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Thank you for standing by. My name is Christina, and I will be your conference operator today. At this time, I would like to welcome to MediaAlpha Q3 2023 Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session [Operator Instructions]. I would now like to turn the floor over to Denise Garcia, Investor Relations. Denise, you may begin your conference.

Thank you, Christina. After the market closed today, MediaAlpha issued a press release and shareholder letter announcing results for the third quarter ended September 30, 2023. These documents are available in the Investors section of our Web site and we will be referring to them on this call. Our discussion today will include forward-looking statements about our business and our outlook for future financial results, including our financial guidance for the fourth quarter of 2023, which are based on assumptions, forecasts, expectations and information currently available to management. These forward-looking statements are subject to risks and uncertainties that could cause future results or events to differ materially from those reflected in those statements. Please refer to the company's SEC filings, including its Annual Report on Form 10-K and its quarterly reports on Form 10-Q for a fuller explanation of those risks and uncertainties and the limits applicable to forward-looking statements. These forward-looking statements are based on assumptions as of today, November 1, 2023, and the company undertakes no obligation to revise or update them. In addition, on today’s call, we will be referring to certain actual and projected financial metrics of MediaAlpha that are presented on a non-GAAP basis, including adjusted EBITDA, which we present in order to supplement your understanding and assessment of our financial performance. Non-GAAP measures should not be considered as a substitute for or superior to financial measures calculated in accordance with GAAP. Reconciliations of these non-GAAP measures to the most directly comparable GAAP measures are included in our press release and shareholder letter issued today. Finally, I’d like to remind everyone that this call is being recorded and will be made available for replay via a link on the Investors section of the company’s Web site at investors.mediaalpha.com. Now, I'll turn the call over to Steve and Pat for a few introductory remarks before opening the call to your questions.

Thank you so much, Denise. Hi, everyone. Welcome to our third quarter 2023 earnings call. I'd like to make a few observations before turning the call over to our CFO, Pat Thompson, for his comments. We continue to execute well in a difficult market environment. Our third quarter results came in at or above the high end of our guidance range due to strong top line growth and profitability in our health insurance vertical. For the fourth quarter, we expect our health transaction value to be roughly flat year-over-year as continued strength in our under 65 segments is offset by near term weakness in Medicare as the industry adapts to recent regulatory changes. Q3 results in our P&C insurance vertical were in line with our expectations as carriers have maintained consistent levels of advertising spend since June. While we expect P&C advertising spend to remain at or near current levels through the remainder of the year, we're encouraged by the industry's improving underwriting profitability and continue to expect a broader market recovery to take hold in 2024. Looking forward, our immediate focus is on delivering solid results in our health vertical during the current open and annual enrollment periods. Longer term, our objective remains to capitalize on the significant growth opportunities presented by the insurance industry's ongoing shift to digital customer acquisition, and we remain confident in our ability to drive significant top and bottom line growth in the years to come. With that, I'll turn the call over to Pat.

Thanks, Steve. I'll begin with a few comments on our third quarter financial results and other recent business and market developments before reviewing our fourth quarter financial guidance and opening the call up for questions. As Steve mentioned earlier, our third quarter results were at or above the high end of the guidance range. Adjusted EBITDA exceeded expectations, increasing $1.4 million year-over-year despite a 26% or $38 million decline in transaction value with the annual growth driven by continued expense discipline. Transaction value in our P&C insurance vertical was down 46% year-over-year in line with our expectations as carriers continued to focus on restoring underwriting profitability over acquiring new customers. In our health insurance vertical, we had another quarter of strong growth as transaction value grew 11% year-over-year in line with expectations. Moving the fourth quarter guidance. We expect another quarter of positive year-over-year adjusted EBITDA growth as the impact of expense discipline and higher gross margins more than offsets the impact of continued headwinds in our P&C vertical. In P&C, we expect the impact of seasonality to be muted with transaction value dollars to be similar to third quarter levels. In health, we expect transaction value growth to be roughly flat year-over-year for the reasons Steve noted earlier. As a reminder, fourth quarter typically represents about 40% of full year transaction value in our health vertical due to the timing of AEP and OEP. As a result, we expect Q4 transaction value to be between $145 million and $160 million, a year-over-year decrease of 10% at the midpoint. We expect revenue to be between $106 million and $116 million, a year-over-year decrease of 10% at the midpoint. Lastly, we expect adjusted EBITDA to be between $9.5 million and $11.5 million, a year-over-year increase of 16% at the mid point. Q4 operating expenses after adjusted EBITDA add-backs are expected to be approximately $500,000 to $1 million higher than Q3 levels due in part to seasonality. Moving to other noteworthy items. During Q3, we incurred approximately $2 million of legal expenses, the majority of which were related to the ongoing FTC inquiry with the balance from a legal settlement unrelated to our core operations. We expect to incur $1 million of fees associated with the FTC inquiry during Q4, a bit lower than Q3. We continue to believe we have been and remain fully compliant with all laws and regulations and we are cooperating with the FTC as they continue their inquiry. Turning to the balance sheet. We continue to prioritize financial flexibility and using excess cash to decrease net debt. We ended the quarter with $15 million of cash on hand and our focus remains on reducing financial leverage through a combination of net debt reduction and adjusted EBITDA growth. With that, operator, we are ready for the first question.

