SelectQuote, Inc.

Welcome to SelectCote's fourth quarter earnings conference 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 the first time, simply press star followed by the number one on your telephone keypad. If you would like to redraw your question, press the pound key. It is now my pleasure to introduce Matt Gunter, SelectCote Investor Relations. Mr. Gunter, you may begin the conference.

Thank you, and good afternoon, everyone. Welcome to SelectQuote's fiscal fourth quarter earnings call. Before we begin our call, I would like to mention that on our website, we have provided a slide presentation to help guide our discussion this afternoon. After today's call, a replay will also be available on our website. Joining me from the company, I have our Chief Executive Officer, Tim Danker, and Chief Financial Officer, Raf Sadoon. Following Tim and Raf's comments today, we will have a question and answer session. In order to allow everyone the opportunity to participate, we do ask that you limit yourself to one question and one follow-up at a time, and then fall back into the queue for any additional questions. As referenced on slide two, during this call we will be discussing some non-GAAP financial measures. The most directly comparable GAAP financial measures and a reconciliation of the differences between the GAAP and non-GAAP financial measures are available in our earnings release and investor presentation on our website. And finally, a reminder that certain statements made today may be forward-looking statements. These statements are made based upon management's current expectations and beliefs concerning future events impacting the company and therefore involve a number of uncertainties and risks. including but not limited to those described in our earnings release, annual report on Form 10-K, and other filings with the SEC. Therefore, the actual results of operations or financial condition of the company could differ materially from those expressed or implied in our forward-looking statements. And with that, I'd like to turn the call over to our Chief Executive Officer, Tim Danker. Tim?

Thanks, Matt, and thank you to everyone joining on the call. We hope you've all had a good summer. On today's call, we will review our record fiscal 2021 and provide our thoughts on the upcoming year, including the growth we see in our core business and the exciting potential we see in SelectRx. Additionally, we will share color and disclosure on the trends and returns we are seeing in our senior segment. So let's get started on slide three with review of our full year 2021. Sleco generated full-year 2021 consolidated revenues of $938 million, up 76% year-over-year, and adjusted EBITDA of $228 million, up 48% over last year. The strong growth is driven by our core senior business, which ended the fiscal year with revenues of $729 million, up 101%, and adjusted EBITDA of $244 million, up 57%. Our consolidated net income totaled $131 million, or 79 cents per share, which is up $50 million compared to last year. RAF will detail our guidance for full year 2022 in a minute, but we expect continued strength in our core senior business, including a strong year-end run rate for our SelectRx business, which is just the start of the significant return potential we see in our broader population health strategy. Additionally, we will provide some detail and context on persistency impacts in our recent cohorts and some measures we are taking in 2022 to mitigate tail adjustment in future periods. Overall, 2021 was a landmark year for SelectVote, both in terms of aggregate revenue and EBITDA growth and because of the unique opportunity we've created through population health. Let's start our review with our full-year consolidated results on slide four. We grew revenues by 76% or $406 million and have now achieved a compound annual growth rate of 67% over the last two years. Best of all, we still see ample runway for continued growth. Turning to EBITDA, we grew by $74 million over the past year at a margin of 24%. As we have outlined since our IPO, our focus is on EBITDA dollar growth over margins in the near term. As we'll discuss in a moment, our 2022 outlook reflects our continued growth, including our investments in population health, which we expect to scale and add EBITDA as we exit the fiscal year. If we turn to slide five, let me give a quick overview of a few of the primary KPIs for our strong year in 2021. As mentioned, we grew both revenue and EBITDA significantly on top of a strong year in 2020. In our senior business, we grew both submitted and approved Medicare Advantage policies by over 100% and maintained strong unit economics with a 3X revenue-to-CAC ratio. We operated in 2021 with over 1,100 average productive agents, which is up 75% over last year and is all the more impressive given our ability to navigate the pandemic and a remote work environment. As we've noted in previous calls, our ability to execute remotely is highly encouraging and opens new hiring options for our rapidly expanding platform. In fact, as we look ahead to 2022, we are pleased with our hiring progress to date, which should drive another strong year of growth. Lastly, our MALTVs in the senior segment ended the year at $1,260, which is down 2% compared to a year ago. As mentioned earlier, we're going to provide some additional context, on recent