SelectQuote, Inc.

Q1 2024 Earnings Conference Call

11/2/2023

spk00: Hello and welcome to SelectQuotes Fiscal First Quarter 2024 Earnings Call. My name is Terry and I'll be coordinating your call today. There will be an opportunity to ask questions and you can do this by pressing star followed by one on your telephone keypads. It is now my pleasure to introduce Matt Gunter, SelectQuotes Investor Relations. Mr Gunter, you may begin your conference call.
spk02: Thank you and good afternoon, everyone, and welcome to SelectQuote's fiscal first 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 10-Q for the period ended September 30, 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?
spk01: Good afternoon, everyone, and thanks for joining us. We're proud to share that Slugfoot produced stable and strong profitability in the first quarter of fiscal 2024. We've now achieved seven consecutive quarters of materially improved operating results in each of our business segments. At the risk of repeating ourselves, we have made significant strides across both our senior distribution and healthcare services segments and are confident in the platform's ability to produce consistent fundamentals and, most importantly, expand consolidated profitability. Our core senior business continues to perform well, driven by our strategy to overweight tenured agents and arm them with high-quality leads. As a result, the first quarter again exhibited strong agent close rates and policy approval rates, efficient marketing cost per approved policy, and stable retention metrics, all of which give us substantial confidence as we enter the 2024 AEP and OEP seasons for Medicare Advantage. Similar to last year, we've hired and trained agents earlier and are very well prepared for the season. In fact, early results for AEP have been good and in line with our expected execution. Our healthcare services business, driven by continued strength in SelectRx, generated strong growth and was again profitable in the quarter, despite one cue being a higher expense period to prepare for the lead flow SelectRx is expected to receive during the busy AEP and OEP selling seasons. Put another way, the scale of SelectRx is ramping, which is great to see as SelectWhat becomes an increasingly year-round business. For SelectRx specifically, we have now surpassed 52,000 members and continue to see significant runway for both growth and increased profitability. As a point of reference, healthcare services revenues exceeded our senior revenues for the first time in company history this quarter, which speaks to the increasing diversity and power of our integrated model. Lastly, our life and out-and-home businesses were solid and continue to provide a strong base of cash flow for the overall organization. Overall, we're proud of the successful results delivered in the first quarter, which is the slowest seasonal quarter of the year. The company delivered consolidated revenue of $233 million, resulting in adjusted EBITDA of negative $11 million as the company geared up for the 2024 AEP season. which exceeded our internal expectations and represents a year-over-year improvement of more than 16 million compared to 1Q fiscal 23, driven in large part by the positive and growing contribution from healthcare services. As a result, we're very well situated to execute our fiscal 2024 and reiterate the guided financial ranges provided last quarter. If we turn to slide four, let me provide color on our approach to AEP and what we have observed so far this season. As we've communicated previously, we believe our strategic redesign has repositioned the company to deliver consistent and strong returns in a range of Medicare Advantage selling seasons. Represented here are the pillars of our strategy, which should all look familiar because this is the same playbook we have run the last seven quarters. Let me begin with the pillars that are within SelectQuotes control, our agents, marketing, and technology. First, our agent-led model continues to be Sleclet's biggest competitive advantage. And again, we're prepared for the upcoming season by hiring, training, and onboarding those agents earlier than in years past. The strategy to employ a higher mix of tenured agents has been a winning formula as those agents have historically been about two times more efficient than newly hired agents. Better yet, because the Sleclet model empowers our agents and provides a compelling career opportunity, our tenured agent retention remains very strong and has strengthened over the course of the past year. We believe this is a key strategic advantage for Select Close, and we've entered the AAP season with what we believe is the best and most prepared sales force, which is critical as we know each season can be different. Second, our marketing strategy will again focus on quality leads where policyholders exhibit factors that predict higher persistency and less shopping behavior. And third, we have further developed our technology and agent desktop tools, which enable our agents to serve policyholders with the best solutions for their specific needs as efficiently as possible. As I mentioned, these three pillars are within our direct control, and we believe we have designed the best model to ensure success at each point in the value creation chain. This brings us to the plans designed by our carrier partners. As expected, plan features this year are largely similar to last season, especially amongst the largest carriers with continued investment and the most important plan benefits. We're also encouraged by the increased emphasis on healthcare services as part of the Medicare Advantage ecosystem. This is clearly aligned with SLECWT's view of the world and where it's going. Bottom line is we feel good about SLECWT's preparation and the early indicators point to our ability to close and win policies effectively this season. Lastly, beyond the policies themselves, Selectwood has been recognized by carriers as a quality distribution partner, and we've seen this exhibited in deeper coordination to ensure the best onboarding experience and retention behavior once policyholders have chosen