MediaAlpha, Inc.

Hello, my name is Chris, and I'll be your conference operator today. At this time, I'd like to welcome everyone to the Media Alpha Q1 2023 earnings 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 this time, simply press star, then the number one on your telephone keypad. To withdraw your question, please press star one again. Thank you. Denise Garcia, Investor Relations. You may begin.

Thank you, Chris. After the market closed today, Media Alpha issued a press release and shareholder letter announcing results for the first quarter ended March 31st, 2023. 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 second quarter of 2023, 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 4, 2023, 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, including 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 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.

Okay, thanks Denise. Hi everyone. Welcome to our first quarter earnings call. I'd like to make a few observations before turning the call over to our CFO Pat Thompson for his comments. As we discussed in a shareholder letter, after a strong start to the year, our largest PNC carrier partner sharply pulled back their marketing investment in light of renewed profitability concerns. As a result, We expect the inevitable market recovery in our P&C vertical to be pushed back several quarters relative to our prior expectations. We responded to this unexpected change in our near-term outlook by making the difficult but necessary decision to reduce our workforce by 16%. As a result, we're guiding to positive adjusted EBITDA on Q2 despite an expected 40% to 50% year-over-year reduction in P&C transaction value and the typical seasonal smallness in our health insurance vertical. While the magnitude and duration of this P&C hard market cycle have been frustrating for us, both as a management team and as significant shareholders, we remain confident in the fundamental competitive advantages of our marketplace model and our ability to capture an increasing share of the multi-billion dollar opportunity across all of our insurance verticals. We will emerge from the current P&C market downturn with a stronger and more efficient organization which will in turn enable us to generate significant operating leverage as our top line results recover. With that, I'll turn the call over to Pat.

Thanks, Steve. We delivered a solid first quarter with results above the midpoints of our guidance ranges across all metrics. This outperformance was driven by 108% quarter over quarter transaction value growth in our P&C vertical. which was slightly ahead of the roughly 100% sequential growth expectation we discussed on last quarter's call. Moving to our Q2 guidance, as Steve mentioned earlier, we expect P&C transaction value to decline 40% to 50% year over year. In our health insurance vertical, we expect transaction value to remain roughly flat year over year. And in our life and other verticals, we expect transaction value to decline at a similar rate to Q1. As a result, we expect Q2 transaction value to be between 107 million and 122 million, a year-over-year decrease of 37% at the midpoint. We expect revenue to be between 74 million and 84 million, a year-over-year decrease of 24% at the midpoint. Lastly, we expect adjusted EBITDA to be between 500,000 and 2.5 million, a year-over-year decrease of 67% at the midpoint. We expect our recently initiated workforce reduction to result in approximately $6 million of annual cash expense savings. We are therefore projecting operating expenses after adjusted EBITDA add-backs to be approximately $1.5 million lower than Q1 levels and to remain at these levels in Q3. I'd now like to touch on a couple of housekeeping items related to our adjusted EBITDA add-backs. First, we expect to add back roughly $1.3 million of cash severance in Q2 related to our workforce reduction. Second, in Q1, we added back $300,000 of legal fees related to the ongoing FTC inquiry, and we expect to incur similar to slightly higher amounts for the next few quarters. We believe we have been and remain fully compliant with all laws and regulations, and we are cooperating with the FTC as they continue their inquiry. We are adding back both of these items as we believe they do not reflect the ongoing operating performance of the business. Turning to the balance sheet, we are focused on reducing net debt and expect to continue to be in compliance with our debt covenants. We generated positive cash flow from operations in Q1, and due to our transaction-based revenue model and low capital requirements, we expect cash flows to improve sharply and in line with adjusted EBITDA coming out of the P&C hard market cycle. With that, operator, we are ready for the first question.

Thank you. As a reminder, if you'd like to ask a question, please press star then 1 on your telephone keypad. The first question is from Michael Graham with Canaccord. Your line is open.

Thanks, and thanks for the color on the quarter, guys. Maybe just reflecting the shareholder letter, and you talked about – how, you know, we had a major carrier, you know, returning to spend, and then in the last days of March, you know, sort of saw higher loss ratios. Can you just maybe go a layer deeper in terms of, like, what do you think is going on, you know, at the carrier, you know, level, and, you know, just any more color you can share on sort of, like, what you see as the cadence within P&C as we move throughout the rest of the year here?

