to leverage social media channels to help meet the growing call demand from health insurance carriers, and we're excited to have the CHT team on board. With that, I'll turn the call over to Pat to say a few words before we open the call to your questions.

Thank you, Steve. I'll now touch on a few more items before opening up the call to questions. In March, we announced our first-ever share repurchase plan, which commenced in mid-April following the cooling-off period. In terms of our capital priorities, our first priority is to reinvest in the business capture the massive opportunity created by the insurance industry's transition to online policy sales. Second, we will continue to pursue M&A to grow our marketplaces and capabilities in turbocharged growth. The CHT transaction, which closed on April 1st and will begin contributing to our business in the second quarter, was a great example of such a transaction. Third, we will use excess cash to repurchase shares on an opportunistic basis. Turning to the quarter, We exceeded the midpoints of our guidance range across all of our Q1 guidance metrics. And looking forward, our second quarter guidance reflects continued quick volume growth in our P&C insurance vertical, offset by the carrier spend declines Steve mentioned in his remarks, which are manifesting in lower pricing. Outside of P&C, we expect ongoing momentum in our health insurance vertical, including results from CHT. Although I will highlight that we had unusually high volume in last year's second quarter, due to the extended open enrollment period in 2021. Given the continued constraints in P&C marketing budgets, we are planning a more measured rate of investment in headcount and other OPEX for the balance of 2022, and we expect overhead excluding stock-based compensation in Q2 to be $1 to $2 million below Q1 levels, due largely to lower professional fees. As we look forward, While we don't know exactly when the P&C carriers will complete their rate actions and realize improved profitability, we know they will. And when they do, we expect to see pricing increase as carriers look to drive growth and volume increase as consumers shop more in response to higher premiums. And with our transparent, flexible platform, we are ready to capitalize. With that, operator, we are ready for the first question.

At this time, I would like to remind everyone in order to ask a question, press star then the number one on your telephone keypad. We'll pause for just a moment to compile the Q&A roster. Your first question today comes from the line of Andrew Kligerman with Credit Suisse. Your line is now open.

Hey, good evening. I touch on your view of transaction value in the second quarter guidance going down sequentially as cited in your letter due to pushbacks and spend and due to seasonality. Could you, and I know it's tough to kind of figure out, but could you give a little color on why that's happening? Because I get the sense that pricing is, you know, some of these companies have kind of gotten to close to an equilibrium level and some of the states are starting to be more attractive. So, you know, why is it still coming off in 2Q? And then secondly, do you think you could see a significant pickup in 3Q on this property and casualty shopping?

Hey, Andrew. This is Steve. Thanks for your question. Yeah, I would say that I don't know that the industry's reached the equilibrium point. I think what you're seeing is that there's been a prolonged inflationary environment and you're seeing continued elevation of claims costs. And for some carriers, this is leading them to take higher rate increases than they originally planned. You know, it's a dynamic environment. And I think in any underwriting cycle like this, you are going to see different timing and magnitude of rate taking between different carriers. And so I think you are seeing some early positive signals from carriers who took additional rate or more rate early on in the cycle. But then on the other hand, you're hearing from some carriers that the rates that they initially took or planned on taking weren't sufficient and that higher rate taking is needed. And so I think the overall underwriting environment remains fairly uncertain and dynamic. But we do share an overall outlook that we'll start to see improvement in the second half of this year. But I think the expectations of when the overall auto insurance industry will pivot back to growth mode and resume normal marketing levels, our assessment now is that that will likely take longer than most had originally anticipated.

I see, Steve. So if I understand what you just said, Second half, you'll see improvement, but not the kind of growth you really need to get in a good profitable mode. That might take a little longer, right?

I think that's right. And I think that it will take longer than some of the original expectations that you heard in the marketplace.

Got it. And then just one other follow-up on expenses. So I was kind of running through the financials. And you mentioned that equity-based compensation, I think that's going to be around 13, it was 13.8 in the quarter versus 10.6 million year over year. I looked at GNA, that was about 17.1 million in the quarter versus 15.7 last year in the quarter. I guess my question is, can you help me understand this expense growth given the tough environment for growing transaction value. Maybe talk a little bit about these expenses and why they came up.

Andrew, this is Pat. Are you talking about quarter over quarter or year over year numbers?

Year over year.

The thing I would say on expenses is Keep in mind, we have always been a lean company, and we went public in late 2020, and we were well under 100 employees when that happened. And so almost from the get-go at the time we became public, we've had to build out all of the public company infrastructure, and that has been well in excess of $10 million of incremental costs that we've layered in really over kind of a five-quarter period, five or six-quarter period. Last year, we were also in investment mode in terms of taking up headcounts to support business growth as well to kind of lay a lot of the foundations for success across the next cycle. So I think you saw both of those trends manifest in overhead growth over the course of the last year. And the Q1 of this year was something of a high watermark for us, particularly on the non-people cost side as we spent a good bit on professional fees to get over the hump on first-year SOCs and, you know, kind of processes that are relatively newer to us as a public company. And our view is that those numbers, you know, are going to come down in Q2 and, you know, and that we've, you know, we're doing some rebaselining of the business. The other thing I would say going forward is, and I think we use the term more measured investment in headcount and, you know, I think You know, we're not going to give firm guidance on what that means, but I would expect, you know, very minimal growth on that side, you know, just given some of the hard market conditions we're experiencing in PNC where we feel like we're adequately staffed to support growth. But, you know, we won't hesitate to add, you know, heads here and there where we think they can be revenue generative and pay back quickly.