their plan. I'll conclude my remarks on slide five with another perspective on how unique the SelectRx platform is, both in terms of our ability to successfully onboard and rapidly scale the business. At left, we detail two pharmacy platforms we acquired in 2021. Despite the excellent consumer value proposition, the businesses were subscale with only about 4,500 members. The businesses also experienced high customer acquisition costs and were hampered by disparate systems, which made customer service and logistical efficiency difficult to manage. On the right is what we have built in SelectRx, which is rapidly scaled in terms of both member growth and profitability. Aside from a lot of hard work by our team, the key success factor has been how we interact with and know our customers. Similar to the senior distribution platform, we are successful when our customers get the best care that is tailored to their specific needs. The only way to achieve that goal is with information and personal engagement. We've utilized that engagement to drive growth for SelectRx. Member growth today does almost entirely come from the population of seniors we have assisted with Medicare Advantage plans, effectively requiring zero additional marketing spend. At Attractive Unit Economics, we believe SLECO is also well positioned to reach consumers outside of our Medicare Advantage business. Additionally, our platform and information advantages mean we have the scale and capabilities to serve all 50 states. Our single pharmacy system is more efficient and is seamlessly integrated with our automated fulfillment and shipping functions. The scale and efficiency translate directly to our unit economics, evidenced by our revenue per member per month being more than 35% higher than what the prior business achieved. Lastly, we're becoming more efficient as we grow, both as we scale our fixed costs, but also as we continue to use our buying power to negotiate improved drug pricing. In sum, SelectRx is the prime example of why SelectQuote is not just a Medicare Advantage distribution company. but as an information hub that enables differentiated customer acquisition and engagement. Both we and our partners see SelectVote as competitively unique and positioned at an advantage intersection of the rapidly shifting healthcare ecosystem. SelectVote has always approached our value proposition holistically to each of the key stakeholders in healthcare and insurance. Medicare Advantage is simply one product facilitated by our model. Tailored prescription drug delivery driving higher patient medication adherence and convenience is another. We noted last quarter there are additional market opportunities for us to leverage Selectwood's platform to deliver value to participants in the healthcare ecosystem. We plan to share more as we develop these strategies in the coming quarters and years. I'd like to emphasize that we believe our company is being viewed through the wrong investment lens. To be clear, it is our responsibility to execute and produce financial results for our shareholders. What is less clear to us is how the value of Sleklik seems widely dislocated relative to the broader market opportunities we pursue and the unique approach we take to deliver financial results in that pursuit. With that, I'll end my remarks and turn the call over to Ryan. Ryan?
spk05: Thanks, Tim. I'll begin on slide six with our consolidated results for the first quarter. As Tim mentioned, the quarter was successful not just relative to our initial expectations, but also as the company continues to diversify and smooth the seasonal swings from quarter to quarter. As many of you know, our fiscal first quarter has historically been a period with lower revenue and elevated investment as we ramped for the Medicare Advantage selling season. We are pleased by the increasing offset our healthcare services business contributes to the expense incurred in the quarter. As you can see in the chart here, revenue grew by 43% compared to a year ago, primarily driven by SelectRx. More importantly, our adjusted EBITDA improved by over 16 million year-over-year as healthcare services continues to scale and is increasingly accretive to EBITDA. In sum, the quarter was a success for SelectQuote across the board, and we feel good about our preparation for AEP and OEP, and similarly feel confident in the fiscal 2024 targets we communicated last quarter. If we turn to slide seven, let's review our senior segment results. In what's the smallest of our quarters, we are very pleased with the efficiency with which SelectQuote has prepared for the AEP and OEP selling season. Similar to Tim's comment, we are executing the same strategy as last year with earlier onboarding and a higher mix of tenured agents. Aside from the sales efficiency benefit we expect this season, we are increasingly pleased with how streamlined we have become in mitigating preparation expense and investment. To that point, our senior business grew revenue by 16% compared to a year ago, which resulted in adjusted even just shy of breakeven during a quarter that has historically been a significant investment quarter. Turning to slide eight, let's review the makeup of the first quarter for our senior distribution business. As you can see at left, MA approved policies grew by 17% to 98,000. As Tim mentioned, we continue to engage with carriers early in the selling season, and our fiscal first quarter is another example of those efforts. One key detail I would like to draw your attention to is the year-over-year change in booked LTV for the quarter, which averaged $761. As we noted last quarter, the sequential decline in LTV is typical given commissions booked in our fiscal 1Q are prorated for the shorter initial year duration. On the other hand, the year-over-year decline in LTV is more of a function of policy mix by carrier, and to be clear, is not an indicator of persistency, which continues to exhibit improvement. It is important to emphasize that we continue to see the benefit of our strategy on policyholder persistency and reiterate our view that booked LTVs for fiscal 2024 will be higher than fiscal 2023. We