MediaAlpha, Inc.

Hello and thank you for standing by. At this time, I would like to welcome everyone to the MediaAlpha, Inc. first quarter 2024 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 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, please press star one. I would now like to turn the conference over to Alex, the lawyer. Please go ahead.

Thank you, Jericho. After the market closed today, Media Alpha issued a press release and shareholder letter announcing results for the first quarter ended March 31st, 2024. These documents are available in the investors' section of our website and we'll be referring to them on this call. Our discussion today will include forward-looking statements about Media Alpha's business and outlook for future financial results including its financial guidance for the second quarter of 2024, 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 1, 2024, 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 and contribution, 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 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, Alex. Hi, everyone. Welcome to our first quarter 2024 earnings call. I'd like to make a few comments before turning the call over to our CSO, Pat Thompson, for his remarks. We've had an outstanding start to the year. Our first quarter results exceeded the high end of our guidance ranges across the board. as we saw increasingly strong step-up in marketing investments by our P&C carrier partners during the back half of the quarter. We're confident that we're now firmly in the midst of an auto insurance market recovery, and we're expecting strong year-over-year growth in our second quarter P&C transaction value. First quarter results in our health insurance vertical were also above expectations. This was driven by continued strength in our under-65 business, as well as opportunistic carrier spend in Medicare. We expect high single to low double-digit year-over-year transaction value growth in our health insurance business in the upcoming second quarter. As auto insurance carriers' rate increases continue to significantly outpace moderating lost cost inflation, the P&C industry's recovery from a period of unprecedented underwriting losses is quickly gaining momentum. We expect these favorable market conditions to be sustained for the remainder of this year and beyond as an increasing number of carriers achieve rate adequacy and begin to reinvest in customer acquisition. We believe these positive trends will enable us to drive meaningful cash flow growth and shareholder value in the years to come. Finally, Eugene Nanko, my co-founder and the company's chief technology officer, will be transitioning out of his current role at the end of the year and handing the reins to Amy Yeh, our SVP of Technologies. Amy has worked closely with Eugene during her nine years at Media Alpha and will take over as our CTO in 2025. I would like to personally thank Eugene for all he has done over his 13 years with the company. Without him, of course, we would not be where we are today. With that, I'll turn the call over to Pat.

Thanks, Steve. I'll begin with a few comments on our first quarter financial results and other recent business and market developments. reviewing our second quarter financial guidance and opening the call up for questions. As Steve mentioned earlier, our first quarter results exceeded the high end of our guidance ranges across all metrics, with year-over-year transaction value and adjusted EBITDA growth of 13% and 98% respectively. Transaction value in our P&C insurance vertical was up 150% quarter-over-quarter, driven by strong step-ups in marketing spend during the back half of the first quarter by our carrier partner, especially our largest advertiser. Transaction value in our health vertical was also up 16% year-over-year, above expectations. The adjusted EBITDA increase of $7.1 million year-over-year was driven by higher contribution and lower overhead. We are in a very different place now than where we were at this time last year, when carriers were significantly pulling back on marketing spend. We expect 60% to 70% sequential growth in P&C transaction value driven by a continuation of the positive trends we've been seeing. In health, we expect transaction value to grow at a high single to low double-digit rate year over year. Moving to our consolidated financial guidance, we expect Q2 transaction value to be between 285 and 300 million dollars, a year-over-year increase of 132 percent at the midpoint. We expect revenue to be between 145 and 155 million dollars, a year-over-year increase of 77% at the midpoint. We expect adjusted EBITDA to be between $15.5 and $17.5 million, a year-over-year increase of 359% at the midpoint, driven by higher contribution. We expect overhead to be approximately $500,000 higher than Q1 2024. Lastly, Q2 legal costs associated with the ongoing FTC inquiry are expected to be approximately $1 million, similar to Q1. Finally, a few comments on expenses and profitability going forward. We continue to have measured hiring plans for 2024 and expect limited overhead growth for the full year. Given our lean team and capital efficient model, we expect to generate significant operating leverage and adjusted EBITDA as our top line growth accelerates. Cash flow is expected to follow suit, and our near-term priority remains on using excess cash to reduce net debt. To the extent attractive alternative capital deployment opportunities arise, we will reassess at that time. With that, operator, we are ready for the first question.

Thank you.

And your first question comes from the line of Michael Grant with Canicl.

Please go ahead. Hey, thanks a lot and congrats on the really strong results. My first question, I just wanted to kind of ask how you were thinking about sort of like what the high watermark could be for the business in this early cycle. Like if we look back at your historical transaction value results, you sort of peaked in the middle part of 2021. And you were sort of like on a run rate well north of a billion dollars. And I'm just wondering, like, you know, do you think the industry is set up for you to be, you know, at that level when this next cycle peaks or larger? Or just like how are you thinking about that topic?