Yeah, hey, Michael, this is Steve. So, So I'll take that question. So I think that, you know, really the pullback, you know, by this major carrier who believed that they had achieved great adequacy, I think is an indication of, I think, how unusual this hard market cycle is and how uncertain the current underwriting environment remains. And so I think it's difficult to foresee and predict exactly like when they're going to return to the marketplace. I think, you know, based on their comments and our discussions with them, I think our best estimate is that they'll come back into the marketplace, you know, two to three quarters, you know, from now as they get more comfortable with what their profitability looks like for the remainder of the year. And so really, I think what we're seeing is just, you know, the magnitude of the hard market cycle and the lingering inflationary pressures that insurance carriers, you know, continue to face. And so I think overall what that means for the P&C market recovery is that it's very likely going to be delayed a few quarters, you know, from what our original expectations were. But, you know, I would like to remind everyone that, you know, the Q1 results that we had, right, And the growth investments that we saw from this carrier, which were immediately back to normal historical levels, right, when they felt confident about their profitability, you know, is a sign that when the carriers get comfortable with where their rates are and the stability of the underwriting environment, that these growth investments, namely investments into our marketplace to hire new customers and policies, will return quickly and can return very sharply. And when that's matched with the heightened shopping behavior of consumers, you saw in Q1 exactly what happened. That carrier in question posted record policy growth numbers during Q1. And so when the market does turn and these advertising budgets come back, we expect to see a sudden influx of investment from these carriers, which will then meet the heightened shopping that we see from consumers as their rates have gone up 15%, 20%, 25%.

Okay, thanks, Steve. That's helpful. And can I just ask a follow-up on the, you know, when you think about on the health side, when you think about, you know, the Medicare products and, you know, has there been any structural change there? There were some chatter during the quarter regarding, you know, some regulatory changes that would make it more difficult for, you know, bidding activity to happen and you know, might end up being a factor for, you know, businesses like yours as we get into open enrollment later in the year. Can you just maybe talk about are you seeing any changes on that front?

Yeah.

Hey, Michael. This is Steve again. I think what you're referring to are some of the new CMS regulations around how you can market Medicare Advantage policies. And so there were, you know, final rules were released, I think, in April of this year. Even though the final rules have been released, it's a little too early to say exactly what the impact is going to be in our marketplace. And that's because there's some interpretation that's needed from these rules, particularly as to figure out exactly how that's going to apply into an online advertising environment. At this point, we're working really closely with all of our major partners, and most notably our major carrier partners, to figure out exactly how these rules would be interpreted and applied to the online marketing context. Now, I think with that said, I think just seeing these rules and based on our early discussions with these carriers, we're optimistic about the limited impact that we expect this to have in our upcoming enrollment period. I think what's foreseeable is that There may be some downward pressure in pricing for outbound data leads, namely leads that are purchased by brokers and carriers to actually call out on consumers who are interested in Medicare, depending on the interpretation of a 48-hour waiting period requirement and whether that's assessed to actually apply to these data leads. And so notwithstanding that, we don't expect a lot of impact on the two primary ad products that we have in our marketplace, which are inbound calls and clicks. And in fact, if we do see some downward pressure and lower demand for these data leads, we could very foreseeable see increased pricing for inbound calls and clicks, which would be actually overall a net positive for our marketplace.

And this is Pat. I'll just add one thing to what Steve said. And he hinted at it, but the outbound data leads are a very, very small percentage of our overall Medicare business.

Okay, great. Thank you, guys. Thanks, Michael.

The next question is from Daniel Grosslight with Citi. Your line is open.

Hi, guys. Thanks for taking the question. I want to kind of stick with that line of questioning on the 48-hour rule in Medicare Advantage. So are you saying it's your understanding that the 48-hour rule will not apply to incoming calls and it's just an outbound call that it will?

Yeah. Oh, hey, Daniel. Sorry to interrupt you. Yeah, I mean, that's just our interpretation. That's the interpretation that we're getting from our partners, again, including our health insurance partners. And so, you know, it's something that actually we're working through and we're trying to get clarity on. But initially, that is the interpretation that most in our space have taken.

Got it. Okay. And I guess, you know, if it were to apply to both inbound and outbound calls, I wonder how much flexibility you have right now to kind of turn off the Medicare Advantage or not necessarily turn off, but transition away from the Medicare Advantage product into other products which might not be subject to the rule, like Medicare supplement and ancillary products. And then obviously you have an under 65 segment, which may do well amid potential redeterminations this year. So I'm just curious how you're thinking about the potential shift away from Medicare Advantage. Should those rules be more onerous than originally thought?

