SelectQuote, Inc.

Welcome to SelectQuote second 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 this time, simply press the star followed by the number one on your telephone keypad. If you would like to withdraw your question, press the pound key. It is now a pleasure to introduce Mr. Matt Gunter, SelectQuote Investor Relations. Mr. Gunter, you may begin the conference.

Thank you, and good afternoon, everyone. Welcome to SelectQuotes Fiscal Second 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 Sadun. 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. As you saw in our press release, SelectWode had a disappointing quarter compared to our expectations. We will use the beginning of this call to discuss the challenges we face this AEP and how we are evolving our strategy going forward. Before we begin, though, I'd like to be clear to shareholders that we view these results as unacceptable. Unacceptable to you, certainly, but also unacceptable compared to what we know is achievable within the SLECWD organization and our differentiated position within the shifting healthcare system. With that, let's begin on slide three. SLECWD's consolidated revenue for the quarter totaled 195 million, and adjusted EBITDA finished at negative 163 million. Revenues decreased 45% compared to a year ago, and adjusted EBITDA declined significantly, driven by a number of unexpected factors this AEP season, which we will detail in a minute. Beyond the challenges with an AEP in the quarter, we also recognized a cohort tail adjustment of $145 million in the quarter, which includes the potential risk previously disclosed. This earlier and larger adjustment reflects lower persistency, primarily from higher entry-year lapse rates we experienced during the calendar year 2021. Bottom line, these results were materially below our expectations, and given the significant weighting and importance of the second quarter, Our full year results will come in below our outlook range as well. As you saw in our press release, our new outlook range for revenue is $810 million to $850 million, and the range of adjusted EBITDA is negative $235 million to negative $260 million, given the headwinds we've realized to date. Raph will give more details on our outlook for 2022, but clearly this will be a transitional year for our company. To that point, the SelectQuote management team and our board of directors are actively reviewing business strategy, especially within our senior Medicare Advantage distribution business. We will share our initial action plan on this call, but it's important to understand that this review will run through the remainder of the fiscal year and likely into next fiscal year as well. We are committed to getting this right, not just for our Medicare Advantage business, but because of the value we know SelectQuote provides as a unique connector between policyholders and patients, and the healthcare insurers and providers that pay for and provide their care. To that point, our population health initiative and SelectRx in particular have been a bright spot for us. We continue to see strong consumer need and demand for the growing array of healthcare services we coordinate with the population health platform. Consumer interest in our SelectRx pharmacy solution in particular continues to ramp up. To date, we have completed over 40,000 gross customer enrollments, and we are beginning to hit our stride in terms of shipments and recently eclipsed 10,000 active members receiving prescriptions. We know we can address the challenges impacting our senior distribution business and grow our population health business simultaneously, but our highest priority is to deliver value to shareholders based on the meaningful synergy between these businesses and the thousands of senior Americans that our services touch every day. Let's turn to slide four and discuss what happened this season and our senior Medicare distribution business. If we work from left to right, the first headwind began during our preparation for AEP, where we faced a very challenging labor market, as we discussed last quarter. In hiring for AEP, many prospective sales agents verbally accepted our offers that failed to complete the licensing process or took other employment. Filling these positions caused a delay to our hiring goals for the season, which we discussed during our last earnings call. We also indicated our expectation that those delays would impact effectiveness early in AEP, but we expected those agents would eventually achieve close rates more in line with historical flex agent classes. Although close rates did improve over the course of AEP, they did not improve as much as anticipated. Additionally, CMS mandated an industry-wide review of marketing materials immediately prior to the start of AEP, which added delays to some of our marketing programs, and more critically, masked the number of close rate pressures that we experienced early on in the season. We believed at the time that the FlexAgent onboarding delays and the CMS marketing review process were the underlying reasons for our depressed close rates and that both dynamics would ultimately prove temporary in nature. On the right side of the page, this Medicare Advantage season was also unique because of the seeming parity in Medicare Advantage plan features. In prior years, several large carrier partners underwent a multi-year process of building new and richer benefits such as more expansive dental, prescription drug, healthy meal, and wellness programs into their MA plans. These new and exciting plan features created compelling reasons for customers to move into a new MA plan. This year's greater level of parity in plan features across our carrier partners negatively impacted our sales process, which slowed throughput and significantly lowered close rates. In hindsight, the greater parity in plan design ultimately proved to be a larger headwind