Hey, Michael. Yeah, I'll take the first crack at that question. So as we think about where we are and sort of what the future holds, I mean, certainly – The first thing that comes to mind is something that we've talked about in earlier calls, which is that this is an unprecedented underwriting cycle. And as the market recovers from it, I think there's going to be a lot of unpredictability. And so I think certainly we're seeing that with our first quarter results and with how the second quarter is shaping up as well. I think what's driving that are a couple of things. I mean, first is I think we were right in predicting for this recovery that it would start with a small number of the advertiser carriers really getting back into the marketplace. And that momentum would continue to build as more carriers achieved rate adequacy and started to really reinvest in growth, you know, through 24 and into 25. Certainly, we've seen that play out. I think the second thing we got right was that consumer shopping sentiment with auto insurance is at an all-time high. So volume is at an all-time high in our marketplace, and that's to be expected because consumers have had rate increases of 30%, 40%, which really spur shopping behavior. And again, there too we expect that to continue through 24 and 25 because rate-taking continues. So even now, I think rates are going up. about 20% to 22% year over year. Their carriers were still taking rate this year and will be taking rate into 25. And as those rate increases continue to earn through and show up in people's renewal notices, that's going to trigger shopping behavior. So we expect the shopping behavior to continue to remain elevated again through this year and into next. I think the thing that we got wrong in terms of the unpredictability is really the pricing. With a small number of national carriers really reentering the marketplace, Early this year, I think everyone knows who those carriers are. They're the ones who were early to take rate, achieve rate adequacy. I think that was enough to really get pricing back to the pre-hard market levels over the first quarter and early part of the second quarter. And that was unexpected. I think we can attribute that snapback in pricing to a couple of things. I think one is just the appetite that these carriers have after having sat in the sidelines for the better part of three years. I think the second is really the hallmark of our marketplace that we've talked about in the past, which is the measurability, right? The measurability, which then leads to a small number of competitors really being needed to actually have pricing be set based on expected lifetime value and return on ad spend and far less on competitive dynamics. And so along the pricing front, Again, we've been pleasantly surprised at how quickly that's returned to pre-hard market levels. What we do expect going forward is that as more carriers come back in, pricing is going to go up, right? As some of the states like California and New York, New Jersey kind of come back online, again, average pricing across our network is going to go up. But I think those increases going forward are going to be a bit more measured than the sharp increase that we've seen here today. Michael, does that give you the color that you were looking for?

It does, Steve. Thank you. That was a complete answer, so I'll defer to the next caller. Thanks so much.

Thanks, Michael. Our next question comes from the line of Mike Zaremski with BMO Capital Markets. Please go ahead.

Thanks. Good afternoon. I guess my only follow-up question question to that good question and answer is just should we be cognizant or maybe you can remind us if there's some seasonality we should be thinking about. Clearly you gave us 2Q guide. I believe historically there's been seasonality around tax refund season. Maybe that's obviously that would be encapsulated in the 2Q guide if that is true but anything on the seasonality front um we should keep in mind yeah and and steve do you want me to take this one yeah go ahead pat perfect yeah so uh so mike thanks for the question and i would say that you know i think the our two main verticals have different seasonality trends and so i would say in pnc in a typical year you know q1 and q3 tend to be the biggest for consumer shopping Q2 tends to be a little bit below those, and then Q4 tends to be, you know, a bit lower than that. And I think we've given the guidance in the past that in the typical year, we would expect Q1 to be 15% to 25% bigger than Q4. You know, so I think that, you know, some of the guidance we're giving for Q2, you know, shows a trend that's kind of bucking normal seasonality on the PNC side, and we haven't given any guidance, as you pointed out, for Q3 and beyond. On the health vertical, that piece of the business is relatively focused on Q4. So in a typical year, Q4 is about 40% of our business and health. Q1 tends to be the next largest because some of the enrollment period leads over into January, and then Q2, Q3 tend to be a little bit smaller than Q1. And so hopefully that kind of gives you the view of, you know, what typical seasonality looks like. And, you know, I would say just as in the hard market downturn we had, you know, some of the seasonality was a bit hard to tease out of the numbers. You know, wouldn't doubt that, you know, it could be hard to tease out as the business recovers as well.

Okay.

