MAX - NYSE

Hello, and thank you for standing by. At this time, I would like to welcome everyone to the MediaAlpha, Inc. First Quarter 2024 Earnings Call. [Operator Instructions] I would now like to turn the conference over to Alex [indiscernible]. Please go ahead.

Thank you, Jericho. After the market closed today, MediaAlpha issued a press release and shareholder letter announcing results for the first quarter ended March 31, 2024. These documents are available in the Investors section of our website, and we'll be referring to them on this call. Our discussion today will include forward-looking statements about MediaAlpha's business and outlook for future financial results, including its financial guidance for the second quarter of 2024 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, May 1, 2024, 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 and contribution, 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 would 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 website 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.

Thanks, Alex. Hi, everyone. Welcome to our first quarter 2024 earnings call. I'd like to make a few comments before turning the call over to our CFO, Pat Thompson, for his remarks. We've had an outstanding start to the year. Our first quarter results exceeded the high end of our guidance ranges across the board as we saw increasingly strong step-up in marketing investments by our P&C carrier partners during the back half of the quarter. We're confident that we're now firmly in the midst of an auto insurance market recovery, and we're expecting strong year-over-year growth in our second quarter P&C Transaction Value. First quarter results in our Health insurance vertical were also above expectations. This was driven by continued strength in our under-65 business as well as opportunistic carrier spend in Medicare. We expect high single to low double-digit year-over-year Transaction Value growth in our Health insurance business in the upcoming second quarter. As auto insurance carriers rate increases continued to significantly outpace moderating loss cost inflation, the P&C industry's recovery from a period of unprecedented underwriting losses is quickly gaining momentum. We expect these favorable market conditions to be sustained for the remainder of this year and beyond as an increasing number of carriers achieve rate adequacy and begin to reinvest in customer acquisition. We believe these positive trends will enable us to drive meaningful cash flow growth and shareholder value in the years to come. Finally, Eugene Nonko, my co-Founder and the company's Chief Technology Officer will be transitioning out of his current role at the end of the year and handing the reins to Amy Yeh, our SVP of Technology. Amy has worked closely with Eugene during her 9 years at MediaAlpha and will take over as our CTO in 2025. I would like to personally thank Eugene for all he has done over his 13 years with the company. Without him, of course, we would not be where we are today. With that, I'll turn the call over to Pat.

Thanks, Steve. I'll begin with a few comments on our first quarter financial results and other recent business and market developments before reviewing our second quarter financial guidance and opening the call up for questions. As Steve mentioned earlier, our first quarter results exceeded the high end of our guidance ranges across all metrics, with year-over-year Transaction Value and adjusted EBITDA growth of 13% and 98%, respectively. Transaction Value in our P&C insurance vertical was up 150% quarter-over-quarter, driven by strong step-ups in marketing spend during the back half of the first quarter by our carrier partners, especially our largest advertiser. Transaction Value in our Health vertical was also up 16% year-over-year, above expectations. The adjusted EBITDA increase of $7.1 million year-over-year was driven by higher contribution and lower overhead. We are in a very different place now than where we were at this time last year when carriers were significantly pulling back on marketing spend. We expect 60% to 70% sequential growth in P&C Transaction Value, driven by a continuation of the positive trends we've been seeing. In Health, we expect Transaction Value to grow at a high single to low double-digit rate year-over-year. Moving to our consolidated financial guidance. We expect Q2 Transaction Value to be between $285 million and $300 million, a year-over-year increase of 132% at the midpoint. We expect revenue to be between $145 million and $155 million, a year-over-year increase of 77% at the midpoint. We expect adjusted EBITDA to be between $15.5 million and $17.5 million, a year-over-year increase of 359% at the midpoint, driven by higher contribution. We expect overhead to be approximately $500,000 higher than Q1 2024. Lastly, Q2 legal costs associated with the ongoing FTC inquiry are expected to be approximately $1 million, similar to Q1. Finally, a few comments on expenses and profitability going forward. We continue to have measured hiring plans for 2024 and expect limited overhead growth for the full year. Given our lean team and capital-efficient model, we expect to generate significant operating leverage and adjusted EBITDA as our top line growth accelerates. Cash flow is expected to follow suit and our near-term priority remains on using excess cash to reduce net debt. To the extent attractive alternative capital deployment opportunities arise, we will reassess at that time. With that, operator, we are ready for the first question.

And your first question comes from the line of Michael Graham with Canaccord.

