MediaAlpha, Inc.

Thank you for standing by and good day, everyone. My name is RG and I will be your conference operator today. At this time, I would like to welcome everyone to the Media Alpha Inc. fourth quarter and full year of 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, press star one again. Thank you. I would now like to turn the call over to Alex Aloia. I'd like to turn the call over to Alex Aloia. Please go ahead.

Thanks, R.G. Good afternoon, and thank you for joining us.

With me are co-founder and CEO Steve Yee and CFO Pat Thomson. On today's call, we'll make forward-looking statements relating to our business and outlook for future financial results, including our financial guidance for the first quarter of 2025. These forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially. Please refer to our SEC filings, including our annual report on Form 10-K and quarterly reports on Form 10-Q for a fuller explanation of those risks and uncertainties and the limits applicable to forward-looking statements. All the forward-looking statements we make on this call reflect our assumptions and beliefs as of today, and we disclaim any obligation to update such statements except as required by law. Today's discussion will include non-GAAP financial measures which are not a substitute for GAAP results. Reconciliations of these non-GAAP financial measures to the corresponding GAAP measures can be found in our press release and shareholder letter issued today. which are available on the investor relations section of our website.

I'll now turn the call over to Steve. Hey, thanks, Alex. Hi, everyone. Thank you for joining us.

Our 2024 financial results were outstanding. Emerging from the most difficult auto insurance market in decades, our transaction value grew by more than 150%, and our adjusted EBITDA grew by more than 200% year over year. We ended 2024 on a high note, delivering record fourth quarter results across all of our key performance metrics, driven by strength in our P&C insurance vertical. We believe the auto insurance advertising market is well positioned for sustained growth as carrier financial results continue to improve and competition for market share increases. Over the past five years, we've more than tripled our P&C transaction value and gained significant market share due to attractive secular trends and strong executions. These secular growth drivers remain in place, and we expect to continue to outgrow the market as we enable superior outcomes for our partners. In our health insurance vertical, our fourth quarter results were impacted by ongoing headwinds in Medicare Advantage and some softening in under-65 demand. While we expect near-term pressures in health, it's important to note that our long-term growth opportunity in this vertical is the Medicare Advantage markets. which is a several hundred billion dollar industry at a nascent stage of online advertising adoption. We have a strong market position, including partnerships with seven of the top ten Medicare Advantage carriers, and we expect the challenges currently facing this industry to be resolved over time. As you may recall, last quarter I discussed the TCPA one-to-one consent rules, which were scheduled to take effect at the end of January. Before they were implemented, a federal appellate court determined that they exceeded the FCC's authority. We do not expect revised rules to be implemented in the foreseeable future. To the extent they are, we would expect minimal impact as only 7% of our 2024 transaction value was from leads. As we previously shared, on October 30th, we received a draft complaint and initial settlement demand from the Federal Trade Commission related primarily to the operation of our under-65 health insurance business. We take compliance very seriously and strongly disagree with the FTC's allegations, and we believe we have meritorious defenses. At the same time, we are actively engaged in discussions with the FTC staff in an effort to reach a mutually acceptable resolution. If we reach a resolution, we'll update investors. Otherwise, we will continue to update our disclosures on a quarter-by-quarter basis. With that, I'll hand it over to Pat for a deeper dive into our fourth quarter performance and first quarter guidance. Thanks, Steve.

Our fourth quarter results exceeded the high end of our guidance ranges across all metrics, including record transaction value and adjusted EBITDA of $499.2 million and $36.7 million, respectively. PMC transaction value was up sequentially in line with expectations and above normal seasonality, driven by higher year-over-year pricing and volumes as investment in our marketplace continued to scale. Transaction value in our health vertical was down 8% year over year, slightly below our expectations, as we saw softening in under 65, as well as the expected headwinds in Medicare Advantage. For 2024, our health vertical accounted for $270 million of transaction value, or 18% of the total, at a 14% take rate. Within health, Under 65 accounted for approximately two-thirds of the transaction value at a slightly higher take rate. Our Q4 adjusted EBITDA included $9 million of add-backs related to the FTC matter. These consisted of $2 million of legal expenses along with a $7 million reserve recorded in accordance with U.S. GAAP requirements. Inclusive of these add-backs, Q4 adjusted EBITDA increased $24 million year-over-year representing 189% growth. Looking forward to Q1, we expect P&C transaction value levels to grow approximately 170% year-over-year, representing a high single-digit sequential decline. To date, we have seen a moderation in pricing from Q4 levels, partially offset by the typical seasonal volume uplift, and we expect these trends to continue for the remainder of the quarter. In our health vertical, we expect transaction value to decline by a high teens percentage year over year, as conditions in under 65 have continued to soften in Q1. As Steve mentioned, we see our long-term growth opportunity in this vertical in Medicare Advantage. Moving to our consolidated financial guidance, we expect Q1 transaction value to be between $415 million and $440 million, a year-over-year increase of 95% at the midpoint. We expect revenue to be between $225 million and $245 million, a year-over-year increase of 86% at the midpoint. We expect adjusted EBITDA to be between $24.5 million and $26.5 million, a year-over-year increase of 77% at the midpoint. We expect overhead to increase sequentially by approximately $500,000 to $1 million as we continue to selectively add headcount to support and drive growth. Turning to the balance sheet, we've made solid progress in deleveraging, ending the quarter with $43 million of cash and net debt to 2024 adjusted EBITDA of less than 1.3 times. Moving forward, we expect to convert the significant portion of adjusted EBITDA into unlevered free cash flow due to the operating efficiencies in our business. including minimal capital expenditures and low working capital needs.

