This conference call transcript was computer generated and almost certianly contains errors. This transcript is provided for information purposes only.EarningsCall, LLC makes no representation about the accuracy of the aforementioned transcript, and you are cautioned not to place undue reliance on the information provided by the transcript.
spk09: Good day, everyone. My name is Kellyanne. I'll be your conference operator for today. At this time, I'd like to welcome everyone to the MediaAlpha Q3 2022 earnings conference call. Today's call is being recorded. 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 1 on your telephone keypad. If you would like to withdraw your question, you may press star 1 again. At this time, I'd like to turn the conference over to Ms. Denise Garcia of Investor Relations. Please go ahead, ma'am.
spk02: Thank you, Kellyanne. After the market closed today, Media Alpha issued a press release and shareholder letter announcing results for the third quarter ended September 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 fourth 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, November 3rd, 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 Alpha that are presented on a non-GAAP basis. This includes adjusted EBITDA, which we present 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. Go ahead, Steve.
spk00: Hey, thanks, Denise. Hi, everyone. Welcome to our third quarter earnings call. I'd like to make a few observations about the quarter before turning the call over to our CFO, Pat Thompson, for his comments. Due to ongoing inflation-driven underwriting losses, auto insurance carriers continue to limit their variable marketing investments in Q3. and that spend remains extremely depressed relative to normal levels. Recently, these profitability pressures on P&C carriers have been compounded by the large insured losses from Hurricane Ian, which we expect to lead to a further pullback in marketing spend by carriers in Q4. On the positive side, carriers continue to pursue and gain approval for rate increases in many states, which will ultimately lead them to resume their growth focus as profitability improves. As a result, we anticipate improved performance in our P&C verticals when the industry begins to emerge from the current hard market cycle and carriers once again turn to MediaAlpha to help them meet their growth objectives. In our health insurance vertical, we expect transaction value to be down slightly year over year as robust spend from our carrier partners is offset by lower spend from brokers. We continue to be very optimistic about the long-term growth outlook for this vertical, which is in the very early innings of the shift to online shopping and enrollment. Given this difficult marketing environment, we are continuing our disciplined approach to expense management while maintaining our capacity to outgrow our peers coming out of the P&C hard market cycle. Our outstanding team remains strongly engaged and committed to our mission. While this has been a challenging year, we remain as bullish as ever regarding our prospects for long-term profitable growth once market conditions improve. The secular shift to direct-to-consumer distribution and digital marketing continues across all of our insurance verticals, and our marketplace remains unparalleled in its scale, scope, and capabilities. With that, I'll turn the call over to Pat to say a few words before we open the call to your questions. Great.
spk05: Thank you, Steve. I'll take a moment to point out a few items regarding this quarter. I'm pleased that we were able to exceed our guidance ranges and generate positive adjusted EBITDA and free cash flow during the quarter. Operating expenses excluding non-cash items came in below our forecast, and we remain intensely disciplined on expense management as we await a return to growth in our P&C vertical. Next, I would like to remind investors of the seasonality of our business. In our P&C vertical, Q4 transaction value typically declines relative to Q3, and is the slowest quarter of the year. In our health vertical, Q4 is our strongest quarter due to the timing of annual enrollment periods for ACA and Medicare plans, with Q4 transaction value usually representing approximately 40% of the full year total. Our fourth quarter guidance reflects these seasonal trends. Turning to the balance sheet, we paid down $17.5 million of debt during the quarter and ended the quarter with $30 million of cash and cash equipment. Our term loan matures in July of 2026, and we have significant headroom relative to our debt covenants. These covenants are based on consolidated EBITDA, as defined in the credit agreement, which includes a number of significant add-backs not included in adjusted EBITDA, such as public company costs, and is therefore materially higher than adjusted EBITDA. Looking ahead to Q4, our guidance reflects a similar year-over-year decline in PNC transaction value as in the third quarter, now that we have crossed the first anniversary of the start of this hard market cycle. Within our health insurance vertical, we expect transaction value to be down slightly year over year, as robust spend from our carrier partners is offset by lower spend from brokers. As a result, we expect transaction value to range from $155 million to $170 million, a year over year decrease of 34% at the midpoint. We expect revenue to range from $110 million to $120 million, a year-over-year decrease of 29% at the midpoint. Lastly, we expect adjusted EBITDA to range from $5 to $7 million, a year-over-year decrease of 55% at the midpoint. We are projecting our operating expenses, excluding non-cash items, to be $1.2 to $1.7 million higher than Q3 2022 levels. driven by both temporary and seasonal increases in non-headcount operating expenses. With that, operator, we are ready for the first question.
spk09: Thank you. And at this time, I would like to remind everyone, if you do have a question, that will be star one. We'll hear first today from Michael Graham with Cancord.