to close rates and policy production than we initially believed early in AEP. Lastly, we experienced a higher than usual fall off in submitted to approved policies driven by increased shopping behavior among Medicare consumers. Put plainly, in many cases we saw consumers consider a new plan only to remain with their existing plan given the lack of disparity in new features. In sum, The impact was a significant decline in our close rates compared to past seasons. During this AEP season, our average close rate was down more than 20% from last season, which had an even greater detrimental impact on agent productivity. Taking a step back, these headwinds clearly impacted volume, but what might be less apparent is the pressure our model faces on unit profitability with the type of unexpected slowdown we've experienced this season. Put simply, our operating leverage was too high for this unique environment and I'll touch on that as it relates to our strategy in a minute. Before I do, let's turn to slide five and I'll get some context on how each headwind impacted our profitability relative to plan. On the left side of the bridge, we begin with our outlook for consolidated EBITDA and the implied 2Q forecast of approximately 150 million. If we work from left to right again, first you can see the impact of the 145 million cohort tail adjustment recognized this quarter. To be clear, this includes the potential risk of $65 million for a cohort tail adjustment that was included in our previous full year 2022 outlook as part of our fourth quarter estimates. Raph will provide more detail in a minute on the makeup of that adjustment as well as actions we are taking to change our LTV methodology given the shift in environment. Next, as I mentioned, you can see the 20% plus decline in year-over-year AEP close rates accounted for the lion's share of our EBITDA shortfall outside of the tail adjustment. This EBITDA shortfall is a function of two things. First is the unexpected general parity in carrier plan design, which drove lower volumes and limited our throughput, which negatively impacted our top line. The second relates to the significant amount of operating leverage in our Medicare Advantage business. As you know, the AEP and OEP season for Medicare Advantage distribution is a compressed timeline that includes a number of fixed costs for the season. including recruiting, training, agents, and marketing. When the season performs within a normal range, the results and profitability are more than attractive, as we've exhibited over the past few years. The flip side is clearly true, and as a result of this season, we are reviewing what the appropriate balance is between growth and risk, as defined by operating leverage. If we move to the next section of the bridge, you can see the additional impact that we've experienced from senior LTV, primarily driven by lower persistency as well as the impact we've imposed with wider assumptions on our constraint, as well as our first year in renewal provisions. Raf will speak at length to those assumption changes in a minute. And lastly, we encountered some headwinds to other revenue, primarily made up of our auto and home and life divisions. While we were able to save $43 million in expenses, that was not nearly enough to offset the revenue declines and therefore adjusted EBITDA came in significantly below our expectations. Again, clearly not what we expected when we prepared for this season, but we're using this experience in real time to realign our strategy. To that point, please turn to slide six and let me offer our initial high-level assessment of SelectQuote Senior's business model and the direction we need to take it given the shift in environment. At the left, it is clear that many participants in the MA space, including SelectQuote, were organized for rapid growth against an addressable market that remains very large. It remains our view that SLECWT has significant competitive advantages given our data-driven technology and agent-led model. That said, our historical philosophy for growth and operating leverage is not aligned with today's market. To be clear, we believe the market for Medicare Advantage policies is very large and will continue to grow with the aging of America. We plan to benefit from and execute against this strong demographic backdrop for years to come, but we also owe it to our shareholders to mitigate volatility in our results. As I mentioned, we are working hard with our board to review our approach, and we believe our ultimate strategy for the Medicare Advantage business will be to reset our growth philosophy with a stronger focus on repeatable unit operating margins and predictable cash flows within a wide range of market scenarios. Next year, we will likely build a plan that pulls back on submissions year over year to reset the baseline with the intention of growing modestly from there. This will allow us to operate more efficiently with a higher mix of tenured agents and lower flex agent hiring needs, which reduces volatility and lowers cost. It also improves cash flow significantly. While this year's AEP included a number of unexpected headwinds, we need to better plan for risk, and we believe Selectwood has the ability to still grow at an attractive rate while also significantly reducing our operating leverage and downside risk. Moving down the page, as we have discussed in previous quarters, policyholder lapse rates from season to season have also driven volatility in our results. Rafa will discuss the changes we are making to our LTB assumptions to reset expectations here as well. Lastly, SelectQuotes' real value and potential exist beyond just Medicare Advantage. SelectQuotes' value as a connector, facilitator, and intermediary within the shifting healthcare landscape is core to our strategy. If we flip to slide seven, let me provide some initial thoughts on how we expect SelectQuote to shift strategically