hope this additional detail is helpful, especially in a seasonally smaller quarter where mixed impacts like the one I just detailed can swing our KPIs. For context, our first quarter historically makes up about 15% of our booked policies for the full year. On that point, let's move to slide nine, where we can underscore our confidence in the underlying unit economics of our senior distribution business, which were, again, very strong. SelectQuote drove increased efficiency across each of our core KPIs compared to a year ago. Operating expense for policy declined 22% year-over-year, marketing expense for policy improved by 30%, and our agent close rates increased by 25%. As we've shared over the past two years, These improvements are a direct result of our strategic redesign and best of all, they have synergistic benefit to one another. Our expenses per policy benefit from the deployment of better and more experienced agents. Our marketing costs for policy benefit from refocus lead targeting, which in turn benefits agent close rates. And lastly, to the point of our confidence in LTVs, we firmly believe that our strategic redesign has improved the persistency of onboarded policyholders. To bring it full circle, We monitor each of these metrics closely and provide them for context in your analysis. That said, what is most important is our conviction that the mix of these building blocks for unit economics will generate consistent profitability in a range of Medicare selling seasons. Put another way, with stable observed persistency and the per policy efficiency we have delivered over the past two years, we reiterate our view that the senior distribution business can produce attractive EBITDA margins in the low 20s in fiscal 2024. Let me turn to healthcare services and give additional detail about the strong results SelectRx continues to produce. Beginning with member growth, in a seasonally slower quarter, SelectRx continued to grow sequentially, and we have now eclipsed 52,000 members, which is up over 60% compared to a year ago. Again, we would note that nearly all of the growth in our membership to date has come from customers we've engaged with on Medicare Advantage. With over 4 million Americans turning 65 each year, There is a long runway for that source of growth. As Tim alluded to, though, the population for those in need of organized and convenient prescription drug delivery is significantly larger, and SelectQuote has the opportunity to generate growth and attractive returns on investment with other lead sources. We'll share more on these initiatives as the business continues to expand. As you can see, there are a number of growth drivers for SelectCorrect, including organic member growth through our Medicare Advantage business, new lead opportunities, and lastly, the continued maturation of our membership. Specifically, healthcare services revenue totaled $97 million for the quarter, and our adjusted EBITDA was again positive over $2 million, which is a strong result given a seasonally slower quarter with higher expenses in preparation for the season ahead. Overall, we are thrilled with the progress, and you can see the ramp in both our revenues and adjusted EBITDA as the business continues to scale. Lastly, I'll briefly touch on our life and auto and home segments, which performed in line with our expectations and similarly benefited from the strategy we've employed in our core senior business. Combined revenues of 47 million were up nearly 7% compared to last year. Our life business continues to benefit from the broadening and adoption of our swift term select product and our auto and home business remains stable despite a hard PNC insurance market. Overall, the life and auto and home segments produce stable profitability with combined adjusted EBITDA totaling nearly 9 million. Finally, it's worth noting that both our auto and home and life businesses are solid contributors to company cash flow. With that, let me conclude our prepared remarks and take your questions. Operator?
spk00: Thank you. If you would like to ask a question, please press star followed by one on your telephone keypads now. When you're preparing to speak, please ensure that your line is unmuted locally. The first question on the line comes from Ben Hendrix of RBC. Please go ahead. Your line is now open.
spk03: Thank you very much. Congratulations on a strong quarter. Appreciate the comments, early comments about AEP being good progress and in line with expectations. You know that the plan features are similar to what you saw last year, and engagement with customers has been in line. Was there any surprise in that? We heard earlier this week from Humana that they made the same observation, that the plan features and plan design was kind of more closely resembled last year than they had expected, given the risk model changes, and that they expected there could be some contraction and chopping behavior versus what they had initially expected. Wanted to see if there was anything that changes the way you're thinking about AUPs and the rest of the season versus heading in. Thank you.
spk01: Hey Ben, this is Tim. Thanks so much for joining us this afternoon. We appreciate it. I'll make some comments and ask Grant, our president, to comment as well, but I'll start just by saying, you know, we feel good about our overall preparedness coming in to AEP and how things are really shaping up in the early innings of AEP. To your question about the plan features, yeah, we heard that as well, and I think it was alluded to kind of going into the season that some of the managed care organizations were going to reevaluate some of their plan benefits, but also, you know, ensure that they kept the benefits that were most important to MA beneficiaries. You know, we've now started selling those 24 plans. We've got visibility to those plans. And I think globally, I would agree, we've not seen degradation in plan designs. And I think the carriers have largely achieved the goal of really keeping those most critical consumer benefits. Bob, anything you want to add on plan features and maybe Ben's second point or question around shopping behavior?
