SelectQuote, Inc.

Welcome to SelectQuote fourth quarter conference call. All lines will be placed on mute to prevent any background noise. After 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, please press the pound key. It is now my pleasure to introduce Matt Gunther, SelectQuote Investor Relations, Mr. Guthrie, you may begin the conference.

Thank you and good morning, 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. 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 Interim Chief Financial Officer Ryan Clement. Following Tim and Ryan'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?

Good morning, and thank you all for joining us. We're pleased to report a strong fourth quarter relative to our initial expectations, and we are encouraged by the early achievements SelectQuote has made since we outlined our strategic redesign back in fiscal second quarter. Between the operational improvements we're seeing in our core senior business and continued success of SelectRx, there is a lot to be optimistic about for SelectQuote. I'll provide color on each of these strategic initiatives in a minute, But first, let's turn to slide three to review the highlights from our fourth quarter and full year 2022. SelectQuote drove strong operating results relative to our internal forecast in both our core senior business and on a consolidated basis in the fourth quarter. Senior revenue was $98 million, and consolidated revenue totaled $139 million for the quarter. Our net loss for the quarter totaled $105 million, or negative 64 cents per share. Operationally, this was the second consecutive quarter of improving trends in our senior business. Trends that we believe are tied to our initiatives to optimize SelectLoad and drive better returns and more predictable cash flows. For instance, our agent close rates increased 31% compared to a year ago, and our marketing cost per approved policy decreased 35%. Lastly, our SelectRx business finished the quarter above our original expectation of 25,000 members. We feel these results validate the service we provide to consumers and speak to how well SelectRx fits with SelectQuote and the healthcare services continuum. We're pleased with the better close rates, which aided revenue growth. And more importantly, we are seeing green shoots that our customer retention trends are stabilizing and improving. And as mentioned, our results were also driven by continued success and our SelectRx business. Overall, this was the second consecutive quarter of good momentum as we look ahead to 2023. We believe SelectQuote is transforming into a more predictable and efficient company focused on consistent returns instead of pure growth. To that point, as part of our 2023 forecast review, in the fourth quarter we elected to recognize an additional $48.3 million adjustment for certain cohorts. to address potential renewal pressure that could have triggered adjustments in 2023 or 2024. To be clear, the adjustment is not a reflection of recent persistency trends, which we believe have stabilized. And while we're not pleased with another downward revision, we have a high degree of confidence this action has significantly de-risked the potential for further adjustments in the future. Ryan will provide additional color on that point later in our remarks. We believe SLECWD has established a foundation to drive better returns in cash flow with less volatility in our forward financials. With these actions, we have positioned the company and our investors for improving returns in the future. With that, let's turn to slide four and review the pillars of our new strategy and detail the foundation SLECWD has built for the upcoming year. First, as noted, our philosophy on growth has changed significantly. Our forecast for 2023 implies a 35% to 45% pullback in our Medicare Advantage policy production. The market opportunity for a very large and growing population of American seniors would clearly support continued growth, but as we've said, we're committed to policy sales that generate consistent unit economics and cash flow. With our increased emphasis on cash flow, We anticipate our cash EBITDA will be significantly improved and approaching breakeven for fiscal 23. Let's summarize a few of the initiatives in place to drive that goal. First, we've identified a number of opportunities and are targeting the marketing to drive better sales efficiency and policy performance. Similarly, we're confident that our refined approach to our agent population will also improve productivity and customer retention. Specifically, this season our agents will skew more heavily to core tenured staff over flex agents in order to achieve our goal to generate improved returns and cash flow through better agent productivity and marketing efficiency. Second, we have made strides to reduce our operating leverage, which we expect will reduce volatility in our results as well as improve returns. To date, we have identified over $250 million in year-over-year cost reductions including around $40 million in fixed expense. In addition, we believe earlier hiring and training of our agents ahead of next AEP will aid productivity, which in turn would reduce the marketing and operating costs for policy. We're pleased to announce that we've completed hiring our sales agents for AEP in July and are already several weeks into training and onboarding this new class. Similarly, we believe more targeted marketing will also provide cost benefits during the upcoming season. Turning now to LTV, as we've noted repeatedly over the past few quarters, we believe we've taken significant action to reflect the current reality of policyholder persistency in both our legacy cohorts as well as our newly written business. To summarize, modeled LTVs are now down about 30% from the peak, and we've nearly tripled our constraint to 15% over that same period. Additionally, as noted, the tail adjustment we made in the fourth quarter further de-risks future results. Although early, we're quite pleased with how the 2022 cohort is performing relative to LTV expectations. More importantly, we believe the risk of additional cohort tail adjustments has