Got it. Yep. That is helpful. And I guess, you know, it's been, you guys have, you know, it's been like maybe a, You've done a good job. I know it's probably tough with the expense cuts in recent years. You know, directionally, as the market stabilizes or, you know, gets a lot better, are you guys going to be kind of cautious at first in kind of making sure, you know, the revenues are there before kind of reinvesting? Or are you guys, right, you know, have a good enough line of sight that, you know, we should just be Are you thinking you guys are going to go back to kind of, you know, doing what you, you know, you have always done in terms of how to reinvest when we think about margins? Yeah. And, you know, Mike, I would say that, you know, I think, you know, efficiency is in our DNA as a company. And, you know, as a bootstrap company, it's been profitable since, you know, the very beginning. And, you know, we take that very, very seriously. And so, yeah. You know, I think we've, you know, we've managed pretty well through the hard market. You know, we're going to be seeing, you know, a bit of investment over the course of this year. And I would say that, you know, some of that is going to be capacity and some of that is going to be, you know, in kind of core tech product analytics. But, you know, our guidance for the year is on limited dollar overhead growth for the full year of 24 as compared to 23. And, you know, I think we've kind of, you know, we've indicated Q2 should be, you know, up 500,000 versus Q1 and, you know, would expect, you know, probably a bit of increase in, you know, Q3 relative to Q2 and Q4 relative to Q3 as we start to hopefully reinvest as we gain more confidence. And, Pat, as a last follow-up, is there any way you could size up by level, like what percentage of your expense base is fixed versus variable? That's not something we disclose, Mike. The one thing I would say is that the vast majority of our headcount is included in the operating expenses category, and so we would, you know, deem it to be fixed or semi, you know, kind of semi-fixed. Obviously, there are some roles in there that you know, probably are variable at some point, which is, you know, hey, if you've got, you know, a bunch more business happening, do you need another account manager or something like that? But, you know, I'd say that the vast majority of our headcount, I would deem, is being fixed.

Thank you.

Our next question comes from the line of Corey Carpenter with J.P. Morgan. Please go ahead.

Good afternoon. Thank you. Steve, could you just give us a sense of how close the Wave 1 carrier is back to fully normalized spending levels? And then if we think of, I'll call them the Wave 2 or Wave 3 carriers, how much are they contributing? How material is that to 1Q? And how do you expect them to ramp into 2G? Thank you.

Yeah. So, Corey, if I heard your question correctly, I think you're asking about, I think, the small number of carriers who right now are getting, you know, close to normal levels. And I think I just answered your question by saying that. I think a small number of carriers who've achieved great adequacy are really starting to reinvest in growth, are actually getting close to normal levels. And so we've been, again, surprised by that, very pleasantly so. And again, I think that's really attributable to the fact that there's been three years of muted growth investments, and the industry is really ready to start reinvesting in growth once each of the carriers in the industry achieve rate adequacy. In terms of color into what that next wave looks like, I mean, we're certainly engaged in positive discussions with all of the other carriers. I think that You know, one thing that we're seeing that's a little bit different than the last hard market cycle is just the sheer number of other carriers, right, who typically haven't been big players within the online direct-to-consumer space and just how far advanced they are versus when we emerged from the last hard market. And what I mean by that is just in terms of the level of technical integrations that we have with them. their understanding of how to measure expected lifetime value, how to match that to media costs to actually target return on ad spend, the value of programs to gain additional monetization from visitors, like our carrier publishing program, and the strong adoption we got of that program during the hard market period. And even with the personnel, that are within the marketing departments of a lot of these carriers and just the level of sophistication they have. And so, you know, the timing of the second tier or the next wave of carriers to come on I think really will be dictated by how quickly they achieve rate adequacy. And I think, you know, you and I have the same access to that data. Again, I'm not going to go out and say that they're going to return ahead of getting profitability where they need to be. It was a tough cycle. But when they come back, really what we're excited about is just how many more carriers actually in a good place to really scale their spend with us. And I think that really bodes well for this vertical for us over the next couple of years, again, of what we are expecting to be sort of the opposite of the hard market cycle, which is the soft market cycle, where a number of carriers are really aggressively spending in growth and in marketing in order to gain market share. And we're excited about working with just a growing number of carrier partners to really realize and help them realize their growth objectives.

Great. Thank you very much. Our next question comes from the line of Tony McJoy with KBW.

Please go ahead.

Hey, good afternoon. Thanks for taking my questions. With With so much, you know, auto consumer shopping going on, you mentioned that, you know, carriers are certainly thinking pretty hard about lifetime values of customers. Can you talk about, you know, some of the advantages that Media Alpha has over its competitors in terms of helping carriers, you know, evaluate this really important input as carriers are looking to kind of seek out new customers? Basically, just, you know, what is the value proposition that Media Alpha goes to market to its carriers?

Sure. I think first is the measurability. All the media in our marketplace is performance media. And so it's expected to and it's tied back to an actual sale. And so at the end of the day, every dollar spent in our marketplace is fully accountable and, again, tied back to a policy sale to justify a media pricing. And so in addition to being a performance-based marketplace, You know, it's really the scale of our marketplace because in terms of carrier spend and our ability to support that as a marketplace, you know, the carrier spend here is oftentimes two to three times that of any other marketplace. And that additional data really allows the carriers to get a much better view into the expected lifetime value because there's just so much data out there for every consumer segment that they're targeting. And so what that helps is gets enables them to get a much more accurate bearing on the estimated lifetime value of all the customers that they're acquiring in our channel, which then allows them to have a much better ROI or return on ad spend, again, across 300 to 400 publishers within our marketplace. And in a time like this when advertisers are really looking to scale up, right, The granularity that's really enabled a massive scale and transparency that we have in our marketplace is really what's going to enable carriers to scale up while keeping their efficiencies at target level.

