MediaAlpha - Earnings Call - Q2 2021

Transcript

Operator (participant)

Good day, and thank you for standing by. Welcome to the MediaAlpha Second Quarter 2021 earnings conference call. At this time, all participants are in listen-only mode. After the speaker's presentation, there will be a question-and-answer session. To ask a question during the session, you will need to press star one on your telephone. Please be advised that this conference is being recorded. If you require any further assistance, please press star zero. I would like to hand the conference over to your speaker today, Ms. Denise Garcia, Investor Relations. Please go ahead.

Denise Garcia (Head of Investor Relations)

Thank you, Sarah. Our discussion today will include forward-looking statements about our outlook for future financial results, including our financial guidance for the third quarter and the full year 2021, 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 today's guidance. Please refer to the earnings release we filed with the SEC on Form 8-K and the shareholder letter we posted to the Investor Relations section of our website today for a fuller explanation of those risks and uncertainties and the limits applicable to forward-looking statements.

MediaAlpha will routinely post information that may be important to investors on our IR website, investors.medialpha.com, and we use this website address as a means of disclosing material information to the public in a broad, non-exclusionary manner for purposes of the SEC's regulation fair disclosure. In addition, we will be referring to certain actual and projected financial metrics of MediaAlpha, which are non-GAAP financial measures. These metrics include adjusted EBITDA, contribution, and contribution margin, and we present them in order to supplement your understanding and assessment of our financial performance. Non-GAAP measures should not be considered a substitute for or superior to financial measures calculated in accordance with GAAP. The most directly comparable GAAP measures, as well as reconciliations of the non-GAAP measures to those GAAP measures, are available in our second quarter earnings release.

As a reminder, we published a shareholder letter on our IR website that we'll refer to during this Q&A session. Now I'll turn the call over to Steve for a few introductory remarks before opening the call to your questions. Go ahead, Steve.

Steven Yi (CEO)

Hey, thanks, Denise. Hi, everyone. We're pleased to report yet another strong quarter. Our top-line transaction value in the second quarter of 2021 was $256.5 million, an increase of 46% year over year. We continue to focus on executing against a large market opportunity and increasing our share of wallet with some of the largest advertisers in the world. Our performance is driven by strength across all of our insurance verticals, as carriers continue to move more of their customer acquisition investments online. As the largest digital customer acquisition platform in the insurance industry, we have an unmatched level of scale. That scale, combined with our data science capabilities, enables us to innovate and drive significant business value for our partners, which in turn drives our market share growth as measured by transaction value.

As we continue to deepen our relationships with our carrier partners through an increasing number of technology integrations, we unlock opportunities for long-term growth, including, as outlined in our shareholder letter, a $1 billion-plus incremental market opportunity in our efforts to work with major insurance carriers as supply partners. We have a tremendous runway for growth, as we barely scratch the surface of our potential and areas of innovation, and I look forward to sharing more on our progress. With that, we'll open it up to your questions.

Operator (participant)

As a reminder, to ask a question, you will need to press star one on your telephone. To withdraw your question, press the pound key. Again, if you would like to ask a question, simply press star then the number one on your telephone keypad. Please stand by while we compile the Q&A roster. First question comes from the line of Cory Carpenter from JPMorgan. Your line is open.

Cory Carpenter (Analyst)

Okay, great. Thanks for the question. I have two, probably both for you, Steve. First, just hoping you could expand a bit on the comments in the letter you made around changes you're seeing in P&C carrier spend and how that's informing your second-half guide. Then second, just hoping for an update on MediaAlpha for Agents. Thanks.

Steven Yi (CEO)

Thanks, Cory. I would say, start off by saying that I think it's still very early, and in fact, too early to say really what the impact of some of the profitability concerns that we're seeing in the industry will be on our business. I mean, really, from an industry perspective, I think it's still unclear whether or not this is the case of a certain number of carriers or an isolated number of carriers requiring some minor course corrections as driving behavior starts to return to more normal levels. It's happening either at a faster rate than they were expecting or just in different patterns than what they were expecting. Whether, based on what we talked about in the shareholder letter, this could be the start of a broader market trend. For us, the direct carrier feedback that we've gotten has been mixed.

