MediaAlpha, Inc.

Good afternoon. My name is Samantha, and I will be your conference operator today. At this time, I would like to welcome everyone to the MediaAlpha Q2 2022 earnings conference call. Today's conference is being recorded. All lights 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 the star key followed by the number one on your telephone keypad. If you would like to withdraw your question, press star 1 once again. Thank you. I would now like to turn the call over to your host, Denise Garcia, Investors in Relations. Ma'am, you may begin your conference.

Thank you, Samantha. After the market closed today, MediaAlpha issued a press release and shareholder letter announcing results for the second quarter ended June 30, 2022. 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 third 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, August 4, 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 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 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 second quarter 2022 earnings call. I'd like to start with a few key takeaways from our shareholder letter. A year into the P&C insurance hard market cycle, we continue to work through challenging market conditions as the industry grapples with some of the highest inflation it has seen in the past 50 years. As a result of elevating place costs, the vast majority of our P&C carrier partners continue to prioritize profitability over growth, which has resulted in additional price declines in our P&C marketplace. While we expect near-term results in our P&T vertical to remain under pressure for the remainder of the year, we continue to expect a swift rebound in demand once carriers restore their profitability. The transition periods following hard markets present compelling opportunities for carriers to gain market share, as higher rates lead to increased consumer shopping. This is optimism that stems from direct past experience. When we emerged from the last hard market cycle in 2018, transaction value in our P&C vertical grew over 80% year over year. Turning to our health insurance vertical, we continue to anticipate a strong annual and open enrollment period in the upcoming fourth quarter. We closed the CHT acquisition on April 1st, and we have been encouraged by our early success extending this team's social media capabilities to our under 65 health insurance vertical. We continue to expect its acquisition to help us benefit from the rapid growth in digital marketing investments from health insurance carriers, particularly in the years ahead as the expanding population of Medicare beneficiaries increasingly shops and opts for Medicare Advantage policies. With that, I'll turn the call over to Pat to say a few words before we open the call to your questions.

Great. Thank you, Steve. I'll now touch on a few more items before opening the call to questions. First, I am pleased to announce that we have substantially completed the $5 million share repurchase plan we announced in March. Under that plan, as of yesterday, we have spent $4.93 million to repurchase approximately 450,000 shares at an average price of 1097 per share. Our ability to opportunistically repurchase shares in the midst of a challenging P&C market speaks to the resiliency of our financial model. Given the tough operating environment, we are more focused than ever on costs. We expect Q3 headcount and operating expenses, excluding non-cash items, to be roughly flat with the second quarter. Our highly automated model and expense discipline have enabled us to remain profitable in spite of significant revenue declines, and we remain intensely focused on operating efficiently. Turning to our third quarter guidance, while we expect continued year-over-year click volume growth in our P&C vertical, we expect pricing to decline relative to what we saw in Q2. Outside of P&C, we expect Q3 transaction value in our health vertical to be similar to Q2 levels as we face another difficult comp due to the non-recurrence of a special enrollment period for ACA plans, which impacted last year's comparable figure. as well as continued lower spend by our Medicare broker partners for leads and calls. We expect a return to strong year-over-year growth in our health vertical during Q4, driven by annual open enrollment periods for under 65 in Medicare plans. During this hard market in P&C, we are staying focused on executing our long-term growth strategy, helping our partners become more efficient with our customer acquisition spend, increasing our data integrations with partners, and having productive conversations with a number of P&C carriers regarding new supply partnerships. We expect these efforts to bring us market share gains and strong growth when the P&C market recovers. Finally, our management team continues to believe that Media Alpha stock is an attractive investment. During the quarter, I purchased 35,000 shares of Media Alpha stock, and our co-founders Steve and Eugene are not selling their portion of newly vested RSUs required to cover the associated tax liabilities. We are very much aligned with our long-term shareholders. 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 and send the number one on your telephone keypad. We'll pause for just a moment to compile the Q&A roster. And your first question comes from a line of Michael Graham with Canaccord.

For all the information in the shareholder letter, I just wanted to ask a bigger picture question about the competitive environment we saw. you know, some, some reports from some of the other players like, like Everquote and Quinn street and, you know, the, the, the, the growth, the declines in revenue there were, were fairly modest. And I'm just wondering if you either had any, any comment about, um, you know, what you're seeing the competitive front and, you know, what you think about your performance versus, you know, some of those other players.

Hey, uh, Hey Michael, uh, this is Steve. Uh, that's a great question. Um, I think what you're seeing is the reflection of some of the differences in our business models. I think most of our publicly traded competitors are traditional lead generators. So what they do is they buy traffic to their site, convert this traffic into clicks for carriers, and leads that they sell to agents. So in a hard market, as compared to direct carrier demand, agents' demand actually held up pretty well. A couple of reasons for this. One is that the marketing subsidies that agents get from their carriers largely remain in place. I think importantly, we have to understand that the economic incentives that agents have are somewhat different than carriers in that agents continue to earn commissions on new policy sales, whether or not that policy is profitable or not. And so what you tend to see is that during hard market cycles, agents typically continue to market, even when carriers themselves pull back. And it's this agent demand that acts as a ballast for a lot of the traditional lead generators. And so I think, as you know, our model is different. You know, we're a marketplace focused on connecting direct carrier demand with millions of shoppers through our hundreds of supply partners. And we continue to focus on these carrier partnerships because this is where the growth and scale is going to come from when the hard markets start going.