Congrats on the really strong results. My first question, I just wanted to kind of ask how you were thinking about sort of like what the high watermark could be for the business in this early cycle? Like if we look back at your historical Transaction Value results to sort of peaked in the middle part of 2021, and you were sort of like on a run rate well north of $1 billion, I'm just wondering, like do you think the industry is set up for you to be at that level when this next cycle peaks or larger? Or just like how are you thinking about that topic?

Michael, yes, I'll take the first crack at that question. So as we think about where we are and sort of what the future holds, I mean, certainly, the first thing that comes to mind is something that we've talked about in earlier calls, which is that this is an unprecedented underwriting cycle. And as the market recovers from it, I think there's going to be a lot of unpredictability. And so I think, certainly, we're seeing that with our first quarter results and with how the second quarter is shaping up as well. And so I think what's driving that are a couple of things. I mean, first is, I think we were right in predicting for this recovery that it would start with a small number of the advertiser carriers really getting back into the marketplace and that momentum would continue to build as more carriers achieved rate adequacy and started to really reinvest in growth through '24 and into '25. Certainly, we've seen that play out. And the second thing we got right was that consumer shopping sentiment with auto insurance is at an all-time high. The volume is at an all-time high in our marketplace, and that's to be expected because consumers have had rate increases of 30%, 40%, which really spur shopping behavior. And again, there, too, we expect that to continue through '24 and '25 because rate taking continues. So even now, I think rates are going up about 20% to 22% year-over-year. There are carriers who are still taking rate this year, and we'll be taking rate into '25. And as those rate increases continue to earn through and show up in people's renewal notices, that's going to trigger shopping behavior. So we expect the shopping behavior to continue to remain elevated, again, through this year and into next. I think the thing that we got wrong in terms of the unpredictability is really the pricing. With a small number of national carriers really reentering the marketplace early this year. I think everyone knows who those carriers are. They're the ones who were early to take rate -- achieved rate adequacy. I think that was enough to really get pricing back to the pre-hard market levels over the first quarter and early part of the second quarter. And that was unexpected. I think we can attribute that snap back in pricing to a couple of things. I think one is just the appetite that these carriers have after having sat on the sidelines for the better part of 3 years. I think the second is really the hallmark of our marketplace that we've talked about in the past, which is the measurability, right? The measurability, which then leads to a small number of competitors really being needed to actually have pricing be set based on expected lifetime value and return on ad spend and far less on competitive dynamics. And so along the pricing crowd, again, we're pleasantly surprised to how quickly that's returned to pre-hard market levels. What we do expect going forward is that as more carriers come back in, pricing is going to go up, right? As some of the states like California and New York, New Jersey kind of come back online, again, average pricing across our network is going to go up. But I think those increases going forward are going to be a bit more measured than the sharp increase that we've seen year-to-date. Michael, does that give you sort of the color that you were looking for?

It does, Steve. And that was a complete answer, so I'll defer to the next caller.

Our next question comes from the line of Mike

I guess my only follow-up question to that good question and answer is just should we be cognizant? Or maybe you can remind us if there's some seasonality we should be thinking about. Clearly, you gave us a 2Q guide. I believe historically, there's been seasonality around tax refund season, maybe that we've -- maybe that's -- obviously, that would be encapsulated in the 2Q guide, if the Fed is true. But anything on the seasonality front we should keep in mind?

Yes. And Steve, do you want me to take this one?

Yes. Go ahead, Pat.

Perfect. Yes. So Mike, thanks for the question. And I would say that I think the -- our 2 main verticals have different seasonality trends. And so I would say in P&C, in a typical year, Q1 and Q3 tend to be the biggest for consumer shopping. Q2 tends to be a little bit below those, and Q4 tends to be a bit lower than that. And I think we've given the guidance in the past that in the typical year, we would expect one to be 15% to 25% bigger than in Q4. So I think that some of the guidance we're giving for Q2 shows a trend that's kind of bucking normal seasonality on the P&C side, and we haven't given any guidance as you pointed out for Q3 and beyond. On the Health vertical, that piece of the business is relatively focused on Q4. So in a typical year, Q4 is about 40% of our business in Health. Q1 tends to be the next largest because some of the enrollment period bleeds over into January, and then Q2, Q3 tend to be a little bit smaller than Q1. And so hopefully that kind of gives you the view of what typical seasonality looks like, and I would say just as in the hard market downturn we had, some of the seasonality was a bit hard to tease out of the numbers, I wouldn't doubt that it could be hard to tease out as the business recovers as well.