spk04: Yeah, absolutely. So, Ben, what's been really interesting is we believe that watching what's happening now into Humana's comments and Tim's, that the carriers are just getting smarter about plan design. You know, it's not that long ago that they introduced ancillary benefits, which would become such a big deal within the plan design. And we're really seeing the carriers get more intelligent on where they pull back on, I'd say, benefits that just aren't used very much or beneficiaries don't seem to care about and getting really intelligent about putting more dollars behind benefits that beneficiaries do very much care about. So we're seeing actually a further investment in things people seem to like in kind of that ancillary benefits world. and a little bit of a reduction in things that people don't seem to really focus on as we go through those conversations, which actually to that point, you know, we're seeing really strong kind of, uh, shopping behavior in a good way for us, but we're actually feel really, really good about our book. Um, and early indications, you know, feel very good there. So meaning our volume is strong, uh, but, uh, what we're seeing from talking to our consumers, they're happy with the plan that they're on and they're happy with the changes that the carriers made. We also think that the reduction in kind of the industry as a whole and what happened two years ago and kind of all of those things are also helping create a tailwind where there's just not as much kind of noise in the marketplace, if you want to say, which we've been very open about. And I also think our targeting of consumers to your second question and how we understand where we should really kind of focus and hone our marketing in on, take those customers in a proper way. We understand now kind of how to help them navigate plan benefits, those things, all the things we've been talking about, which have led to really, really large 90-day increases or increased 90-day persistency, which are great leading indicators. We're seeing those leading indicators play out. We feel great about kind of the way we're doing business and what's happening on our books. So I think kind of a win-win for us.
spk03: Great, appreciate that. Just staying on the same track here, last night we heard from Media Alpha as well. And one thing that they noted was potentially a slower start to APAP for some of their partners due to some of the implementation of the regulatory changes that we've talked about over the last couple of quarters. Just wanted to see if there's anything that's a surprise from a regulatory perspective and if maybe headwinds for some other brokers may be kind of supporting some of your strong volumes.
spk01: Yeah, great, great question. Fair question, Ben. I mean, we are seeing some impact from the 48-hour role specifically on the industry, but it's certainly in line with what we expected. Again, we've been in this business for almost 13 years. We're very accustomed to role changes. Those are not uncommon. And we had spent the better part of the summer all the way leading up into AEP, preparing both with our carrier partners as well as our marketing partners to make any necessary adjustment. So for us, not significant disruption. You know, we can't speak to other industry players. We kind of stick to our own nitty. But would say, you know, we don't see any risk to the fact that we believe we can drive 20% plus full year margins in the senior division consistent with what we guided to in August.
spk03: Great. Switching over to SelectRx real quick, how do we benchmark the growth trajectory that we're on here? It seems like you guys clearly are ramping this business up nicely, but just wanted to see kind of what we can expect and what you are budgeting for the rest of the year in terms of growth in that business. And is there any risk of overgrowing or going too fast beyond the platform there?
spk01: Brian, do you want to take the lead there?
spk05: Yep, absolutely. As shared with our guide for the year, we are expecting membership growth of around 25%. Healthcare services revenue, we are expecting it to grow even faster, around 50%. That's really driven by the continued maturation of the base as we get more and more members to full boxes. It is important to recognize that this This offering, it's different from the insurance offerings in that we actually ship this out each and every month. And so the membership base continues to grow. As we've shared, the vast majority of the members to date have been generated through the interactions we've been having on the senior Medicare distribution platform. But we do see an opportunity to grow and generate really attractive margins outside of that. You know, we absolutely are, as we prepare for the AEP season, you're ramped up and expect, you know, strong membership growth over the coming quarters.