Got it.

Thanks. And then just a second question here. From your perspective, have you seen a lot of unbundling of customers in terms of you know, looking to separate home and auto? And kind of how has that impacted, you know, what carriers are kind of willing to bid for customers who are looking to acquire?

Yeah, I mean, I think that that's, I mean, that's certainly something that a lot of people are talking about, the dynamic in the marketplace, just because both auto and home have had its own issues in terms of dislocated markets and large pricing increases. And so I certainly believe that that is happening in the marketplace. We don't really have visibility into that. You know, our marketplace is predominantly auto and home is a smaller part of our marketplace. But what we are seeing is increased demand for home that I think is reflected or resulting in part from some of the issues that the carriers may be having with retaining some of their bundle customers.

Makes sense. Thanks. Our next question comes from the line of Ben Hendrix with RBC Capital Market.

Please, go ahead.

Great. Thanks, guys. Congratulations on the quarter. Maybe a couple of quick ones here. First, just if you could follow up on this opportunistic partner spend in Medicare. Can you remind us kind of the nature of that arrangement, kind of what you saw in terms of magnitude this quarter, and how should we think about that going forward?

Yeah, and Ben, this is Pat. So, you know, I would say that on the Medicare side, there were a couple of carriers that, you know, kind of in late February and March unlocked some spend with us. And, you know, I'd say that presumably they liked what they saw in terms of market opportunity and returns. And so they, you know, spent into that. And, you know, the feedback from them was generally positive on, you know, they felt like they got a good return on that spend. The thing I would say is that, you know, kind of given the size of our health vertical in Q1 and, you know, the spend and kind of the growth outperformance we had relative to expectations, like it wasn't that much spend. It just ended up driving, you know, 6, 8, 10 percentage point beat versus expectations. But, you know, clearly positive from our perspective.

Gotcha.

And just also, you know, we saw a suboptimal rate notice for Medicare Advantage next year. We see some of the MA leaders, Humana and CBS, talking about protecting margins, curtailing benefits for next year. It seems like the shopping setup is just getting incrementally better. Just want to see kind of if you agree in how you see the, you know, the transaction value opportunity shaping up for OEP this year.

Yeah. And, you know, I would say that, you know, I think you did a, you had a nice summary of a lot of the market forces that have been at play. And I think, you know, one of the things we've, you know, seen over time with, you know, both Medicare and our under 65 business is that, you know, regulatory and, you know, market shifts, you know, can have an impact on the business, you know, say over the longterm, totally confident that the industry will successfully adapt to whatever, whatever changes come, you know, near term, you know, maybe hiccups, maybe positive surprises, you know, we'll kind of see on that. And, you know, I would say that, you know, we're excited by the long-term opportunity. You know, we're hearing, you know, decent things from our advertising partners and on the publishing side. And I think we're, you know, we're, we're feeling okay about Q2 and I think we'll provide more guidance as we get closer to the time and get a little bit more clarity on exactly what folks are thinking. But, you know, we'll, we'll, we'll see how things shape up and, where we will, as always, be ready to do the best we can and react to whatever may come our way.

Thank you very much.

There's a follow-up question from Mike Zaramski with BMO Capital Markets. Your line is now open.

Thanks for putting me in. Just one quick follow-up, and I think you might have used a bit of this out. Thinking on the property and casualty insurance segment, I believe if we go back prior to the industry's profitability woes, that the revenue was very concentrated with a smaller number of carriers in terms of the largest carrier. If we think about the first half of 2024, And I believe it defragmented after that, but maybe I'm wrong. When we think about first half 24, is it back to being very concentrated and you expect it to deconcentrate, or maybe you could just unpack that a little bit?

Yeah, Mike, I think you said it exactly right. I think because we're in the early part of the recovery where there's still a small number of carriers who are, you know, back to or something close to normal levels of spend, you're going to see more concentration in our PNC marketplace. Again, as more carriers achieve rate adequacy, you know, start to make growth investments again, I think you're going to see, you know, increasing diversity in demand in our PNC marketplace. And I think coming out of this hard market, as I mentioned before, again, I think we have you know, a stable of additional carriers that we're working with, who I think, again, we feel are really poised to really, you know, embrace this channel, you know, in this next growth cycle. And so I think we're going to expect to see, I think, additional, I guess you said fragmentation in demand or diversification in demand as the soft market really starts to gain traction.