Okay. Got it. Yes. That is helpful. And I guess it's been -- you guys have -- it's been like maybe -- you've done a good job. I know it's probably tough with the expense cuts in recent years. Directionally as the market stabilizes or gets a lot better, are you guys going to be kind of cautious at first in kind of making sure the revenues are there before kind of reinvesting? Or is it -- are you guys right -- good enough line of sight that we should just be -- basically, you guys are going to go back to kind of doing what you have always done in terms of how to reinvest when we think about margins?

Yes. And Mike, I would say that I think efficiency is in our DNA as a company. And it's a bootstrap company. It's been profitable since the very beginning. And we take that very, very seriously. And so I think we've managed pretty well through the hard market. We're going to be seeing a bit of investment over the course of this year. And I would say that some of that is going to be capacity, and some of that is going to be in kind of core tech product analytics. But our guidance for the year is on limited dollar overhead growth for the full year '24 as compared to '23. And I think we've kind of -- we've indicated Q2 should be up $500,000 versus Q1 and would expect probably a bit of increase in Q3 relative to Q2 and Q4 relative to Q3 as we start to hopefully reinvest as we gain more confidence.

And Pat, as a last follow-up, is there any way you could size up by level like what percentage of your expense base is fixed versus variable?

That's not something we disclose, Mike. The one thing I would say is that the vast majority of our head count is included in the operating expenses category. And so we would deem it to be fixed or semi -- kind of semi fixed. Obviously, there are some roles in there that probably are variable at some point, which is, hey, if you've got a bunch more business happening, do you need another account manager or something like that. But I'd say that the vast majority of our headcount, I would deem as being fixed.

Our next question comes from the line of Cory Carpenter with JPMorgan.

Steve, could you just give us a sense of how close the wave 1 carrier is back to normal, fully normalized spending levels? And then if we think of, I'll call them, the wave 2, wave 3 carriers, how much are they contributing? How material was that to 1Q? And how do you expect them to ramp in 2Q?

Yes. So Cory, if I heard your question correctly, I think you're asking about, I think, the small number of carriers who right now are getting close to normal levels. And I think I just answered your question by saying that. I think the small number of carriers who have achieved rate adequacy are really starting to reinvest in growth, are actually getting close to normal levels. And so we've been, again, surprised by that very pleasantly so. And again, I think that's really attributable to the fact that there's been 3 years of muted growth investments and the industry is really ready to start reinvesting in growth once each of the carriers in the industry achieve rate adequacy. In terms of color into what that next wave looks like, I mean, we're certainly engaged in positive discussions with all of the other carriers. I think that one thing that we're seeing that's a little bit different than the last hard market cycle is just the sheer number of -- of other carriers, right, who typically haven't been big players within the online direct-to-consumer space and just how hard bank they are versus when they -- when we emerged from the last hard market. And what I mean by that is just in terms of the level of technical integrations that we have with them, their understanding of how to measure expected lifetime value, how to match that to media cost to achieve target return on ad spend, the value of programs to gain additional monetization from visitors like our carrier publishing program and the strong adoption we got [ of that program ] during the hard market period. And even with the personnel that are within the marketing departments of a lot of these carriers and just the level of sophistication they have. And so the timing of the second tier or the next wave of carriers to come on, I think, really will be dictated by how quickly they achieve rate adequacy. And I think you and I have the same access to that data. Again, I'm not going to go out and say that they're going to return ahead of getting profitability where they need to be. It was a tough cycle. But when they come back, really what we're excited about is just how many more carriers are actually in a good place to really scale their spend with us. And I think that, that really bodes well for this vertical for us over the next couple of years, again, of what we are expecting to be sort of the opposite of the hard market cycle, which is a soft market cycle where a number of carriers are really aggressively spending in growth and in marketing in order to gain market share. And we're excited about working with just a growing number of carrier partners to really realize and help them realize their growth objectives.

Our next question comes from the line of Tommy McJoynt with KBW.

With so much auto consumer shopping going on, you mentioned that carriers are certainly thinking pretty hard about lifetime values of customers. Can you talk about some of the advantages that MediaAlpha has over its competitors in terms of helping carriers evaluate this really important input as carriers are looking to kind of seek out new customers? Basically, just what is the value proposition that MediaAlpha goes to market to its carriers?