spk01: Hey, thanks a lot, guys, for the question. I wanted to ask you, the first one is just, Another player in the space mentioned that one big carrier had achieved rate adequacy and it started spending again. And I just wanted to ask you to maybe put a little more depth around your comment that, you know, carriers in general were still working on rates. Is there any, you know, depth you can add to that in terms of, like, percent complete or, you know, do you think any of the carriers are close to being done? That's the first one, and then I'll ask a follow-up.
spk00: Okay. Hey, Michael. It's Steve. Thanks for your question. Yeah, I mean, we saw something similar. I think, you know, overall, you know, what we're seeing isn't that different from what we talked about in the past, which is that, you know, I think as we're seeing from the Q3 results from a lot of the P&C carriers, you know, the carriers are at very different stages of achieving rate adequacy. And certainly there's some carriers who feel like they're there. And we've seen them, you know, lean back into growth mode, increasing their marketing investments. And certainly here, notwithstanding, you know, the effects of Hurricane Ian and the pullbacks that we alluded to in Q4, we continue to expect to see quarter over quarter increases in their marketing budgets as we get into 2023. I think it's fair to say that the majority of other carriers, though, you know, are still in the middle of the process of getting their rates increased to achieve rate adequacy. And I think what we're seeing is that you know, contrary to some of the thoughts that we had very early in this period, that they're at very different stages. And so what we're expecting and planning on is really through 2023 on a carrier-specific basis, you know, market recovery to happen, marketing budgets to return. And so I think it's fair to say that, you know, through 2023, we're expecting recovery to start, but that it might be a little bit lumpy, nonlinear, because it'll be based on each specific carrier, you know, achieving rate adequacy.
spk01: Okay, thanks for that. That's helpful. And then just, you know, with experience with hurricanes, if this had happened, if Ian had happened in a vacuum, like how long would you typically expect a hurricane, you know, a major hurricane to impact carrier spending? Is it a quarter or two quarters or what are your thoughts there?
spk00: Yeah, again, I think that's a great question. And so I think that the I think that the impact is largely near term. I think it depends on where the carriers are with their overall combined ratios for the year. And so I think what you're seeing with respect to the carriers who achieved great adequacy and pulled back in Q4 due to the effect of hurricane Ian, I think the primary driver behind that was really to get their combined ratios in line and hit their targets for the year. And so I think that reaction isn't unlike what you'd see in a normal market period. And again, it depends on the severity of the event as well as what carriers are expecting in terms of their overall combined ratios for the year. I think overall, as we think about how the market's going to recover, certainly the effects of Hurricane Ian could linger into early 2023, but with the discussions that we've had with carriers you know, who achieved rate adequacy and started to leap back into marketing, the feedback has been that in Q1, you know, they'll lean back in. And certainly by the time that other carriers follow suit later in the year, we don't anticipate that Hurricane Ian and the effects of Hurricane Ian will continue to have an effect.
spk08: Okay. Thank you, Steve.
spk09: Again, for questions, let us star one at this time. We'll hear next from Daniel Grossleit with Citi.
spk03: Hi, guys. Thanks for taking the question. I want to focus on the health segment for a little bit. You mentioned you're seeing strength in the under 65 market in your shareholder letter given the extension of subsidies. Can you give us a general idea of how big that business is as a percent of your overall health business and any thoughts around transitioning your recent acquisition of the customer helper team from more of a Medicare Advantage focus to a under 65 focus. Yeah.
spk05: And this is Pat. Thank you for the question, Dan. On the breakdown of our health vertical between Medicare and under 65, that's not a number that we disclose. The thing I can tell you is that it's a healthy mix between the two, and it's not like it's 80-20 skewed in one direction, but it's a very healthy blend of the two. And as we think about the customer helper team acquisition, that business was pretty heavily focused on Medicare when we bought it. The Medicare market, I think, is you and most investors know has been relatively challenged over the course of this year. Part of the deal thesis on that was that the capabilities they had in Medicare could be extended to other areas. First area we chose for that is under 65 health. So the team at CHT has been working there. We had real revenue with real gross profit. you know, in that area in Q3. You know, we're in the third day of OEP right now, and, you know, the business is seeing, you know, kind of the expected uplift you would see in that period. And we, you know, kind of remain long-term bullish about the opportunity for CHT both in Medicare and in other verticals like under 65 health.
spk03: Got it. Okay. Okay. And all the carriers themselves have made comments that they're investing heavily in their own sales force and their own lead acquisitions. I'm just curious if you can provide any commentary around the strength you've seen out of carriers versus brokers and how you think that's going to shape up, not just this year, but over the coming two to three years.