Okay. Loud and clear. Thank you. Thanks, Mike. It seems that there are no further questions at this time. And this concludes today's conference call. You may now disconnect. you Thank you. Thank you. Thank you. We'll be right back. you Hello, and thank you for standing by.

At this time, I would like to welcome everyone to the Media Alpha Inc. First Quarter 2024 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 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, please press star one. I would now like to turn the conference over to Alex Deloya. Please go ahead.

Thank you, Jericho. After the market closed today, Media Alpha issued a press release and shareholder letter announcing results for the first quarter ended March 31st, 2024. These documents are available in the investors section of our website and we'll be referring to them on this call. Our discussion today will include forward-looking statements about Media Alpha's business, and outlook for future financial results, including its financial guidance for the second quarter of 2024, 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 1st, 2024, 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 and contribution, 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 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, Alex. Hi, everyone. Welcome to our first quarter 2024 earnings call. I'd like to make a few comments before turning the call over to our CFO, Pat Thompson, for his remarks. We've had an outstanding start to the year. Our first quarter results exceeded the high end of our guidance ranges across the board, as we saw increasingly strong step-up in marketing investments by our P&C carrier partners during the back half of the quarter. We're confident that we're now firmly in the midst of an auto insurance market recovery, and we're expecting strong year-over-year growth in our second quarter P&C transaction value. First quarter results in our health insurance vertical were also above expectations. This is driven by continued strength in our under 65 business, as well as opportunistic carrier spend in Medicare. We expect high single to low double-digit year-over-year transaction value growth in our health insurance business in the upcoming second quarter. As auto insurance carriers' rate increases continue to significantly outpace moderating lost cost inflation, the P&C industry's recovery from a period of unprecedented underwriting losses is quickly gaining momentum. We expect these favorable market conditions to be sustained for the remainder of this year and beyond as an increasing number of carriers achieve rate adequacy and begin to reinvest in customer acquisition. We believe these positive trends will enable us to drive meaningful cash flow growth and shareholder value in the years to come. Finally, Eugene Nanto, my co-founder and the company's chief technology officer, will be transitioning out of his current role at the end of the year and handing the reins to Amy Yeh, our FCT of Technology. Amy has worked closely with Eugene during her nine years at MediaAlpha and will take over as our CTO in 2025. I would like to personally thank Eugene for all he has done over his 13 years with the company. Without him, of course, we would not be where we are today. With that, I'll turn the call over to Pat.

Thanks, Steve. I'll begin with a few comments on our first quarter financial results and other recent business and market developments before reviewing our second quarter financial guidance and opening the call up for questions. As Steve mentioned earlier, our first quarter results exceeded the high end of our guidance ranges across all metrics with year-over-year transaction value and adjusted EBITDA growth of 13% and 98% respectively. Transaction value in our P&C insurance vertical was up 150% quarter-over-quarter driven by strong step-ups in marketing spend during the back half of the first quarter by our carrier partners, especially our largest advertiser. Transaction value in our health vertical was also up 16% year over year, above expectations. The adjusted EBITDA increase of $7.1 million year over year was driven by higher contribution and lower overhead. We are in a very different place now than where we were at this time last year, when carriers were significantly pulling back on marketing spend. we expect 60% to 70% sequential growth in P&C transaction value, driven by a continuation of the positive trends we've been seeing. In health, we expect transaction value to grow at a high single to low double-digit rate year over year. Moving to our consolidated financial guidance, we expect Q2 transaction value to be between $285 and $300 million, a year-over-year increase of 132% at the midpoint. We expect revenue to be between $145 and $155 million, a year-over-year increase of 77% at the midpoint. We expect adjusted EBITDA to be between $15.5 and $17.5 million, a year-over-year increase of 359% at the midpoint, driven by higher contribution. We expect overhead to be approximately $500,000 higher than Q1 2024. Lastly, Q2 legal costs associated with the ongoing FTC inquiry are expected to be approximately $1 million, similar to Q1. Finally, a few comments on expenses and profitability going forward. We continue to have measured hiring plans for 2024 and expect limited overhead growth for the full year. Given our lean team and capital efficient model, we expect to generate significant operating leverage and adjusted EBITDA as our top line growth accelerates. Cash flow is expected to follow suit, and our near-term priority remains on using excess cash to reduce net debt. To the extent attractive alternative capital deployment opportunities arise, we will reassess at that time. With that, operator, we are ready for the first question.

Thank you.

And your first question comes from the line of Michael Grant with Canicor. Please go ahead.

Hey, thanks a lot and congrats on the really strong results. My first question, I just wanted to kind of ask how you were thinking about sort of like what the high watermark could be for the business in this early cycle. Like if we look back at your historical transaction value results, you sort of peaked in the middle part of 2021. and you were sort of on a run rate well north of a billion dollars, and I'm just wondering, do you think the industry is set up for you to be at that level when this next cycle peaks or larger, or just how are you thinking about that topic?