Sure. I think first is the measurability. All the media in our marketplace is performance media. And so it's expected to and is tied back to an actual sale. And so at the end of the day, every dollar spent in our marketplace is fully accountable and again, tied back to a policy sale to justify media pricing. And so in addition to being a performance-based marketplace, right, it's really the scale of our marketplace. Because in terms of carrier spend and our ability to support that as the marketplace, the carrier spend here, there's oftentimes 2x to 3x that of any other marketplace. And that additional data really allows the carriers to get a much better view into the expected lifetime value, because there's just so much data out there for every consumer segment that they're targeting. And so what that helps is get -- enables them to get a much more accurate bearing on the estimated lifetime value of all the customers that they're acquiring in our channel, which then allows them to have a much better ROI or return on ad spend, again, across 300 to 400 publishers within our marketplace. And in a time like this, when advertisers are really looking to scale up, right, the granularity that really enabled that massive scale and transparency that we have in our marketplace is really what's going to enable carriers to scale up while keeping their efficiencies at target levels.

Got it. And then just a second question here. From your perspective, have you seen a lot of unbundling of customers in terms of looking to separate home and auto? And kind of how has that impacted? What carriers are kind of willing to bid for customers who are looking to acquire?

Yes. I mean, I think that, that -- I mean, that's certainly something that a lot of people are talking about, the dynamics in the marketplace, just because both auto and home have had its own issues in terms of dislocated markets and large pricing. So I certainly believe that, that is happening in the marketplace. We don't really have visibility into that. Our marketplace is predominantly auto, and home is a smaller part of our marketplace. But what we are seeing is increased demand for home that I think is reflected of resulting in part from some of the issues that the carriers may be having with retaining some of their bundled customers.

Our next question comes from the line of Ben Hendrix with RBC Capital Markets.

Congratulations on the quarter. Maybe a couple of quick ones here. First, just if you could follow up on this opportunistic partner spend in Medicare. Can you remind us kind of the nature of that arrangement, kind of what you saw in terms of magnitude this quarter? And how should we think about that going forward?

Yes. And Ben, this is Pat. So I would say that on the Medicare side, there were a couple of carriers that kind of in late February and March, unlocked some spend with us. And I'd say that presumably they liked what they saw in terms of market opportunity and returns. And so they spent into that, and the feedback from them was generally positive on -- they felt like they got a good return on that spend. The thing I would say is that kind of given the size of our Health vertical in Q1 and the spend and kind of the growth outperformance we had relative to expectations, like it wasn't that much spend. It just ended up driving 6, 8, 10 percentage point beat versus expectations, but clearly positive from our perspective.

Got you. And just also, we saw a suboptimal rate notice for Medicare Advantage next year. We see some of the MA leaders, Humana and CPS talk about protecting margins, curtailing benefits for next year. It seems like the shopping setup is just getting incrementally better. Just want to see kind of if that's -- if you agree and how you see the Transaction Value opportunity shaping up for OEP this year.

Yes. And I would say that I think you had a nice summary of a lot of the market forces that have been at play. And I think one of the things we've seen over time with both Medicare and our under-65 business is that regulatory and market shifts can have an impact on the business, say, over the long term, totally confident that the industry will successfully adapt to whatever changes come. Near term, maybe hiccups, maybe positive surprises. We'll kind of see on that. And I would say that we're excited by the long-term opportunity. We're hearing decent things from our advertising partners on the publishing side. And I think we're feeling okay about Q2, and I think we'll provide more guidance as we get closer to the time and get a little bit more clarity on exactly what folks are thinking. But we'll see how things shape up and we're -- we will, as always, be ready to do the best we can and react to whatever may come our way.

And there's a follow-up question from Mike

Just one quick follow-up. And I think you might have teased a bit of this out. Thinking on the Property & Casualty Insurance segment, I believe if we go back to the -- prior to the industry profitability was that you -- the revenue was very concentrated with a smaller number of carriers in terms of the largest carrier. Is -- if we think about the first half of '24, is it -- and I believe it defragmented after that, but maybe I'm wrong. When we think about first half '24, is it still very -- is it back to like being very concentrated and you expect it to deconcentrate? Or maybe you could just unpack that a little bit.

Yes, Mike, I think you said it exactly right. I think because we're in the early part of the recovery, where there's still a small number of carriers who are back to or somewhere close to normal levels of spend, you're going to see more concentration in our P&C marketplace. Again, as more carriers achieve rate adequacy, start to make growth investments again, I think you're going to see increasing diversity in demand in our P&C marketplace. And I think coming out of this hard market, as I mentioned before, again, I think we have a stable of additional carriers that we're working with who I think, again, we feel are really poised to embrace this channel in this next growth cycle. And so I think you're -- we're going to expect to see, I think, additional, like you said, fragmentation and demand -- diversification and demand as the soft market really starts to gain traction.