Very helpful. Thanks, Steve and Pat.

Thank you.

Thanks, Andrew.

Your next question comes from the line of Daniel Grosslight with Citi. Your line is now open.

Hi, guys. Thanks for taking the question. I want to focus on the health segment for a little bit. It seems like that is holding up nicely and did pretty well, this OEP. I want to try to square that with some of the commentary from the eBrokers, which, again, has been pretty good. difficult in terms of their investment in marketing this year ahead of this year's AEP, which will happen in the fourth quarter. In fact, SelectQuote was on their call this morning saying they're going to cut expenses, $200 million, most of which will be a cut to marketing this year. So I was wondering if you could help square the strengths that you're seeing in the health segment with some of the pullback that the e-brokers are are taking this year and maybe help frame what percent of transaction value in health particularly on the medicare side is coming directly from the carriers themselves versus the the key brokers that'd be very helpful thank you got it um um yeah i'll just that first question really quickly is that it would you know fairly well diversified between brokers and carriers

um you know in in the medicare space and health care overall or health insurance overall um i think with regard to the the media of your question about the broker channel how to reconcile what you're hearing on that side uh with our performance um i think i mean what you need to do is is like look under the covers because it's not really one story um and to get a full picture It really requires, you know, parsing through, you know, different segments of their marketing channels that have worked well for them and haven't. And so certainly I think the sector as a whole are really reevaluating, you know, different marketing channels and the effectiveness, you know, the expected lifetime value of, you know, channel A versus channel B and taking a far more closer look than they did before so that they can more accurately match customer acquisition costs with expected lifetime value. And certainly for us, we welcome that because as a transparent programmatic marketplace, that's exactly what our platform and our marketplace was designed to optimize to. I think even getting more specific, what you're hearing is that the online enrollment channels from these brokers have actually performed very well as they take a closer look. And so what you'll see on our end is that with the broker segment, that the amount of clicks that the broker segment's been buying Has actually been up in a fairly strong the year-over-year And as you know in our marketplace works for both clicks calls as well as lead But clicks is really one area of focus for us And so with regard to the brokers focus on what channels are working very well and what channels aren't working as well I think early on that's really played into our favor of and in getting them to, in aggregate, increase their level of investment with us. And all the while, they might be pulling back in other channels and really taking a closer look at their marketing spend.

Got it. That's helpful.

And can you just confirm if CHT is included in your 2Q guidance? And if so, how much? And for the full year, do you still anticipate

revenue from CHT of around $25 million?

Yes, Dan, this is Pat.

CHT is included in our Q2 guidance. The annual guidance is the same as what we gave last quarter at the time of signing, which was in excess of $25 million of TV and revenue and in excess of $5 million of adjusted EBITDA. And we aren't providing a breakout of what CHT we expect CHT to produce in the quarter. The one thing I will say is that that business is very Medicare-centric, and the Medicare business tends to have a relatively pronounced peak in Q4. So the P&L profile of that business will be very back-up weighted for us over the remaining three quarters.

Understood. Thanks for the color, guys. Excellent. Thanks, Dan. Thanks, Dan.

Your next question comes from the line of Meyers Shield with KBW. Your line is now open.

Now open. Thanks. Going back to the PNC vertical, if I can, how did we think about the line of sight that you have? In other words, are there signs of advance notice or is it just if company X decides that they really want to go in a particular state and all of a sudden they start bidding up

uh for clicks you'll see it that way no i think the way it works the way it works is that you know because there's constant dialogue and we're checking with our partners and have weekly um or at the very least bi-weekly calls with them um i mean we you know ample notice of you know what they're seeing when they expect to turn on certain states and so it's never as you know as simple as hey you know all of a sudden, you know, five states get turned on. I mean, we're, you know, we hear about it, you know, well beforehand.

Okay, that's helpful. Is there any way of breaking down? I think in your opening comments, Steve, you talked about lower price per clicks, but the number of clicks going up. Is there any more detail we can get on that?

Yeah, I think what it means is that we have a great base of supply partners. You know, companies like Zebra, over 35 insurance carriers, So, and I think that what it also means is that the shopping demand or consumer shopping demand remains strong. So, as you know, what happens is when prices go up, you know, consumers shop more as those rate changes take effect. It's difficult to tie back specifically, you know, our volume increases year over year in Q1 to the rate taking that, you know, that guy kicked off in Q3 and Q4 of last year. But I think what you will see is with the magnitude of the rate changes that are taking effect in this cycle, again, overall being higher than expected, I think what you're going to see is that that's going to lead to a far stronger or correspondingly stronger consumer demand for our consumer shopping activity as those rate changes take effect. I mean, usually what happens is if you take anything over 5%, in terms of rate, then that tends to stimulate shopping behavior from your existing policyholders. Anything over 10%, then what you see is almost a non-linear increase of shopping behavior. And I think what we're talking about in this cycle is many carriers in many states taking rate well into the double digits.