with the ultimate goal of driving shareholder value through improved margin predictability and cash flow. Beginning at the top of the diagram, as mentioned, we believe SelectQuote can continue to grow the Medicare distribution business in the future, but do so at slower rates after resetting the baseline next year. Most importantly, we believe we can ultimately achieve growth with better cash flow dynamics and less volatility of results. As mentioned, unexpected factors like we saw this season and increasing competition has clearly impacted the risk-reward balance at the very high level of growth the industry has sought in the past year or two. We maintain our conviction that Selectwood has built the industry's best platform to capitalize on this large opportunity, and we are taking appropriate action to ensure that we deliver attractive returns to shareholders in a wide range of market conditions. Moving clockwise down to the right, We believe slower growth will also allow us to reduce the operating leverage and risk in the Medicare Advantage business. Beyond operating leverage, we have identified a number of opportunities to reduce operational risk factors and will continue to do so to improve overall efficiency. At the bottom of the diagram, as I alluded to, the shifting market dynamics and policyholder behavior require us to review our LTV forecasting and moderate appropriately. Raf will give more detail on the changes and drivers here, but as I noted, it is our responsibility to shareholders to mitigate the backward-looking volatility we have experienced in certain cohorts as reflected through tail adjustments. Lastly, Selectwood has the unique opportunity and capability to be much more than a Medicare Advantage distribution platform. To be clear, there is a significant value in the MA business, including as an on-ramp to additional population health services like SelectRx. That said, our ability to capitalize on synergies and the broader healthcare landscape will be at the forefront of our ongoing strategy review. Now, I want to give some brief context about SelectQuote's history on slide eight. First of all, we're clearly shifting our strategy as it relates to our Medicare Advantage business. But I want to be clear that what we are talking about with population health and leveraging our platform to pursue new revenue streams is not new to SelectQuote. Over the past three decades, Selectwood has continually evolved across end markets, but with a common strategy. At our core, Selectwood is strategically built to leverage customer leads and the unique information we capture to offer value-added services while also optimizing revenue per marketing dollar invested. In the company's early days, we successfully leveraged our term life business to add auto and home insurance. More recently, the scale of our Medicare Advantage distribution business allowed for the expansion into our growing final expense product. And now we believe population health is the natural progression of how SelectWord can best leverage our unique assets and customer base to add value. On that concept, let's turn to slide nine and briefly discuss what we believe SelectWord can achieve with our unique set of assets, data, technology, agents, and partners. As we've discussed, we believe our population health initiatives position SelectWord as a critical value creator across each of the important constituents and the healthcare spectrum. As you know, our Medicare Advantage business makes SelectQuote a first point of contact with a growing number of senior Americans each year. From this point of entry, our data-intensive and agent-led model can connect policyholders, patients, healthcare providers, and payers across a wide array of healthcare services. SelectRx and a number of our value-based care initiatives are just the beginning of the broader population health strategy, and we believe SelectQuote has a number of strategic advantages to capitalize on this very large market. And I'd like to be very candid in saying that we provide this longer-term vision to give you a sense of our strategic direction. Based on our recent results, we and the board completely accept that it is our responsibility to shareholders to earn credibility for the strategy through tangible results. To that point, let me conclude my comments on slide 10 and give investors and analysts some insight to what to expect from us in the coming quarters. As I mentioned, our strategic review will continue beyond this fiscal year. What I can tell you today is that SelectQuote currently plans to take the following actions. First, looking ahead to next year's AEP season and in line with our objective to reduce operating risk, we plan to hire the majority of our agent class for next AEP much earlier. Similarly, we expect a reduction in overall agent headcount, including a lower mix of flex agents by next year. Next, we plan to provide regular updates on our SelectRx membership and revenues. As I mentioned earlier, we remain well on pace with our original expectations of 25,000 members by the end of this fiscal year and plan to share more detail on our expectations for the business later in our fiscal year. Third, you can expect to see additional detail from us regarding how we intend to increase visibility to our cash flow and earnings, beginning with the changes we are making to our LTV assumptions. Additionally, we plan to scrutinize our corporate expense structure with an eye to bringing costs in line with our forecasted policy production and revenue in light of our expected reset and the size of our Medicare distribution business. Lastly, as I mentioned on the previous slide, the growth of population health initiatives is a key focus, and we expect we'll be a growing contributor to our revenues and value over time. With that, Raph will now provide more detail on our financial and operational results for the quarter. Raph?