Hey, Michael. Yeah, I'll take the first crack at that question. So as we think about where we are and sort of what the future holds, I mean, certainly The first thing that comes to mind is something that we've talked about in earlier calls, which is that this is an unprecedented underwriting cycle. And as the market recovers from it, I think there's going to be a lot of unpredictability. And so I think certainly we're seeing that with our first quarter results and with how the second quarter is shaping up as well. I think what's driving that are a couple of things. I mean, first is I think we were right in predicting for this recovery that it would start with a small number of the advertiser carriers really getting back into the marketplace, and that momentum would continue to build as more carriers achieved rate adequacy and started to really reinvest in growth, you know, through 24 and into 25. Certainly we've seen that play out. I think the second thing we got right was that consumer shopping sentiment with auto insurance is at an all-time high. So volume is at an all-time high in our marketplace, and that's to be expected because consumers have had rate increases of 30%, 40%, which really spur shopping behavior. And again, there too we expect that to continue through 24 and 25 because rate-taking continues. So even now, I think rates are going up. about 20% to 22% year over year. Their carriers were still taking rate this year and will be taking rate into 25. And as those rate increases continue to earn through and show up in people's renewal notices, that's going to trigger shopping behavior. So we expect the shopping behavior to continue to remain elevated, again, through this year and into next. I think the thing that we got wrong in terms of the unpredictability is really the pricing. With a small number of national carriers really reentering the marketplace, Early this year, I think everyone knows who those carriers are. They're the ones who were early to take rate, achieve rate adequacy. I think that was enough to really get pricing back to the pre-hard market levels over the first quarter and early part of the second quarter. And that was unexpected. I think we can attribute that snapback in pricing to a couple of things. I think one is just the appetite that these carriers have after having sat in the sidelines for the better part of three years. I think the second is really the hallmark of our marketplace that we've talked about in the past, which is the measurability, right? The measurability, which then leads to a small number of competitors really being needed to actually have pricing be set based on expected lifetime value and return on ad spend and far less on competitive dynamics. And so along the pricing front, Again, we've been pleasantly surprised at how quickly that's returned to pre-hard market levels. What we do expect going forward is that as more carriers come back in, pricing's going to go up, right? As some of the states like California and New York, New Jersey kind of come back online, again, average pricing across our network is going to go up. But I think those increases going forward are going to be a bit more measured than the sharp increase that we've seen here today. Michael, does that give you the color that you were looking for?

It does, Steve. Thank you. That was a complete answer, so I'll defer to the next caller.

Thanks so much. Thanks, Michael. Our next question comes from the line of Mike Zaremski with BMO Capital Markets.

Please go ahead.

Thanks. Good afternoon. I guess my only follow-up question question to that good question and answer is just should we be cognizant or maybe you can remind us if there's some seasonality we should be thinking about it. Clearly you gave us 2Q guide. I believe historically there's been seasonality around tax refund season. Maybe that's obviously that would be encapsulated in the 2Q guide if that is But anything on the seasonality front, we should keep in mind. Yeah, and Steve, do you want me to take this one? Yeah, go ahead, Pat. Perfect. Yeah, so Mike, thanks for the question. And I would say that, you know, I think our two main verticals have different seasonality trends. And so I would say in P&C, in a typical year, you know, Q1 and Q3 tend to be the biggest. for consumer shopping. Q2 tends to be a little bit below those, and then Q4 tends to be a bit lower than that. And I think we've given the guidance in the past that in the typical year, we would expect Q1 to be 15% to 25% bigger than Q4. So I think that some of the guidance we're giving for Q2 you know, shows a trend that's kind of bucking normal seasonality on the PNC side, and we haven't given any guidance, as you pointed out, for Q3 and beyond. On the health vertical, that piece of the business is relatively focused on Q4. So in a typical year, Q4 is about 40% of our business in health. You know, Q1 tends to be the next largest because some of the enrollment period leads over into January, and then Q2, Q3 tend to be, you know, a little bit smaller than Q1. And so hopefully that kind of gives you the view of, you know, what typical seasonality looks like. And, you know, I would say just as in the hard market downturn we had, you know, some of the seasonality was a bit hard to tease out of the numbers, you know, wouldn't doubt that, you know, it could be hard to tease out as the business recovers as well.

Okay.

Got it. Yep. That is helpful.