Yeah, that makes a lot of sense to you. And if I could just ask a quick follow-up and, you know, are there any data points that you're getting from your carrier partners that you know, that leads you to kind of be, you know, more optimistic or less optimistic, you know, relative to last quarter in terms of how long this market's going to go on for?

Yeah, I think, you know, thanks, Michael. Yeah, I think, you know, we'll echo some of the sentiment that I think you've been hearing both from people within our industry and the broader P&C space is that, you know, we do have a more pessimistic outlook. I think our current outlook is that you're really not going to see a broad-based recovery in carrier marketing demand until 2023. And it's for all the reasons that I think we're increasingly becoming aware of, right? We're still seeing some of the highest inflation in nearly 50 years in claims costs. I think adding to that is that some states and some of the larger states actually are taking longer to accrue rates than anticipated. And you're seeing this really play out in the second quarter combined ratios that you're seeing from carriers that are coming out that are worse than actually sometimes far worse than expected. And so, I mean, even though I think that's our market cycle, you know, it's turning out to be deeper and longer than I think most predicted. I mean, certainly us too. You know, carriers achieving rate adequacy is not a matter of this though, but it's really when. And when this happens, you know, as I mentioned before, our direct experience is that carriers tend to snap back to growth mode rather quickly. And really our marketplace model enables carriers to really scale their customer acquisition investments better than the other models. You know, coming out of the last-term market cycle, you know, we outperformed competitors because of the hallmarks of our marketplace, and we expect to do so again.

All right. Thanks a lot, Steve. Thanks, Michael.

Your next question comes from a line of Andrew Kilgerman Macias.

Close, Kliegerman. But anyway, yeah, that was an interesting point about maybe it taking till 2023 before you see that turn. Would you expect that kind of rapid snapback at that point in time, if indeed this does happen? You know, where I think in the letter you mentioned and on the call you mentioned an 80%, turnaround in revenue? I mean, is that the kind of snapback you would expect? Could it be multiples of what you're seeing now in terms of revenue?

You know, based on our past experience, I think, you know, that snapback, you know, can happen in a period that's as short as six to nine months. And it's hard to predict, you know, the overall scale and the actual speed this time around, just because there are obviously factors at play here in this hard market cycle that are different than the last one. But it's really what ends up happening is when carriers have gone fallow in terms of investing in growth over a period of one and a half to two years, as carriers start to realize that their rates are adequate and start to develop confidence in that, and they see their competitors actually starting to market against it, and as consumers start to shop more, I think the profitability pressures that the carriers are facing now reverts pretty quickly to growth pressures. And we've seen this happen before, and I think we expect to see this happen again.

Okay. And there's probably one thing I would add to that, Andrew, which is, I think we outlined in our shareholder letter that pricing was down around 50%. And so you can start to make assumptions on, hey, what happens if pricing recovers to prior year levels or a little bit less, or you can run sensitivities around that and start to get a feel for as the business recovers, what we think that recovery curve could look like. I see.

That's very helpful. And what... Maybe a little more color on the exit of the education vertical, why you felt the need to exit. I mean, it seems like a profitable business. Maybe just a little further color on that.

Yes, sir, I can take that. I mean, the exit was really more of an end to one of our legacy partnerships. I think you all know that our current focus is almost entirely on insurance, but You know, in the past four or five years ago, we were more broadly focused as an advertising technology platform across multiple verticals. And really, the higher ed vertical was just consisted of really one legacy partnership supported by, I think, one full-time equivalent. And so, really, when this partnership ended, we decided to exit this vertical and continue our focus on insurance.

That makes a lot of sense. And then just –

Yeah, maybe lastly, you know, just headcount. You talked about a slight decline this quarter. Pat, I think you said that it was going to stay flat next year. Is this an area where you may have a little more flexibility, or I think earlier in the call you were just talking about your you know, you've got a lot of technology and so forth so that the staff is at a very efficient level already. But is there some flexibility in the staffing going forward?

Yeah. And, you know, I believe we said that the headcount and operating expenses would be, you know, roughly flat in Q3 versus Q2. I don't believe that anything about next year on it. But You know, the thing I would say is, you know, we believe we have an efficient operating model. We believe that we run lean. And given, you know, the market conditions, we're being, you know, kind of particularly, you know, kind of choosy and frugal when it comes to, you know, adding heads. And so, you know, I think over the course of the last quarter, we were down a couple of people, excluding the CHT acquisition, and we don't really have any plans to grow that into you know, would say that, you know, over time as the P&C market recovers and we pivot back to growth mode, we would expect that we would, you know, need to add some heads to grow capacity and to invest over time. But we, you know, feel like we're in a good position where we're making the right tradeoffs between the short term and the long term.