With that, operator, we are ready for the first question.

This time, I would like to remind everyone in order to ask a question, press star then the number one on your telephone keypad. We will pause for just a moment to compile the Q&A roster. Your first question comes from the line of Michael Graham from Canaccord. Please go ahead.

Thanks and congrats on the strong business momentum. I know there will be lots of questions about that. I wanted to actually ask on the FTC situation if I could please and just, you know, when you filed your 10-Q last quarter, you had said that the demand settlement, the settlement demand exceeded your, liquidity, you know, your available liquidity, and then I see that you sort of updated us a little bit here, and you have a $7 million accrual. So just looking for a little bit of color, if we could ask for it on, you know, how you see this process unfolding, to the extent you can comment, and specifically why $7 million was the right number for an accrual. Thank you.

Hey, Michael. Yeah, I mean, you know, as I mentioned in my prepared remarks, I mean, we're in ongoing discussions with the FTC staff, and so it's hard for us to really comment, you know, much beyond what we've, you know, disclosed in our filings as well as our prepared remarks. You know, certainly I think what we can tell you is that, you know, when we reach resolution of this matter, we'll certainly update in vectors. You know, otherwise we'll just have to limit our disclosures to a quarterly basis, you know, as this FTC settlement discussions progress. I'll turn it over to Pat to address the questions about the $7 million. Great.

Thanks, Steve. I appreciate the question, Michael. So, you know, on the $7 million for the reserve amount, we calculated this per U.S. GAAP, specifically under ASC 450, which is contingent liability accounting. And effectively, to book any sort of a reserve there, two criteria must be met, which is that a loss is probable and estimable. And we met those criteria. And I would say on the estimability side, the estimate corresponds to the lower end of the range of reasonably estimated losses on our side. And so I'll put the usual caveat in, which is that number is obviously subject to change in the future based on us getting additional information, but that's what we booked for the quarter ended 1231.

Okay, that's helpful context. Thank you both. Thanks, Michael.

Your next question comes from the line of Corey Carpenter from JP Morgan.

Please go ahead.

Hey, good afternoon. Thanks for the question. I wanted to ask about the P&C comments you made around pricing, moderating in 4Q and offsetting seasonality. Could you just expand a bit on what you're seeing in the P&C market this year? And I know you're not giving a guide for 2025, but just kind of how we should maybe use that as a framework for kind of growth going forward and maybe if we kind of have a more complete recovery to date. Thank you.

Yeah, sure. Hey, Corey. Yeah, I mean, I think we're extremely bullish about, you know, what 2025 is going to look like for our P&C vertical. I mean, I think Really, you don't need to look much further than just the profitability numbers that you're seeing from the carriers. They finished the year, or 2024, very strong, and some of the earlier reports that you're seeing in January look outstanding. And so, ultimately, we think that profitability is going to fuel a lot more competition in our marketplace going forward for 2025 and beyond. I think, you know, one thing to note is that now that a lot of the rate actions are starting to slow down, right, because carriers have achieved rate adequacy. I think what you're going to see is additional growth pressure because pricing increases will no longer fuel premium growth. And so I think what you're going to see is a lot of carriers who are slow to jump back into our marketplace and invest in customer acquisition spending really having to do so because they're going to have to now grow by acquiring new customers and new policies and not just rely on on rate actions that they've been taking for the better part of three years. Consumer shopping, as you've heard probably, has remained at elevated levels because of all the rate taking over the past three years. And so from that front, I think it looks good. And so all of those three things really put together, I think, bode well for a lot more competition in our marketplace, particularly within the personal auto space for this year and beyond. Now, thinking about what happened with pricing in Q4 to Q1, I think the dynamics here are really growth market dynamics that we haven't seen in a while. And so what you saw was a lot of carriers having very good 2024s and having essentially locked in their profitability targets for the year relatively early. And so I think what you saw in Q4 was a lot of carriers leaning into their most scalable and highest quality channels, right? to invest in customer acquisition and really showed a willingness to run a little bit hot during the quarter, you know, again, because they had the strong results locked in and they wanted to take advantage of what were unseasonably high consumer shopping trends in Q4. And now that we're in Q1 and it's the new year with new budgets and combined ratios are typically set on a calendar year or annual basis, I think what you're seeing in Q1 is a little bit more conservatism just because inherently they don't know what that year is going to bring. Again, the early results look outstanding. And what we expect to see, as we've seen in the past, is really the momentum continuing to build as the year goes on for all the dynamics I mentioned earlier in this answer.

