SelectQuote, Inc.

Hello everyone and welcome to SELECT's third 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'd like to ask a question during this time, simply press star followed by one on your telephone keypad. If you'd like to withdraw your question, press star followed by two. It's now my pleasure to introduce Matt Gunter, SelectQuote Investor Relations. Ms. Gunter, you may begin the conference.

Thank you and good morning, everyone. Welcome to SelectQuote's fiscal third 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 Chief Financial Officer, Ryan Clement. Following Tim and Ryan's comments today, we will have a question and answer session. 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, quarterly report on form 10Q for the period ended March 31st, 2023, 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 the call. As you saw in our press release, SelectQuote delivered a strong third quarter and continues to post results that are better than internal forecasts. Management and the board couldn't be more pleased with the execution against the strategic redesign and the continued momentum from AEP into OEP, which is our second highest volume quarter of the year. Better yet, we've driven consistent improvement results over the past five quarters and firmly believe the company is well positioned to produce more predictable, profitable and cash accretive growth in the quarters and years ahead. That all said, the past few weeks have driven a lot of confusion in the market about the Medicare Advantage industry. I'd like to address some of those topics up front in our remarks, which we hope will be helpful, especially in considering the significant achievements we've made this year and plan to build upon in the years ahead. First, our value to the Medicare Advantage insurance carriers is critical when viewed through the lens of volume, capacity and scale. Not all brokers in our industry are created equal, and we firmly believe SelectQuote's value as a significant source of quality volume is durable and strategic to the Medicare Advantage insurers. We know this because of the ongoing planning we are doing jointly with our carrier partners for the upcoming season and the role we expect to serve for America's seniors. To that point, WellCare recently named SelectQuote to its preferred sales and distribution partner program which we feel serves as evidence of how SelectQuote's differentiated agent and data-focused approach generates scaled volume at high quality. This competitive advantage and value is recognized by each of our carrier partners and we believe will be a market share generative difference for our company in the future. Second, shopping or switching behavior by certain Medicare Advantage customers does occur, as one of our carrier partners noted this quarter. We've known this since the inception of our senior business, and it's important to remember that a key pillar of SelectQuote's strategy redesign over the past year was to refocus marketing and lead routing based on data that correlates with persistent policyholder behavior. Simply put, we have better line of sight and ability to impact results than perceived by investors. This strategic tenet is one of the major drivers of the improved financial results we have achieved in fiscal 2023. Lastly, regarding the rules proposed by CMS in December last year, SelectQuote has consistently excelled in compliance and customer service. To my planning comment just a second ago, we're working closely with our carrier partners to ensure that any necessary changes are incorporated in our joint strategy for the upcoming season. Remember, CMS regularly updates rules, and we and our carriers are accustomed to intra-season changes as part of our normal preparation. Ultimately, we agree with industry comments that the new proposed rules will drive better quality and rational competition in our industry, which again should result in increased share for SelectQuote. To summarize, contrary to the noise in the equity markets, SelectQuote has made material progress in the past year relative to our strategic goals, and the company has never been better positioned across all business lines to drive profitability, cash flow, and significant shareholder value, especially from these levels. So with that as a preamble, let's discuss SelectQuote and our very strong results for the quarter. If we begin on slide three, let's review our consolidated results and highlights for the quarter. Similar to last quarter, our results were better than expected across the board. Consolidated revenue of $299 million and adjusted EBITDA of $44 million were both driven by our strategy to deliver operating improvements and follow through from a strong AEP. The key performance indicators for our core senior business were incrementally better for the fifth consecutive quarter, highlighted by agent close rates improving 12%, marketing cost per approved policy down 17%, and total cost per approved policy better by 12% year over year. It's important to recall that we took significant action following our results in AEP 2021 to reconfigure our sales agent force and deploy those tenured agents that leads generated by refocused marketing and targeting. Those efforts yielded significant improvements in close rates and other key metrics last OEP. Despite significantly tougher comps on close rates and expense metrics, we still delivered year-over-year improvement again this quarter. As noted over the past year, we hold ourselves to a standard of continuous improvement going forward, but there is a firm foundation for our company to stand on, and we're excited to deliver on the potential that we know our platform is capable of. Our senior business also continues to demonstrate better stability and policyholder retention, which you will recall is a key focus of our strategy. Retention rates have increased largely because of the strength of our customer underwriting. As a result, our MALTVs increased 11% sequentially, or 3% year-over-year, to $965, and year-to-date approval rates for new policies are up about 450 basis points compared to a year ago. Ryan will speak to this in more detail. But fourth quarter LTVs are estimated to come in sequentially lower due to normal seasonality. It's still better year over year. This gives us growing conviction that we will hit our $875 full fiscal year LTV guide. Probably most encouraging, we are seeing the actions we took on the sales, marketing, and operational fronts to improve new business retention rates really start to take root. Year to date, we have observed meaningful improvements in both the leading indicators such as our customer risk scoring algorithm, as well as lagging indicators such as policy approval rates and 90-day active customer rates. While customer retention will remain an ongoing focus, we are encouraged by the progress we are making. In our healthcare services segment, SelectRx continues to show broad-based adoption with nearly 45,000 members. We're pleased with the sequential growth, but would remind everyone of the strategic decision to slow growth from here to prioritize profitability. To that point, we've already seen that effort yield results as healthcare services revenue for the quarter more than tripled year over year to 71 million. And we remain well on track to approach breakeven as we head into fiscal 2024. It's worth noting that cash collection for the business is highly efficient. Furthermore, as the Rx business and customer base matures, our ability to improve margins and cash flow on an incremental customer basis becomes significantly more attractive. Overall, we believe the