Yeah. Honestly, I don't know that there's a lot of controversy around whether or not the 48-hour waiting period requirement would apply to inbound leads. We haven't spoken to a single health insurance carrier who is going to interpret it that way. And ultimately, in terms of how these rules are initially interpreted and how the whole industry will be able to move forward, you know, what's under these new requirements will be based on exactly what the major carriers' interpretations are. And so, with that said, You know, if there is an interpretation that, you know, goes against what our and the industry's expectations are, I mean, certainly, you know, we have a strong presence in under 65. We do have some partners who, you know, who focused on Medicare, who are worried about the potential impact of these new marketing regulations on data leads. And so, some of those partners are starting to shift to other products like, you know, MedSupp, as well as under 65 health insurance. I think the whole space and us in our marketplace will be able to pivot to other areas that won't be impacted by these regulations. But again, I think that in terms of how the rules, new marketing rules will be interpreted, I think there's a very, very low likelihood that that waiting requirement will be interpreted to apply to inbound calls.

Yeah. And Dan, this is Pat. The other thing I would add to that is that a healthy chunk of our overall Medicare business is clicks. And I think there's really no rational interpretation you can take of any of the regulations that would really change the ability to bind policies from clicks in a timely manner. So I think our view is that portion of the business has performed well over time as more consumers go online and particularly older consumers get comfortable going online. And we believe that's a trend that will continue in the years to come.

Got it. And last one for you on another regulatory issue, a bit broader in scope. But a few months ago, the FCC proposed some rules that would effectively make your supply partners more clearly and conspicuously display how they're going to use the data that they collect from potential beneficiaries. I'm curious, Juan, do you know what rules I'm referring to here? And I'm curious, you know, what impact, if any, those rules, proposed rules may have, should they be finalized in their current form?

Hey, Daniel, Steve, I don't know that I know the specific rules that you're referring to. But in terms of just the disclosures that need to be made by our publishers and our owned and operated sites in terms of what will, you know, how data will be used, I mean, you know, whether or not the current regulations are clear enough, I mean, we certainly strive to make that very clear to all consumers coming to the site. I do think that any new regulations that come about making those disclosures even clearer, I don't have too many concerns about the ability of the participants in our marketplace or our owned and operated team to be able to make those clear disclosures while maintaining conversion rates. And so, again, not knowing exactly what you're referring to and the magnitude of the changes that are required, it's not something that worries us a lot, and these things tend to happen with some regularity, particularly within the lead generation space.

Got it. Very helpful. Thank you. Okay.

Sure. The next question is from Ben Hendricks with RBC Capital Markets. Your line is open.

Hey, thank you very much. You've really answered my questions all about the 48-hour rule, but just I know one of your partners, eHealth, talked about potential for further rationalization in the market. I'm just wondering if you had any thought, any early thoughts kind of different thoughts on how this might impact e-brokers versus the carrier partners and if there's anything that applies differently to the two groups.

Thanks. Yeah, I mean, I think that, okay, so, again, I think if the 48-hour waiting rule, waiting requirement, waiting period requirement, sorry, is deemed to apply to third-party leads that are purchased, you know, that would have a disproportionate impact on the broker universe. because that broker universe is the one, versus carriers, that is, who tend to buy more third-party leads for their call center agents to dial out on. I think, you know, with that said, I think that, you know, with a lot of the cleanup that happened with the e-brokers and looking at the lifetime value of the policies that they're selling, you know, one of the channels that they that they cut were these third-party leads. And so, I mean, I think that there will be some impact on the broker universe, and certainly greater than that on carriers, because carriers typically don't buy leads to dial out on. But I think even that impact, you know, based on how much they cut back on these types of marketing channels, I think will be relatively limited for the brokers as well.

Yeah, and I would just add probably two things to that, which is, you know, as a reminder, and I think we've talked about this on prior calls, that we have a healthy mix of demand from both carriers and brokers. And the carrier piece has been growing at a faster clip pretty consistently over the last, you know, three, five years. And that's a trend we, you know, we bet on continuing. And, you know, the second thing to say is that, you know, brokers do clearly meet a consumer need, and that's, you know, when you get into comparison shopping across plans where you go, hey, I don't know if I want carrier A or carrier B or carrier C. And so, you know, I think, you know, there are a lot of prognosticators that have, you know, different views on what the future looks like for brokers, but they, you know, are and we believe will continue to remain an important part of the overall ecosystem.