spk04: Yeah, and operationally, Ben, to your question. Oh, go ahead. Oh, sorry. Go ahead. Sorry, on, oh, I was just going to talk about your question on growing too fast. You know, we feel really, really good operationally where we are. I would say that kind of 4,000 member to 50,000 membership space, was significantly harder operationally than what we anticipate this kind of growth period. Because to Ryan's point, yes, we're growing members, but we're growing revenue at a greater pace by getting more full boxes, more tenured customers, more happy customers. We're very excited with where we are operationally. Our customers are extremely satisfied. Our NPS scores are incredibly strong relative to most pharmaceutical pharma businesses. That's a really friction-filled space, which we talked about, and ours are above excellence. So we feel great about that. And the TAM is massive. So we feel really good operationally where we are. To supplement that too, to Tim's point, we've really done this on the backs of senior customers and conversations that senior has. We do see an opportunity to go and really click down on that business in a responsible way through finding customers from other channels. So now that we've built this mousetrap, now that we are kind of one of the largest players in this space in a very, very large necessary TAM. We feel good about our ability to find new customers. And I think we've proven that out in the past too with final expense. We started that out as an offshoot of our life insurance business and our senior business. And now it's a great kind of independent business that takes its own, finds its own customers. Same thing with auto and home years ago. So we are really, really bullish on our ability to market towards that.
spk03: Josh, and then last question on SelectRx. I just wanted to get an idea, some thoughts on receptivity among leading carriers to this program, the extent to which SelectRx can work hand-in-hand with some of the plans you're distributing. You mentioned that supplemental benefits are popular, mail-order drugs are popular. Is there any way where SelectRx can clash with plan design?
spk04: You go back a year ago when we said, hey, we're doing a good job partnering with carriers. I'd say today we're doing a great job partnering with carriers. We're proving that not only does this have a benefit to overall happiness of a plan, it actually has positive persistency changes, more data, better stars, significantly better adherence to other programs because of the design of the boxes and everything associated. So we feel great. We also have industry-leading MTM completion rates per kind of one of our partners and That's also a carrier in a healthcare business, but then a carrier. So we feel stronger than we ever have about what that partnership looks like. And, you know, we've talked about this before. These aren't really mail order eligible clients. They're not folks that should be on mail, right? Our average box has over, you know, seven drugs and our average member has over 10 drugs at enrollment. And they are expressing extreme concern around taking those drugs as prescribed. You know, that one through five drugs is really what's, we believe is the space for mail order. And we're very supportive of the carriers. Actually, you know, one of our partners, we're their largest kind of referral source, or we do an opt-in so that they have the ability to call the consumers on behalf of their mail order pharmacy. And we're the most successful shop doing that while building this business. So we don't really see it as friction. We see it as an opportunity to continue that partnership beyond just the MA plans.
spk01: Yeah, I think it's really well said what Bob mentioned. We feel that we are very aligned with all participants in the value chain, clearly a very different solution and high adherence solution, one that can help the consumer lead a healthier, happier life. It can help with through that adherence, then cost curves. And I think all the feedback that we've gotten from the broader ecosystem has been very positive.
spk03: Great, thanks. Shifting gears again, just real quick, I appreciate the comment on the P&C hard market cycle. Any thoughts or any forecasts of kind of when we, it feels like we may be getting towards an inflection point, but any thoughts on kind of when we see material change in that space?
spk01: Yeah, we've certainly, as we noted last quarter, the P&C market is certainly in a hard market. I don't know that we have any prognostication exactly when that may soften. You know, there are some signs of that, but also, you know, some carriers that are resetting a bit, right, in terms of their underwriting. Specific to our brokerage, the business continues to perform quite well. It's a good, obviously, very strong value proposition, but also is helping create meaningful cash flow for the company. And, you know, we feel like even some of the activity that we've seen in terms of close rates and our ability to help convert customers through reshopping, we're having good progress on that. So more to come on that, Ben.
spk03: Great. Thanks. My last question, I appreciate the commentary on the one-cube volume mix typically that you see. I was just wondering if there's any EBITDA cadence thoughts you could offer at this point in the fiscal year. Thanks.
spk05: Yeah, I think as we shared on our last earnings call and the guide, we are expecting that the EBITDA cadence and overall distribution by quarter for the various business segments will largely follow what we've historically recognized. The one deviation from that being the healthcare services business, which we're projecting EBITDA margins in the low single digits, obviously entering the year in one slot and actually at a materially higher margin rate as we continue to grow and scale that business.
spk03: Great. Thanks a lot, guys.
spk01: Thank you, Ben.
spk00: Thank you. We currently have no further questions. Therefore, I will hand back to Tim Danker for any closing remarks.
spk01: Well, thank you again for joining us as we enter the busy season for our Medicare Advantage and healthcare services segment. To say it again, we have a lot of confidence in our strategy. Conviction grows with each quarter. That's like what drives strong profitability and cash flow. We certainly believe fiscal 24 will be more of the same. And with the scale of our healthcare services segment, it will drive even more operating leverage for the company. So we thank you again. and look forward to speaking next quarter. Everyone have a good evening.
spk00: This concludes today's conference call. Thank you all for joining. You may now disconnect your lines.
Disclaimer

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