There's only been a couple of carriers who've really slowed their investment growth or indicated that they may, while the vast majority of others have actually been adding to their budgets and actually telling us that they definitely plan to maintain a strong growth posture for the remainder of the year. The reason that we highlighted this in our shareholder letter was because, as a newly public company, we just wanted to educate our investors and talk more about the cyclicality in this industry, as we did about seasonality, and to be transparent about some of the early profitability signals that we've been getting from some of our carrier partners. I do want to reiterate one thing that we said in the letter too, which is that we've been in this space for now going on 11 years.

We have grown through and increased our market share through these broader market cycles in the past, and we expect to be able to continue to do so again. That confidence is based on the continued secular shift to online direct distribution, the direct measurability of the customer acquisition investments in our ecosystem, which lead us to believe, based on feedback from our carrier partners as well, that if there is a pullback in customer acquisition spend, a channel like ours will be one of the last places where an insurance carrier would pull back. Just the increasingly diverse mix of demand and supply partners that we have in our ecosystem versus the past when we went through this cycle a few years ago. Your second question was about agents and that initiative.

We're continuing to invest in product innovation there and really building a great agency. As we've talked about in the past, we're not expecting material contribution from this business segment for the remainder of this year. Really, just we're focused on building a strong foundation for this part of our business to make a material contribution to our growth in 2022.

Thanks, Cory.

Cory Carpenter (Analyst)

Appreciate it.

Patrick Thompson (CFO)

Hey for the first question, this is Patrick. Just to add a little bit of color to the diversity point that Steve made. Today, in Q2 of 2021, we have greater diversity on both the demand side of the ecosystem and the supply side. On the demand side, we had two customers that together accounted for 28% of our revenue. A year ago, a single customer accounted for 28% of our revenue. The same is true on the supply side, where no single supplier accounted for more than 10% of our revenue. A year ago, two suppliers accounted for roughly 23%. It is really great to see the diversity and mix on both sides of the marketplace. Thank you.

Steven Yi (CEO)

Thanks, Cory.

Operator (participant)

Your next question comes from the line of Michael Graham from Canaccord. Your line is open.

Michael Graham (Analyst)

Hey, thanks for taking my question. It was great to get all the data in the shareholder letter regarding the migration of demand partners to also become supply partners. I think that's exciting. I have two questions about that. The first one is, you mentioned that you have 35 carriers that have done the data integration necessary to become supply partners. What do you think the roadmap is to—I don't know what percentage of your customers that is, but what do you think the roadmap is to get the rest of those people on board? You mentioned that some of those carriers were able to offset as much as 30% of their spend by becoming supply partners. I'm just wondering, what is a typical timeframe for when a carrier becomes a supply partner for the first time?

How long does it take them to kind of ramp up to that level?

Steven Yi (CEO)

Yeah, thanks for that question, Michael. I wish I could give you a clear answer on this one. I mean, the reality is that insurance companies tend to act very thoughtfully and deliberately when they're adopting new programs like this, like extending the partnership and not just becoming a buyer or an advertiser or demand partner in an ecosystem, but also becoming an intelligent seller or supply partner in our ecosystem. The 35 partners that we have, or 35-plus insurance carriers that we work with in this capacity, they're at different levels of adoption. As we've mentioned in the past, I believe, the easier parts are in getting these carriers to serve comparison listings when they don't have a policy to sell to a consumer.

Now, the justifiable concern that insurance companies typically have is that if they want to expand beyond this type of an implementation, which is really required to achieve that metric, that benchmark metric that you mentioned, the ability to offset 25%, 30%, 35% of your customer acquisition costs through an intelligent program like this, the potential for losing policy sales by showing comparison options to insurance shoppers on their site has to be addressed. That is really where our data science capabilities come in. The data science is what enables us to work with insurance carriers to help identify those shoppers who are non-converting or have a very, very low likelihood of converting into a policy.