And I guess, um,

You know, it's been, you guys have, you know, it's been like maybe you've done a good job. I know it's probably tough with the expense cuts in recent years. You know, directionally as the market stabilizes or, you know, gets a lot better, are you guys going to be kind of cautious at first in kind of making sure that you know, the revenues are there before kind of reinvesting? Or are you guys, right, you know, have a good enough line of sight that, you know, we should just be thinking you guys are going to go back to kind of, you know, doing what you, you know, you have always done in terms of how to reinvest when we think about margins? Yeah. And, you know, Mike, I would say that, you know, I think, you know, efficiency is in our DNA as a company. And, you know, as a bootstrap company, it's been profitable since, you know, at the very beginning. And we take that very, very seriously. And so I think we've managed pretty well through the hard market. We're going to be seeing a bit of investment over the course of this year. And I would say that some of that is going to be capacity and some of that is going to be in kind of core tech product analytics. But our guidance for the year is on limited dollar overhead growth for the full year of 24 as compared to 23. And I think we've indicated Q2 should be up 500,000 versus Q1 and would expect probably a bit of increase in Q3 relative to Q2 and Q4 relative to Q3 as we start to hopefully reinvest as we gain more confidence. And, Peck, as a last follow-up, is there any way you could size up by level, like what percentage of your expense base is fixed versus variable? That's not something we disclose, Mike. The one thing I would say is that the vast majority of our headcount is included in the operating expenses category, and so we would, you know, deem it to be fixed or semi, you know, kind of semi-fixed. Obviously, there are some roles in there that, you know, probably are variable at some point, which is, you know, hey, if you've got, you know, a bunch more business happening, do you need another account manager or something like that? But, you know, I'd say that the vast majority of our headcount, I would deem, is being fixed.

Thank you.

Our next question comes from the line of Corey Carpenter with J.P. Morgan. Please go ahead.

Thank you. Steve, could you just give us a sense of how close the Wave 1 carrier is back to normal, fully normalized spending levels? And then if we think of, I'll call them the Wave 2 or Wave 3 carriers, how much are they contributing? How material is that to 1Q? And how do you expect them to ramp into 2Q? Thank you.

Yeah. So, Corey, if I heard your question correctly, I think you're asking about, I think, the small number of carriers who right now are getting, you know, close to normal levels. And I think I just answered your question by saying that. I think a small number of carriers who've achieved great adequacy are really starting to reinvest in growth, are actually getting close to normal levels. And so we've been, again, surprised by that very pleasantly. So again, I think that's really attributable to the fact that there's been three years of muted growth investments and the industry is really ready to start reinvesting in growth once each of the carriers in the industry achieve rate adequacy. In terms of color into what that next wave looks like, I mean, we're certainly engaged in positive discussions with all of the other carriers. I think that You know, one thing that we're seeing that's a little bit different than the last hard market cycle is just the sheer number of other carriers, right, who typically haven't been big players within the online direct-to-consumer space and just how far advanced they are versus when we emerged from the last hard market. And what I mean by that is just in terms of the level of technical integrations that we have with them. their understanding of how to measure expected lifetime value, how to match that to media costs to achieve target return on ad spend, the value of programs to, you know, gain additional monetization from visitors like our carrier publishing program, and the strong adoption we got of that program during the hard market period. And even with the personnel, that are within the marketing departments of a lot of these carriers and just the level of sophistication they have. And so, you know, the timing of the second tier or the next wave of carriers to come on I think really will be dictated by how quickly they achieve rate adequacy. And I think, you know, you and I have the same access to that data. Again, I'm not going to go out and say that they're going to return ahead of getting profitability where they need to be. It was a tough cycle. But when they come back, really what we're excited about is just how many more carriers actually in a good place to really scale their spend with us. And I think that really bodes well for this vertical for us over the next couple of years, again, of what we are expecting to be sort of the opposite of the hard market cycle, which is the soft market cycle, where a number of carriers are really aggressively spending in growth and in marketing in order to gain market share. And we're excited about working with just a growing number of carrier partners to really realize and help them realize their growth objectives.

Great. Thank you very much. Our next question comes from the line of Tony McJoy with KBW.

Please go ahead.

Hey, good afternoon. Thanks for taking my questions. With With so much, you know, auto consumer shopping going on, you mentioned that, you know, carriers are certainly thinking pretty hard about lifetime values of customers. Can you talk about, you know, some of the advantages that Media Alpha has over its competitors in terms of helping carriers, you know, evaluate this really important input as carriers are looking to kind of seek out new customers? Basically, just, you know, what is the value proposition that Media Alpha goes to market to its carriers?

Sure. I think first is the measurability. All the media in our marketplace is performance media. And so it's expected to and it's tied back to an actual sale. And so at the end of the day, every dollar spent in our marketplace is fully accountable and, again, tied back to a policy sale to justify a media pricing. And so in addition to being a performance-based marketplace, Right. You know, it's really the scale of our marketplace, because in terms of carrier spend and our ability to support that as a marketplace, you know, the carrier spend here is oftentimes two to three times that of any other marketplace. And that additional data really allows the carriers to get a much better view into the expected lifetime value, because there's just so much data out there for every consumer segment that they're targeting. enables them to get a much more accurate bearing on the estimated lifetime value of all the customers that they're acquiring in our channel, which then allows them to have a much better ROI or return on ad spend, again, across 300 to 400 publishers within our marketplace. And in a time like this when advertisers are really looking to scale up, right, The granularity that's really enabled that massive scale and transparency that we have in our marketplace is really what's going to enable carriers to scale up while keeping their efficiencies at target level.