spk05: Yeah, and this is Pat again on it. The thing I would say is that you know, generally across our health vertical in general, and probably Medicare in particular, carrier spend has been quite a bit stronger than broker spend for us. And, you know, I think that some of the challenges the broker industry is having are well known. And, you know, as we look forward, we think that is a trend that will probably continue in that carriers you know, are looking to Medicare Advantage to be a big growth area for them, I think is, you know, I get reports from you and some of your peers, that's always one of the four or five bullet points in the summary is Medicare Advantage growth. So clearly, they are focused on it. And they want to have direct relationships with their end customers. And I think the the benefit of the carriers kind of gaining in importance is that, you know, we have this playbook and we've executed it before at PNC, where PNC was a space where brokers were relatively penetrated. And you've seen the customer acquisition efforts skew very, very heavily to carriers over time. And, you know, we expect that, you know, carriers will continue to rise in importance in the health channel, although we believe that over time brokers will continue to be very valuable to consumers that want to cross-carriers.
spk08: Got it. Appreciate the cover. Thanks, guys. Thanks, Daniel.
spk09: We'll hear now from Mayor Shields with KBW.
spk04: Thanks. Good afternoon. I guess if we listen to most of the auto carriers over the course of the third quarter, it sounds like there's this recognition that things are worse than they thought. And I'm wondering how that corresponds with what you're seeing from them. In other words, sequentially, the interest from demand partners going from the second quarter to the third quarter.
spk00: Yeah. Hey, Meyer. It's Steve. Yeah, I think that generally resonates with us and what we're hearing from our carrier partners. Referring back to my earlier comment, I mean, there are some carriers who feel that they've achieved great adequacy. But I think that the majority of the carriers that we're working with, I think, are still working through it. And we've seen some positive news on that front. Used car prices coming down. California approving its first rate increase, I believe, in two years. I mean, certainly we see those as positive signs. And then we see the continuing progress that the carriers are making in getting state-by-state approvals. But I think overall, it's fair to say that you know, that, you know, the comments he made about the auto insurance carriers, you know, and how difficult this market environment's been, it certainly resonates with us and matches what we're hearing from them directly.
spk04: Okay. Perfect. Second, this is sort of an abstract question, but it looks like Hurricane Ian may force a return to a more actuarial basis. for pricing homeowners in Florida. And I'm just wondering, is it your sense that competition for Florida business was lower before all of the COVID impacts in the supply chain? Was Florida sort of an underperformer in your marketplace?
spk08: I think it's safe to say that.
spk04: Okay, perfect. I guess we'll see how that pans out. And there's one last question. Is the 8.6 million impairment of cost method investments, does that have anything to do with the other vertical?
spk08: And sorry, Meyer, it was the cost basis impairment?
spk05: Yeah. Yeah, we have an equity investment that we made several years ago, and it's of a company kind of in the space. And we were holding that investment at book value. And given, you know, kind of some of the challenges in the P&C industry, we went through an exercise and we had a partial impairment of that investment. So we kind of, you know, wrote it down and something resembling a mark to market on that.
spk08: So it's a minority investment. All right. No, nothing to do with interest. All right. Sorry about that. Thank you. Hey, thanks, Byron. And once again, for questions, that is star one at this time. We'll hear now from Ben Hendricks.
spk06: Hi, this is Ben Hendricks from RBC. Yeah, hi. Hi, guys. Thanks. Just a quick question going back to the under 65 market on the healthcare side. You know, this past quarter we've heard one of our coverage companies, Bright Health, get out of the – of the ACA exchange market altogether, and we've heard other larger carriers kind of expand their footprint. Has that changed at all your trajectory, your client mix, and your outlook overall for that market? Thanks.
spk00: Oh, hey, Ben. It's Steve. It hasn't. I mean, we've seen some of that. You know, I think that the transition within the under 65 space to having carriers, you know, go direct to consumer, invest in marketplaces like ours, You know, we've seen a steady upward trajectory there. I think we've seen more of that within the Medicare Advantage space, certainly, with major carriers. You know, again, based on, you know, earlier comments, really leaning into this space and building a good balance of distribution through brokers, agents, as well as building direct capabilities. And so, you know, with respect to our overall sentiment with regard to health insurance, I mean, we continue to see just the broad trends there with health insurance companies overall really increasingly going direct to consumers, having an interest in doing that and building those capabilities. And over the long term, I think we will continue to see benefits from that because, as Matt mentioned earlier, that's really within our wheelhouse, the ability to work with major insurance carriers to help them deploy their performance marketing dollars in a
spk08: in a transparent and a super-efficient way.
spk06: Thanks. And then just last question with regards here with your term of 2026. Just can you remind us kind of how that's positioned for increased interest rates? Do you guys have hedges in place on that?
spk05: Yeah. It's floating rate debt, so it's effectively a LIBOR spread that presumably will be transferring to SOFR in the near future. And, you know, so as rates go up, the rates on the floating rate debt go up, you know, we typically kind of lock in the rates quarter by quarter is what we've been doing thus far this year. So, you know, of course, interest expense has been going up, but we don't have any long-term hedges in place.
spk08: Thank you, guys. Thanks, Ben. Thanks, Ben.
spk09: And with no other questions at this time, that will conclude today's conference. We do thank you all for your participation, and you may now disconnect.
Disclaimer