been significantly reduced moving forward. This is important as we build our profitability and candidly reestablish credibility with investors in the coming years. Finally, we continue to be very encouraged by our continued success in healthcare services highlighted by SelectRx. We ended fiscal 2022 with over 25,000 members and are now forecasting a business with revenues exceeding $275 million for fiscal year 2023. This is an impressive ramp for a business acquired with just over $25 million of revenue, a little more than a year ago. There'll be more to share about healthcare services in the quarters and years ahead, but we're very pleased with the validation of our strategy to leverage SelectQuo's unique position in the healthcare ecosystem. And as a reminder, our leverage here stems from the synergy of existing customer acquisition spend and our senior distribution business. We'll share more here over time, but that unique competitive advantage has the potential to yield significant returns for SelectQuote. Best of all, we believe our healthcare services offering seamlessly align with our long-term, trusted two-way relationships with patients, health plans, providers, and most importantly, our shareholders. As we move to slide five, let me highlight three key operating trends in our recent results. First, we've seen encouraging early data from our efforts to improve policyholder persistency. As summarized in the pillars of our strategy, we've made early strides beginning in OEP to refine our marketing with focused targeting and channel optimization. The primary goals here are better persistency trends as well as improved sales and cost efficiency. For instance, as I mentioned, our customer acquisition costs declined 35% year-over-year and our sales conversion improved 31% year-over-year in 4Q, marking the second consecutive quarter of improvement for both metrics. And most importantly, while still early days, the year-over-year comparison of our approved policy persistency bottomed in the third quarter and has since shown consistent improvement. To be clear, we are not declaring victory. and continue to closely monitor these trends to discern the impact of our initiatives. That said, we're encouraged by the retention trends and will pursue incremental improvements as we move into the upcoming AEP season. We've also prepared our agent population much earlier for AEP. As I noted, our AEP recruiting class is now fully hired and in the midst of training and onboarding. We're also doing a good job retaining our highly productive tenured agents, evidenced by an improved year-over-year retention rate. As you recall from our comments in previous quarters, we've historically seen higher levels of productivity and policy retention for tenured core agents compared to newly hired or flex agents. We have conservative expectations, but we believe the combination of a more tenured agent sales force and more targeted marketing on smaller cohort of policies positions us well, demonstrate better policyholder retention and overall returns. Lastly, as we've noted, A lower cost base and continued work to optimize profitability and cash flow should benefit 2023 and the years ahead, while simultaneously reducing volatility in our operating results. I also want to highlight the significant ramp we've seen in our SelectRx membership, as you can see here on slide six. SelectRx offers specialized in-home services to medically complex patients managing multiple chronic conditions. This convenient and coordinated prescription drug delivery has been more than well received. As we exit fiscal 2022 with over 25,000 members, we're highly encouraged about the potential of this business. For context, over 70% of our 25,000 plus SelectRx members were introduced to the business through an MA policy acquired through SelectQuote. Additionally, about 15% of those members originated from another business line's lead generation and referral activity. The bulk of the remaining new SelectRx members came largely from prospects who originally responded to our Medicare plan marketing but did not ultimately buy a Medicare policy from us. In summary, the vast majority of our new SelectRx members came to us without incurring incremental marketing expense directly associated with the promotion of SelectRx. This underscores the power of SelectLoad's ecosystem and why we are uniquely positioned to significantly grow this business with relatively low incremental marketing expense. In future quarters, we plan to share additional detail and disclosure on SelectRx and our healthcare services business. For now, we're excited about both the standalone opportunities and even more excited about the synergy and advantages we see in how healthcare services fits with SelectQuotes positioning as a connector within healthcare more broadly. Lastly, before Ryan speaks to our results, I'd like to reiterate our goals and strategy for fiscal 2023 on slide seven. First, as a baseline, our business model was originally conceived to be an aggregator of significant market share in what remains a substantial and growing market of American seniors. We attacked this market with a scaling population of agents to consume a rising breadth of sales leads. This concept was strategically sound and a stable competitive environment but eroded as competition increased rapidly from other distribution platforms. Fast forward to today, Selectwood has worked incredibly hard over the past six to nine months to pivot our model to ensure attractive policy level returns and visibility in those returns. We're also focused on cash flow and lowering volatility in our financials. In parallel, we've continued to advance the success of SelectRx and believe there is significant potential for our competitive positioning as a combined distribution and healthcare services platform to drive profitable growth and cash flow for shareholders in the years ahead. Again, it is our responsibility to earn that credibility with you all through execution and results, but standing where we are today, we feel confident in our foundation and strategy to achieve that goal. With that, let me turn the call to Ryan.