Thank you very much. Sure, Ben.

As a reminder, that's star one, if you'd like to ask a question. The next question is from KBW. Your line is open.

Hey, guys. This is Tommy McJoy at KBW. Thanks for taking our questions here. looking on the on the pnc insurance side can you guys give us your latest thoughts about how the media alpha fits competitively against some of the other lead generation and customer acquisition offerings from other companies and do you think that your platform is in any way better positioned to weather this downturn or to better capitalize on the eventual rebound in advertising budgets um yeah thanks for that question um i think competitively you know where we sit is

is that vis-a-vis our competitors, or most of our competitors, we're a marketplace model, and that's really what differentiates us. So we have hundreds of supply partners who we connect with insurance carriers, and we connect them with insurance carriers primarily for the national advertising budgets that they have. And so these are the other companies that are more straight lead generators, while they rely on these national click budgets from carriers, they also rely on lead budgets that agents have. And as we've mentioned before, these lead budgets from agents tend to hold up relatively well during these hard market periods. And so in terms of just the overall downturn and I guess the decline of national carrier budgets, I mean, certainly we've been more impacted by that. than some of our competitors have been. And so I think with that said, I think one of the things that we've talked about in the past is that when the recovery happens, it'll happen with the rebound and return of these budgets from carriers, not necessarily through additional spend from agents for leads. I mean, that stays relatively constant. So it doesn't go down during hard market periods, but it also doesn't go up very much in soft market periods. And so our focus on you know, remains really with working with these carriers to be ready for, you know, the day when these budgets return. And we certainly expect to outgrow our competition, right, with our marketplace model, because that's also demonstrated its ability to really scale up very quickly, right, because it's a network of hundreds of third-party supply partners. And so we fully expect coming out of this hard market to outgrow our competition. And that's exactly what happened coming out of the last hard market cycle as well.

Yeah. And I would just add one thing to that, which is, you know, the Q1 numbers, I think, give you a kind of a sneak peek of what a recovery, you know, what the ultimate recovery, you know, could look like. And, you know, we grew transaction value of PNC 108% sequentially, you know, from Q4 to Q1. And that was you know, driven, you know, almost totally by just one major carrier leaning back into marketing. And, you know, I think it's not a stretch to say, you know, when the carriers get to, you know, kind of underwriting results that they're comfortable with, which I would probably term as breakeven or profitable, we would expect them to lean in on marketing and you know, we would expect to see, you know, significant upticks in all of our financial metrics with, you know, probably disproportionate growth in EBITDA. And, you know, I think a Q1 transaction value was down about 20% year over year, and EBITDA was up. And so, you know, we've kind of leaned up the cost structure, and we're ready to take advantage when that happens.

Thanks. And along the same lines, obviously always tough to do a workforce reduction. Do you guys think of that reduction as more permanent or something that you would perhaps need to rehire some capacity to the extent there is a rebound sooner than expected?

Yeah, thanks for that question. Yeah, I mean, I think, you know, it was, you know, hard to do a reduction. But certainly, you know, we focused primarily on roles that weren't revenue generating. And we were careful to do 2 things. 1 is make sure that we were able to continue to invest. In key areas, let's say, such as our health insurance business, and most notably our Medicare product or Medicare sub vertical. And we were also very careful to make sure that we had our core capabilities intact so that we can continue to work with carriers. and be ready for when the rebound does happen so that we can work with them on their growth plans when the market does turn in three quarters or so. And so in terms of the roles that we're cutting, whether or not we need to replace them, and certainly I don't think that that's something that we'll need to do in the near term. You know, some of the selective roles, I mean, certainly, you know, it's foreseeable that in nine months' time or 12 months' time that we'll start to, you know, look for people in, you know, to fill those roles again as we think a little bit more towards the long term. But I think generally speaking, I think, you know, we can certainly grow back with the P&C market with the current team that we have. Our current team is continuing to invest in all the important areas that we have, and so So in terms of the near and mid-term, we don't see any need to really replace any specific role. But as we grow, it'll be dynamic, and we'll start to hire again when the situation improves.

Makes sense. Appreciate the answers.

Yeah, thanks. We have no further questions at this time, and that will conclude today's conference call. Thank you, everyone, for participating. You may now disconnect.