persistency and lapse trends we're seeing with certain cohorts, but more importantly, we're also going to detail the strong returns we are generating in those same cohorts. On that point, let's turn to slide six. As many of you know, we conducted a study with investors and our analysts to determine what would be most helpful in analyzing our results. The message back was loud and clear. that being able to see actual cash collection trends relative to our modeled LTV revenues is important to tracking our success. As a result, we have produced the views on this page to help give context at the cohort level, and we plan to update these for you on a periodic basis. In each of these charts, we are showing a series of lines that represents cash collection curves over time and the expected IRRs. The blue line represents our original LTV at booking of the cohort. The orange line represents the current trend, including the tail adjustment taken in 2021. And the gray line represents potential tail adjustments in 2022 that Raf will detail in a minute. Ultimately, we hope this disclosure is helpful and provides insight and context to trends in the business and what they mean for terms. Before I describe the trends, let me note that not every cohort is the same, and the drivers of actual cash collection include a wide range of factors, such as persistency, carrier mix, plan options, commission structures, and things like AEP, OEP, and any SEPs. Each of these factors contribute to persistency throughout the life of a policy. So with that, let me give some detail around each of our last four cohorts as shown on this page. If we start on the top left and move clockwise, you can see that our 2017 cohort is performing above our original model, and our 2018 cohort is largely performing in line with our model. Both cohorts are currently projected to earn IRRs in excess of 20%, and best yet, both have already realized IRRs of around 30% and 10%, respectively. At the bottom left of the page, let me describe our 2019 cohort, which we have discussed this year. The larger tail adjustment taken in 2021 was primarily driven by lower-than-expected persistency tied to the introduction of OEP. As you can see, our original IRR expectation for the 2019 cohort was 45%, and as a result of our adjustments to date, the expected IRR is now trending to 39%. Additionally, we would note that the current realized IRR in the cohort is already 13%. Now if we turn to 2020. We are seeing the same types of pressure impact this cohort, but to date we have had enough constraint to offset this pressure. That said, we have utilized a significant portion of our constraint due to lower than modeled persistency. As a result, our fiscal 22 guidance contemplates the risk of potential cohort tail adjustments, which would impact the cohort as depicted by the gray line on this chart. Regarding the 2020 cohort, lower persistency was driven primarily by the introduction of OEP. Again, for context, our adjusted trend for 2020, assuming a tail adjustment next year, would still generate an IRR of 24% compared to our original 28% expectation. So if we turn to slide 7, let me talk about what these tail adjustments mean relative to our view of the business and our strategy going forward. Put bluntly, our strategy is largely unchanged. Markets are fluid and have been throughout SLECWA's 36-year history as a company. We have built a model that embraces change and adapts rapidly. Changing markets are not a new challenge for us, and we remain confident in our execution against the large and long tail of opportunity. In fact, we view 2021 as a landmark success for the company, and as Raphael outlined, we see another strong year of growth ahead in fiscal 2022. So why are we so confident? The short answer is that despite a fluid market, the returns we are generating are extremely attractive. To be crystal clear, we model our LTV revenues based upon information from our most recent cohorts and apply those trends to our upcoming season. It is a formulaic process, but the fact is we also face a fluid market and experience variability and persistency early in cohorts from year to year based on the factors like the ones I discussed just a second ago. As we see it, our responsibility as shareholders is twofold as we grow in this dynamic market. First, it is our job to provide detail and context on trends driving our returns, which is our intention with the new disclosure on the previous page. Additionally, as you can see on the table here, we are showing a range of return outcomes based on different persistency scenarios. On the leftmost of the table, we're showing scenarios with cumulative outperformance or shortfalls in persistency compared to our original LTV assumption for our 2021 cohort. On the right side, we're showing the resulting impact on IRR and revenue. To use the bottom case in the table, we could experience a 10% miss in persistency in every year of renewal for the cohort compared to our original model and still generate an IRR in the high teens. For reference, a 10% shortfall in persistency every year is a very stressed scenario for this cohort, especially as it already assumes lower persistency and the fact that we generally see lower variability in the middle and later years of a cohort. As I noted before, this context has been difficult to discern from our results in the