Okay, perfect. Thank you so much.

Again, if you would like to ask a question, press star and the number one on your telephone keypad. Your next question comes from the line of Michael Graham with Canaccord. Your line is now open.

Thank you. Hey, guys. I just wanted to ask a couple of the other players in the space throughout like two-thirds, sort of we think we're two-thirds of the way through kind of the hard market in auto and Just wondering if you have any comment on that. I thought some of the discussion in your shareholder letter around some of the things that you do to differentiate your platform from some of the competitors, I think those were really good insights. I don't know if you've had any early discussions with some of your demand partners. But just wondering if you think you can exit this current environment with more share, maybe being able to highlight the strengths of your offering a little better. Just sort of wondering if you have any comments about that.

Hey, Michael. Yeah, I appreciate the question. You know, I think from the beginning, I think understanding how uncertain these types of underwriting cycles can be, And I think with an appreciation of how this cycle, you know, the root causes of it, you know, still lay within, you know, what was, you know, an unprecedented event, right? I think we've been hesitant to really put a number on where we are or what inning we're in with regard to the rate-taking cycle. And I think what you've seen over the last couple of months, as, again, some carriers, very smart carriers, are figuring out that they need to take more rates as inflationary pressures persist. I think that goes to this. And I think what we're seeing is some conflicting signs coming out, which is far more like a typical rate-taking cycle or a hard market cycle, where some carriers are taking rate earlier, some carriers are taking more rates than others, and in the end, they end up overshooting, undershooting, And so you have carriers really layering in and achieving rate adequacy at different times. And so I think that's what you're seeing in this marketplace. And I think to think that this market cycle is two-thirds or more of the way through, my view is that that's probably putting a little bit too much credence on some of the early positive news that you're hearing about. Okay. In terms of, yeah. Yeah. Did you have a follow-up to that part?

Well, kind of. Maybe it's better to ask that follow-up now, and then I'd love to get your thoughts on the sort of competitive advantage market share question. So sorry to interrupt, but just kind of drilling into that a little bit. When we look at your Q2 guidance, should we interpret that as like what we've seen so far in April, kind of on a run rate basis, or is that more – Because I know you mentioned that, you know, March was kind of okay, but April looked a little bit worse in the letter. You know, so should we think about it that way, or is it more based on sort of relative to the earlier question, a lot of visibility in terms of discussions and just trying to get a feel for how, you know, how conservative or not, you know, that sort of Q2 guidance might be?

Yeah, and Michael, and, you know, what I would say is, you know, I think we outlined in the letter and in Steve's quote, but some of the market dynamics, which were Q1 was relatively stable. Late March, business took a step down. And that trend has been pretty consistent to the present. And we've gotten some good news from some carriers, and we've gotten some not so good news from some other carriers. And so we've incorporated kind of all of our best knowledge as of last night into the guidance numbers that we put out. And I'm not going to tell you exactly what we've got in there for volume and price, but the thing I will tell you is that we're assuming that the balance of the quarter doesn't look all that much different from what we've seen thus far.

Thanks, Pat.

So, Michael, to answer the second part of your question, which I really appreciate, You know, for us, I mean, we've been doing this long enough and being, I think, a part of the insurance industry, we tend to look at things in terms of years and not necessarily quarters. And when you do that, you know, what we've seen in past cycles is that, you know, these hard market times, you know, represent an opportunity for us. And the reason that it does so is that the carriers, you know, when they prioritize profitability over growth, what you see invariably is additional urgency around efficiency initiatives that we're pushing all the time. But these are projects that sometimes can get sidelined when carriers are in full-on growth mode and just looking for additional volume. And so it's about improving conversion tracking, improving data passing, programs to monetize non-converting shoppers, something in particular that we're getting a fair bit of traction with during this cycle. And it's really... during times like this that we tend to make the most headway with these types of initiatives, which I think, you know, sounds small individually, but in aggregate it really allows us to squeeze, you know, several percentage points of efficiency from the carrier spend. And I can tell you that, you know, those things add up. And as the market returns, you know, our ability, you know, through our hundreds of supply partners in our marketplace and our ability to programmatically enable carriers to achieve and maintain their efficiency targets while scaling their spend oftentimes very rapidly is really the hallmark of our marketplace and why we were able to outpace competitors coming out of these hard market cycles. In the last hard market cycle coming out of that and as well as during COVID when you saw a large influx of offline budgets to online. And I can tell you in both of those cycles that we were the primary beneficiary of that, because of all the work that we do during these times that allow for this granular measurement of efficiency that allows carriers to spend and scale their spend very rapidly without having to sacrifice their efficiency targets. And so that's what we're focused on right now. I know, you know, for an earnings call for analysts, that doesn't sound very interesting, but, you know, for us, we've been just for 11 plus years now. I can tell you that that's That's the whole ballgame.

Thanks. Okay, thanks a lot, Steve. I appreciate the answer. Thanks, Michael.

This concludes today's conference call. Thank you for attending. You may now disconnect.