healthcare services segment, headlined by SelectRx, represents a defining proof point to the synergy of our customer-focused model and the information value we provide to both the healthcare insurance and care provider industries. This high level of synergy between our MA distribution and healthcare services platforms is truly unique for the industry and demonstrates the long-term value creation potential SelectQuote can deliver. The ultimate proof will be in the future profitability and scale we see possible within such a large addressable market. From where we sit today, the opportunity to improve the lives of America's over 60 million seniors is as compelling as it is rewarding. Lastly, as highlighted in the release, we are increasing our full year fiscal 2023 guidance ranges to $950 million to $970 million in revenue, and $40 million to $50 million in adjusted EBITDA at the respective midpoints. For background, the new guidance represents a $60 million increase for revenue and a $50 million increase for adjusted EBITDA at the midpoint from our original guide given during fiscal fourth quarter 2022. As one important additional note, we would emphasize SelectQuote is now ahead of schedule and our goal to drive positive cash EBITDA for fiscal 2023. a good step forward in what we believe is just the beginning of what our model can achieve. If we turn to slide four, let's review the key performance indicators for our core senior MA business. As planned, we slowed growth year over year, but we're happy to produce policy counts above our internal forecast for OEP based on the efficiency generated by our strategic redesign. SelectQuote generated 166,000 MA policies at an LTV of $965. The LTV pickup of 3% was primarily driven by carrier mix and improved persistency, similar to our experience in AEP. The key takeaway from our view is that these metrics have improved significantly, both in terms of predictability and stability. Remember that a key priority of the strategic redesign was to build processes that can be scaled while ensuring profitable return on invested capital and cash flow. Our results through this year's AEP and OEP did just that, and our ability to onboard more policies than originally expected was a meaningful validation of the strategy. We firmly believe SelectQuote has built industry-leading durability, and our newly originated policies give an observed improvement in persistency, as well as the 15% constraint we apply in our modeling. We will detail the changes we have made in our policy onboarding and mix, but the most important point is that we have a much higher degree of confidence in our booked LTVs, resulting commissions receivables, and the ability to produce compelling returns than ever before. If we turn to slide five, let me give some additional detail on the key metrics that drove our success in senior profitability and LTV stability. We present these metrics on an LTM basis to illustrate the fact that our redesign strategy can and has produced steady, sustainable results over several periods, not just within a single given quarter. First, on the left side of the page, we delivered another quarter of significant year-over-year reduction and operating expense per approved policy, which includes the two major costs of our business, agents and marketing. Operating costs per approved policy decreased 12% year-over-year and 29% on a trailing 12-month basis. In the middle of the page, we isolate our marketing expense per policy, which improves 17% year-over-year and 36% on an LTN basis. Recall last quarter, we generated a 50% improvement over the same period. Results this period were driven primarily by our tighter screening and focus on quality leads and customers. These are very encouraging metrics, which allowed us to scale higher volumes than originally forecasted. Moving right, our agent close rates were approximately 28% higher year-over-year on an LTN basis. The improvement is primarily a function of our strategy execution this season, highlighted by earlier hiring ahead of AEP and a much higher mix of core tenured agents. These initiatives drove substantial gains in agent efficiency, which we believe are durable in a range of Medicare Advantage seasons. As mentioned in previous quarters, the important takeaway from both the year-over-year and LTM results is that our strategy is producing policies at costs that drive very attractive returns. The reduction in our operating cost metric is the key driver behind the 32% EBITDA margin generated this quarter for the senior division. For a point of reference, that margin and the 37% margin achieved in the second quarter compare similarly to margins produced in fiscal 2021, but at LTVs that are nearly 30% lower. To reiterate the point, we feel really good about the durability we've built into our core senior returns and see a lot of opportunity to do the same in the future. Turning to slide six, let's take a minute to review the improvements and retention metrics since implementing our strategic redesign last fourth quarter. While SelectQuote has adopted a continuous improvement approach within our ongoing operations, we're very proud with the progress made to date. Our efforts over the last several quarters positioned the senior distribution business well to deliver compelling returns and results within a wide range of selling environments. Let's begin with our segmentation and consumer targeting efforts developed by our data science team. By analyzing dozens of qualitative and quantitative factors, our models are able to segment consumers into various transactional categories based on lifetime persistency estimates. We estimate that higher transactional consumer segments demonstrate 90-day lapse rates that are more than double the rates of lower transactional categories, clearly a material difference. Year-to-date, the mix of our high transactional category decreased by 19%. compared to year to date fiscal 2022. In addition, the very high transactional category, which has the highest 90 day lapse rates decreased by more than 70% over the same period. These positive changes in mix are driven by new target marketing tools and a higher quality lead routing to our best agents. A year over year increase in the mix of tenured agents also benefited our retention. During the 2022 AEP selling season, Tenured agents represented 70% of the overall mix versus just 20% during the 2021 AEP season. As we've discussed in the past, tenured agents have materially higher approval rates and 90-day active rates compared to non-tenured agents. That being said, improved agent onboarding and training tools have also led to increased productivity and retention metrics amongst our flex force who continue to play a critical role in our ability to scale during peak periods. This change in mix and enhanced training efforts have helped drive a 450 basis point improvement and overall approval rates since the start of our redesign efforts. Post-approval, we've also seen an increase in 90-day active rates of about 875 basis points over the same period. Similar to AEP, the lion's share of these improvements can be tied to our new tools, which drive a better mix and quality of policies produced, more so than to the overall strength of this year's Medicare Advantage season. With that, let me formally congratulate our CFO, Ryan Clement, who was officially appointed back in February. As you all know, the announcement was largely a formality given how integral Ryan has been to SelectQuote. That said, the title is more than earned and we're lucky to have him. With that, let me turn the call over to review our financial results in more detail.