[Operator Instructions] Your first question comes from the line of Michael Graham with Canaccord Genuity.

Appreciate all the information, hopefully, we are getting to the end of this tough period here. I had two questions related to P&C transaction value. The first one is, you had a peak of $183 million in transaction value in P&C in Q1 of 2021, and this quarter was $45 million. If you're right and we are fortunate enough to have a better year next year and we start growing again. Do you just have any high level thoughts on how long it takes to kind of get back to that previous high? And just a related question you might want to weave in is just, I am wondering how long historically or practically is the lead time that you have visibility into when carriers get ready to turn spending back on, how how far in advance do they tend to notify you?

I will answer the last questions first, which is the amount of lead time. I would say that -- I mean it defers. But I think we get at least several weeks if not a couple of months of lead times before carriers start to turn on spend or turn down spend. Certainly, that has a lot of caveats. I would say, this period right now we are getting plenty of notice from carriers as we are engaging in them in discussions just because we are starting to see the light at the end of the tunnel and what's been a historically difficult hard market. And so -- now to go back to your original question, here's what I'd say. I'd say that we're looking forward to 2024 and certainly, we're seeing positive signs as everyone else is, right? Higher rates are earning through and they're earning through at a rate that's actually far higher than moderating claims costs. And so that's good, that's the industry really digging up its way out of the profitability hole that has been dug for it over the last couple of years. And so I think what you'll see in the beginning of next year is increased spend, because I think enough carriers will either be at target profitability or at the very least have good line of sight to reaching target profitability in 2024, which means that when the annual combined ratio as well as advertising budget cycles renew in the beginning of next year, the whole industry should see a benefit from that, and we should see material increase in advertising spend in Q1. Now I will say that the increase in the upcoming Q1 is not likely to be as strong as what we've seen in the past, namely last year. And it's simply, I think, a concession to how unpredictable the cycle has been. And so, this isn't just us, I think saying this from our discussions with carriers, and ou heard this in the earnings call that Progressive had earlier today. But what we expect to see is really the momentum starting to gain steam over 2024 as more and more carriers get comfortable with their rates. And then we expect this to really extend into ‘25, right? I mean, to answer your specific question of when things will get back to exactly that level, that's impossible to say, but we do think that the recovery is going to gain steam over the next year and a half. And I think with the elevated shopping levels that we expect to see for 18 to 24 months, I think it's going to be a strong two to three years of growth through what is increasingly softening market until we get to that level and beyond in the years to come. So I hope that answers your question, Michael.

And your next question comes from the line of Mike

I'm more of a P&C guy, so my question's on the health side actually. So on the P&C side, when we just think about kind of how much inflation has come into the system just that cost of auto insurance policy versus a few years ago pricing is up 50 plus percent, which I guess, I feel like should eventually help your transaction revenue volumes in outer years. On the health side, can you remind us what type of inflationary levels are impacting the health side of the business?

This is Pat here, I can address that question. And I would say the inflationary trends are pretty different between P&C and the health side of the house. So on P&C, the industry would call it severity, which is the cost of resolving the claims and inflation there has been kind of running in the double digits for a while now. And I think that is in kind of stark contrast to where it was for the better part of 20 years before that, which was -- it anywhere from zero to low mid single digits. And really, I think what's caused a lot of the the P&C hard market is the fact that they just haven't been able to take rate fast enough given how high the claims cost inflation has been. On the health side, I think long term inflation for kind of health care claims has run higher than it has for auto insurance, but it’s also been more consistent and more predictable. And so I think on the Medicare side, you have seen some of the big players talk about medical claims coming in above expectations, it’s a point or two above expectations. And that's in stark contrast to P&C where for 2021 and 2022, it may have been 10 points above people's expectations. And so, I think the health side, yes, there has been a bit of noise about that. But in our mind, that's not a particularly big issue just given the the kind of range in which it normally operates.