Thanks a lot. Thank you. Thank you.

Your next question comes from a line of Ben Hendricks with RBC Capital.

Thank you for taking the question, guys. We're certainly seeing DTC brokers slow their growth to focus on generating more, you know, higher quality Medicare membership and on the senior side there. And so for your senior vertical, is that push kind of, as you mentioned, kind of a slowdown for inactivity there. But for those brokers that stay on your platform and stick with you, is this push towards higher quality membership fostering deeper relationships and further integration on your platform, maybe even more kind of supply side relationships? Thanks.

Great. And this is Pat. I'll tackle that question. So I would say, you know, within Within Medicare, it really is kind of a tale of two different sets of products for us, where there's the Click product, which has been performing well, and that trend continued in Q2. And that has been both across brokers and across carriers. And I think we really like the way we're positioned on that, and we really feel like we have good momentum on it. I think pivoting to, you know, calls and leads, that's an area where it was weak, you know, across both brokers and carriers. From a broker standpoint, would say that we haven't really had any substantive brokers go dark. So we haven't gone to a spot where, you know, hey, a lot of folks have turned us off, but we have seen pretty meaningful budget reductions in pockets from them. you know, the color we're getting, you know, from a lot of them is, you know, kind of the first, you know, trying to manage profitability because I think they've had, you know, some kind of profitability challenges. And secondly, you know, they've felt a bit of inflation on the agent cost side. You know, some well-documented wages are going up and, you know, felt some challenges there. But we would say that, you know, we remain very bullish about, you know, clicks, calls, and leads on the Medicare side because, You know, fundamentally, at the end of the day, the Medicare Advantage product is 44% penetrated, and that number is going up into the right. And so, you know, we think that, you know, this is a temporary blip. Thank you very much. Thanks, Ben.

Your next question comes from a line of Meyer Shields with KBW.

Great, thanks. I just have a couple of, I think, really quick questions. Pat, you quoted the letter talking about the much bigger decline in P&C click prices this time around. Can you give us a sense as to the starting position? In other words, is it a bigger decrease from the same crest, or were we starting from a higher start point?

Yeah, and, Meyer, we're coming from a higher point in 2021 than we were in, you know, 2016 when the prior – hard market hit. So, you know, the general trend over time in CPCs or revenue per click for us has been up. And so the starting point in 2021 was higher than it was in 2016.

I think the one other thing to keep in mind is that, you know, over long periods of time, the pricing can fluctuate based on just the supply side mix, right? High quality supply partners, you know, who can garner, you know, pricing upwards of $50, $67 a click, as well as lower-priced publishers, you know, who have clicks that can be valued at something lower than that, at $5 and $10. And so oftentimes, you know, over a long period, fluctuations in the mix of our supply can affect the average price as well.

Right.

Okay, no, that makes perfect sense. One other, just in terms of the business models, And I didn't think that's what happened, but I now suspect that it will. If you have one major competitor or one major insurer that is adequate well before its peers, does pricing go up then, or do you have to have two companies focused on growth to really see pricing move where you've got that level of competition?

So I think that's a good question. I think what you see is you tend to see pricing start to move up. even when you have a small number of carriers emerging from a hard market cycle. I mean, certainly competitive pressures can drive up the pricing, but really I think the way we work with our carrier partners is really helping them to optimize their spend and their bids based on the expected lifetime value of the policy that's purchased. And as you can imagine, the expected lifetime value doesn't necessarily differ whether or not, you know, the marketplace is competitive or not. And so obviously competition helps. and prices will go up as you see more carriers come back in, and we see a broad-based recovery in demand. But I think what you'll start to see as early carriers come back, get comfortable about their rates, is you'll see that the pricing increases will start to happen in the near term. And what that enables is really the unlocking of a lot of supply, because a lot of our supply partners, you know, can then go out there and acquire higher quality revenue or higher quality traffic. And that's what really jumpstarts the scale within our exchange. And it can be one or a small number of carrier partners coming back in a meaningful way that jumpstarts that.

Okay, Surendra, that's very helpful. And one last question, if I can. You've been very clear about the overall trajectory, but if we look beneath the surface, To the extent that there is direct distribution of homeowners insurance, is that seeing the same challenges that the auto book is seeing?

You're seeing some of the same pressures, but not all. I mean, some of the cost inflation that you're seeing, you're seeing on the homeowner side. I think one of the things that homeowner insurance policy rates are dependent on is also profitability dependent on our catastrophic events.

Right. Yeah, that's true. Okay, perfect. Thank you so much.

Ladies and gentlemen, this concludes today's conference call. You may now disconnect.