past, and we are committed to sharing more detail about our cohort performance and returns going forward. So on to our second responsibility to shareholders, which is to invest your capital at attractive returns. As you saw on the previous page, Selecto's cohort IRRs are highly attractive and compare very favorably versus major investment classes. These high returns paired with a large and long-tailed addressable market are what have us so excited about the opportunity, especially given the strategic advantages and differentiated approach we take to the business. To that point, let me shift gears and talk about another engine of growth for SelectQuote and population health on slide eight. As a reminder, we form population health because of the unique position within the healthcare landscape as we market and speak to an important and growing population of American seniors every day. SUCWIT has the opportunity to leverage our connectivity and marketing efforts with these customers to provide much-needed services, such as high-touch medication management pharmacy program, health risk assessments, and care coordination services with leading healthcare providers, including senior-focused primary care, behavioral, and home-based care. Additionally, we are aligned in this effort with carriers and believe through data we are helping carriers make a significant impact on avoidable medical costs. There is a significant revenue and return opportunity for SelectQuote with attractive cash flow dynamics through population health. And most importantly, our efforts in population health serve to improve the lives of customers and also benefit our healthcare insurance partners. Here on this slide, we want to provide an update on the strong early uptake and momentum we are seeing in population health initiatives and offerings to date. When we discuss population health membership with consumers, about 80% are choosing to opt-in, representing around 1,200 opt-ins each day. On the same consumers, we are conducting health risk assessments for over 85%, which provide our carrier partners with valuable patient information to help them better coordinate care. Turning to the right side of the page, for the SelectRx business, we have seen a three times increase in the number of daily enrollments since we acquired the platform. Our opt-in rate for target customers is currently around 70%. Importantly, around three-quarters of all the customers we engage with are currently taking eight or more monthly prescriptions. This data illustrates a clear need and opportunity to impact health outcomes for seniors who need it most. The takeaway here is that there is real value in what we can offer our base of senior customers, and the early results are encouraging. Longer term, it is clear to us that the secular shift in outcome-based healthcare is happening, and SelectRx, through population health, will be an increasingly important partner for carriers and providers, given our unique connectivity with the inpatient. On that point, let's turn to slide nine, where I'd like to share our vision of how SelectRx and population health more broadly can impact our unit economics and returns. On the left, you can see the makeup of the revenues we generate for each approved core policy today. Currently, the majority of our revenues are made up of commissions earned through our core Medicare Advantage and Medicare Supplement business. We also have some ancillary product commission revenues and revenues from production bonuses, advertising, and revenues from health risk assessments. On the right, our medium-term expectation is that rising adoption of our SelectRx and other population health initiatives have the potential to increase our revenue per approved core policy to approximately $2,000, which is more than a $500 increase from today. Best of all, the return on our investment for these services should be highly attractive and should improve our future cash flow profile. Additionally, we can drive higher revenue dollars on the same marketing spend, which should significantly increase the IRRs that we showed you earlier while helping consumers navigate their complex healthcare journeys. And it's important to remember that with our diversified lines of business and the significant customer demographic overlap between lines of business like senior and final expense, our focus on cross-selling continues to increase. Going forward, we will provide additional visibility into these global customer economics, as that's increasingly how we view and manage our business. Lastly, while not included in this illustration, SelectRx and Population Health make SelectQuote a more important partner and strengthens our tie to both customers and carriers. We believe these initiatives should make a meaningful impact on our customer retention for the simple reason that we are improving their experience and health outcomes. We can do this given our unique ability to match and maximize the utilization of their policies and plan benefits. Better service and experience drives better outcomes and better retention. It's a simple concept, but it takes our level of data and connectivity to execute. With that, let me turn the call over to Raf to review our four key results, as well as detail our outlook for 2022, including our LTV assumptions, as well as our expectations for SelectRx. Raf. Raf.