We have been hearing and seeing data points about health inflation ticking up a bit, okay. On the P&C vertical, my last question, just in the past you have talked about maybe seeing some larger carriers enter the marketplace that weren't larger carriers -- that weren't big players in the marketplace, in the past. Are you still -- do you sense that in the coming year or so, there are some carriers that are trying to be bigger direct-to-consumer players through your marketplace or it's just too early to tell?

No, I think we are continuing to see that trend. I think that when you look at the list of the largest P&C carriers, I think they are punching according to the weight and varying degrees within our marketplace. And so there certainly are large carriers who traditionally have relied on agent based distribution whether the captive agents or independent agents who are looking to invest and have invested in direct-to-consumer capabilities. And they are at various stages of actually investing in those capabilities. And so we continue to expect large carriers, top one or two top five certainly, certainly within the top 25 carriers, to start to come into the marketplace in the upcoming years and become more relevant players in the marketplace, according to our thesis, which is that agent based distribution certainly isn't gonna go away. But really every top carrier needs to invest in direct distribution, because of the success that the direct-to-consumer model has had and really changing the landscape over the last 10 years and league table in the last 10 years. And so we continue to see that trend. I think what you have seen really in the hard market is essentially a pause in that secular trend. But as the market emerges from into a soft market and carriers get back into a growth mindset, I think you will see a continuation of that. And so you should see other larger carriers who again have traditionally focused on different types of distribution methods to really start to resume their direct-to-consumer investments and then some bigger players in our marketplace as a result.

And our next question comes from the line of Ben Hendrix from RBC.

I just was hoping to get a quick update on your thoughts thus far in Medicare AEP. We heard from Humana Management this morning stating that perhaps broadly planned design degradation has progressed to a lesser degree than expected amidst risk model changes, and maybe that could point to less shocking behavior this year than they had initially expected. Just wanted to see how things are turning so far from your perspective, and if there's any change to the way you're thinking about the transaction value activity this year?

So I would say, AEP has gotten off to a slower start than we would've hoped. We would say that some carriers, I think, are doing well. Others are maybe having a few more challenges from at least what we've gleaned from the public calls and from what they've told us. And would say that really there have been kind of two primary issues. First I would say is that we have some partners that have been struggling to adapt quickly to some of the new marketing rules that have been put into place by CMS. And we have other partners that have seen delays in getting marketing creative approved to be able to run in a timely manner for the start of AEP. And so we've seen partners, whether they're publishers or carriers working through adjustments to try to adapt to this new world order and get things to where they need to be, but it looks like it's going to be a slower AEP than we hoped. But having said that whereas bullish as we've ever been regarding the long term potential in Medicare Advantage, it's a product that over half of Americans chosen to opt into. That number keeps going up into the right and that's a trend that we think will continue in the years to come and one that should benefit us and quite frankly benefit the consumers and the carriers. It's a win-win-win.

And our next question comes from the line of Thomas McJoynt from KBW.

The first one is on the P&C side. Is it appropriate to think of the potential kind of carrier advertising spend perhaps next year or perhaps the year after as getting back to the same percentage of premiums as it was a few years ago? And I ask just because given the robust growth and the overall personal auto premium pool that could suggest a pretty tremendous revenue opportunity in the out years once it does normalize. So just want to get your sense on if you think as a percentage of premium, it should revert back to where it was a few years ago.

So carriers typically benchmark their advertising spend or measure the effectiveness of their advertising spend based on the expected lifetime value of the customer. And so -- or the policy that they're acquiring. And so I think to the extent that there's been a significant amount of inflation on the dollar value of all the policies that are being sold, I think you can expect the advertising spend to go up in rough proportion of that assuming that they're going to continue to measure the effectiveness of their advertising spend based on just the percentage of customer lifetime value that they're pegging their return on ad spend too.

And then my second question, is there any concern out there that just the amount of shopping behavior and really the kind of high velocity of switching that we're seeing in light of the rate increases that carriers are pushing through, means that carriers won't have to feel the need to pay for leads as much as they have in the past, just because there's so much kind of natural turnover in the books already?

Yes, that's also a very good question. Well, I think what you what you are hearing about it is a little bit of slowdown in terms of ambient or organic shopping behavior, because we have been in an environment where rates have been going up for the better part of two years. And so I do think that that in this case and in upcoming years what's really going drive the market is the desire for growth that carriers are going to have. And our belief is that whenever there is desire for growth, I think the advertising spend will follow and be in proportion with that desire to grow. And so what you are gonna see is our carriers who have largest sat on the sidelines for the better part of two to two-and-a-half years really not growing their policies in force. And so I think once target profitability is attained by a lot of these carriers, I think the growth pressures will start the build. And regardless of, I think, the amount of organic shopping behavior or behavior that you expect to see in the marketplace, I think the carriers are gonna invest in growth and the way they invest in growth is really through advertising.