Great. Thank you. That's helpful. Thanks, Corey.

You're welcome. Your next question comes from the line of Eric Sheridan from Goldman Sachs. Please go ahead.

Thanks so much for taking the question. Maybe two if I can. In terms of moving beyond the P&C category, can you update us on some of your key initiatives to broaden out that appeal for the platform to a wide array of partners? And then the second part of the question would be, when you think about 2025 as a whole, what would you identify as some of the key strategic investments you think need to make in either platform or product that are driving elements that we should be keeping in mind when you think about elements of incremental operating leverage and also driving growth in 2025? Thanks so much.

Yeah, sure.

You know, when we think about really our biggest growth opportunities, I mean, you know, certainly we continue to believe that P&C has a tremendous amount of growth still left in it. And then, you know, and then we just have to look at Medicare for what is a half a trillion dollar industry. which is in the very, very early innings of going direct to consumer and has really yet to scratch the surface for online advertising. And the fact that Medicare Advantage has over 50% market share with seniors, that we have partnership with seven out of the top Medicare carriers, I mean, I think we have a really strong foundation for growth within Medicare. And so, as we think about other ways to deploy our platform and other businesses to get into, we really can't overlook just how massive the opportunities are within P&C and Medicare. Now, specifically where we're investing, and we're certainly looking at other insurance verticals, such as commercials. you know that we've been investing in our agent business because one of the things that we've been focused on up until now is really working with the direct-to-consumer carriers. And now we'd like to expand those partnerships with agent-based carriers by working directly with their agents. And so we continue to invest there, both on the team and the technology. And then in terms of strategic areas investment, I think like a lot of other companies, we're really focused on data science and bolstering those capabilities to drive greater efficiency for both our publishers to drive higher yield, as well as to drive greater advertising efficiency for our advertisers.

Thank you. Thanks, Eric.

Your next question comes from the line of Tommy McJoy from KBW. Please go ahead.

Hi, it's Jean for Tommy. Can you talk about the trends and the cost to acquire traffic? How does that impact your margin?

Yeah, well, I think that basically, I mean, I think what you're highlighting is one of the differences between our business model and the business model of a lot of our publicly traded comparable companies. in that we don't have a really strong O&O presence, particularly within P&C. And so we're not acquiring or incurring direct customer acquisition costs. We work with a marketplace of hundreds of publishers and allow insurance advertisers to reach consumers shopping on those publisher sites. And so certainly I think what you're seeing in the overall industry as carriers start to reinvest in customer acquisitions It's not just increasing prices and robust budgets in channels like ours, but you're seeing that in upstream channels like Google and display networks as well. Certainly, I think that's affecting some of our publisher partners as well as our carrier partners and their ability to acquire traffic from those other areas. But it really doesn't have that much of an impact on us, particularly on the P&C side, because we don't have a very strong owned and operated business in that area.

Got it. Thanks.

Again, if you need to ask a question, press star 1 on your telephone keypad. Your next question comes from the line of Ben Hendrix from RBC. Please go ahead.

Yeah. Hey, thank you very much. Just appreciate all the comments on the MA Growth Opportunity, but the very near term. Just if you could provide a little more detail on your guidance assumptions for 1Q. Sounds like, if I heard you right, transaction value is expected to decline in the mid-teens maybe versus in 1Q versus an 8% decline in 4Q. Just wanted to get the specifics of kind of what you're seeing in the industry that's driving that lower and if that's kind of moved lower since you initially started seeing headwinds in the senior space. Thanks, John.

Yeah, and Ben, thanks for the question. This is Pat. Our guidance for Q1 is for the health vertical, which is Medicare Advantage and under 65 health to be down in the high teens year over year. And, you know, kind of speaking specifically to, you know, Medicare Advantage, the Medicare Advantage business, I think we, you know, kind of talked about over the back half of last year that we were seeing some headwinds there, and I would say that business was down year over year in Q4. And the headwinds we saw in Q4 are kind of continuing in the Q1. And I would say, you know, the growth rates we're expecting for Medicare, pretty similar between those two quarters. And, you know, where we've seen, you know, kind of the slowdown in our health vertical has been in the under 65 business. And that kind of started in the you know, as we progress through Q4 and it's continued thus far into Q1. And so I would say on the Medicare side, you know, some short-term speed bumps given some of the well-documented challenges that the payers face in that market. But, you know, Steve kind of outlined both in his scripted remarks and in the Q&A. We think the opportunity at Medicare Advantage is pretty vast. It's one we're investing behind and it's one we're excited to unlock in the years to come.

Great. Thanks for the clarification. You're welcome.

That ends our Q&A session, and we appreciate your participation. Ladies and gentlemen, that concludes today's call. Thank you all for joining. You may now disconnect.