Got it. Thanks.

And then just a second question here. From your perspective, have you seen a lot of unbundling of customers in terms of looking to separate home and auto? And kind of how has that impacted what carriers are kind of willing to bid for customers who are looking to acquire?

Yeah, I mean, I think that that's certainly something that a lot of people are talking about, the dynamic in the marketplace, just because both auto and home have had its own issues in terms of dislocated markets and large pricing increases. And so I certainly believe that that is happening in the marketplace. We don't really have visibility into that. You know, our marketplace is predominantly auto and home is a smaller part of our marketplace. But what we are seeing is increased demand for home that I think is reflected or resulting in part from some of the issues that the carriers may be having with retaining some of their bundle customers.

Makes sense. Thanks.

Our next question comes from the line of Ben Hendrix with RBC Capital Market. Please, go ahead.

Great. Thanks, guys. Congratulations on the quarter. Maybe a couple of quick ones here. First, just if you could follow up on this opportunistic partner spend in Medicare. Can you remind us kind of the nature of that arrangement, kind of what you saw in terms of magnitude this quarter, and how should we think about that going forward?

Yeah, and Ben, this is Pat. So, you know, I would say that on the Medicare side, there were a couple of carriers that, you know, kind of in late February and March unlocked some spend with us. And, you know, I'd say that presumably they liked what they saw in terms of market opportunity and returns. And so they, you know, spent into that. And, you know, the feedback from them was generally positive on, you know, they felt like they got a good return on that spend. The thing I would say is that, you know, kind of given the size of our health vertical in Q1 and, you know, the spend and kind of the growth outperformance we had relative to expectations, like it wasn't that much spend. It just ended up driving, you know, 6, 8, 10 percentage point B versus expectations. But, you know, clearly positive from our perspective.

Gotcha.

And just also, you know, we saw a suboptimal rate notice for Medicare Advantage next year. We see some of the MA leaders, Humana and CBS, talking about protecting margins, curtailing benefits for next year. It seems like the shopping setup is just getting incrementally better. Just want to see kind of if you agree in how you see the, you know, the transaction value opportunity shaping up for OEP this year.

Yeah. And, you know, I would say that, you know, I think you did a, you had a nice summary of a lot of the market forces that have been at play. And I think, you know, one of the things we've seen over time with, you know, both Medicare and our under 65 business is that, you know, regulatory and, you know, market shifts, you know, can have an impact on the business, you know, say over the longterm, totally confident that the industry will successfully adapt to whatever, whatever changes come, you know, near term, you know, maybe hiccups, maybe positive surprises, you know, we'll kind of see on that. And, you know, I would say that, you know, we're excited by the long-term opportunity. You know, we're hearing, you know, decent things from our advertising partners and on the publishing side. And I think we're, you know, we're, we're feeling okay about Q2 and I think we'll provide more guidance as we get closer to the time and get a little bit more clarity on exactly what folks are thinking. But, you know, we'll, we'll, we'll see how things shape up and, We will, as always, be ready to do the best we can and react to whatever may come our way.

Thank you very much.

There's a follow-up question from Mike Zaramski with BMO Capital Markets. Please, your line is now open.

Thanks for fitting me in. Just one quick follow-up, and I think you might have used a bit of this out. Thinking on the property and casualty insurance segment, I believe if we go back prior to the industry's profitability woes, that the revenue was very concentrated with a smaller number of carriers in terms of the largest carrier. If we think about the first half of 2024, Is it, and I believe it defragmented after that, but maybe I'm wrong. When we think about first half 24, is it still very, is it back to like being very concentrated and you expect it to deconcentrate or maybe you could just unpack that a little bit?

Yeah, Mike, I think you said it exactly right. I think because we're in the early part of the recovery where there's still a small number of carriers who are, you know, back to or something close to normal levels of spend, you're going to see more concentration in our PNC marketplace. Again, add more carriers, achieve rate adequacy, you know, start to make growth investments again. I think you're going to see, you know, increasing diversity in demand in our PNC marketplace. And I think coming out of this hard market, as I mentioned before, again, I think we have you know, a stable of additional carriers that we're working with, who I think, again, we feel are really poised to really, you know, embrace this channel, you know, in this next growth cycle. And so I think we're going to expect to see, I think, additional, I guess you said fragmentation in demand or diversification in demand as the soft market really starts to gain traction.

Okay. Loud and clear. Thank you. Thanks, Mike. It seems that there are no further questions at this time, and this concludes today's conference call.