It's really about bringing the data science capabilities to bear to help address the concerns that carriers have about adopting this program in full and displaying it on their quote page as they show their rate to insurance shoppers, but then also intelligently, in certain cases, also show comparison listings because the data science tells them that that consumer is really just not going to buy a policy from them at that time. In terms of the adoption to get to that level, I'll put on a number and say it takes two to three years in our partnerships with insurance carriers to really get to that level. As I started off, very hard to predict because insurance companies, if we've learned anything about them, is that they tend to move at their own pace.

Michael Graham (Analyst)

Yeah. All right. Thanks for that. I appreciate the data around that feature. I think it's really helpful.

Steven Yi (CEO)

Sure. Thanks, Michael.

Operator (participant)

Again, if you would like to ask a question, simply press star then the number one on your telephone keypad. Your next question comes from the line of Meyer Shields from KBW. Your line is open.

Meyer Shields (Analyst)

Thanks. I guess when we look back in the insurance industry, we had a significant increase in claim frequency in 2015 and 2016, and a lot of companies were actually pretty late in recognizing that. I was wondering, from your perspective, do you have an idea? Do you have any insight into how well the companies that are increasing their spend, how aware they are of the potential worsening frequency, worsening severity, or other issues that are leading some companies to pull back?

Steven Yi (CEO)

Yeah, that's a great question. I think every carrier is pretty well aware of it. I think that it's really, I mean, the fact that people are driving more and they're getting into more accidents and that severity is going up, I mean, those aren't new things, right? I mean, everyone was expecting that. It's really about, is it coming back in the manner that was forecast three months ago or six months ago by most of these major insurance companies? In our direct discussions with dozens of P&C insurance carriers, that feedback is mixed. Certainly for some, and you've seen this in the news, that it's coming back in a way that they hadn't predicted, and that's requiring them to actually make some adjustments to their rate, i.e., increase their prices to cover that.

We actually get a lot of feedback from our insurance carriers saying that they're monitoring this very carefully. They also understand the inherent uncertainty of this because the economy's never come back from something like a COVID-related, pandemic-related shutdown, right? It is very hard to predict exactly how driving patterns are going to come back. What we're hearing from actually the majority of our carriers is that it's not coming back in a way that they hadn't anticipated, which in turn, I think, is leading to them saying that they want to continue to grow for the remainder of the year.

Meyer Shields (Analyst)

Okay. That's very helpful. Thank you. One question, and I don't know how comfortable you are talking about what we're seeing in the third quarter, but with all of the, I guess, concern about the Delta variant, etc., is that impacting the other vertical? Thinking, obviously, specifically about travel.

Steven Yi (CEO)

I think it is, and I think it will. The thing to note about travel is that that business has been growing for us, as we highlighted. Certainly, it's still not back to pre-COVID levels for us or pre-pandemic levels for us. A couple of things were driving that even before concerns about the Delta variant, which is that international travel really hadn't come back and business travel really hadn't come back. The reason that's important, even though I think leisure domestic travel had largely rebounded, is that international and business travel are very high-margin areas for the travel industry.

The feedback that we're getting from CMOs of the different travel companies that we're working with is that until those two areas come back, most in the travel industry will be conservative in terms of the aggressiveness with which they're going to advertise and try to acquire new customers. I think with those factors and then with the new Delta variant coming on and the uncertainty related to that, I'll say again, it's very hard to predict for our travel business how it's going to come back. We're also very happy with the position that we're in in that vertical, with the team that we have in that vertical, and we'll be ready when the market does come back.

Meyer Shields (Analyst)

Okay. Perfect. Thank you so much.

Steven Yi (CEO)

Thanks, Meyer.

Operator (participant)

If you would like to ask a question, simply press star then the number one on your telephone keypad. Our last question comes from the line of Daniel Grosslight from Citi. Your line is open.

Daniel Grosslight (Analyst)

Hi guys. Thanks for taking the question. We continue to see a movement to the private market. I think at this point last year, around 30% of transaction value was in the private market, and this year it's around 41%. Just curious if we should think about kind of that private market as growing in total share of transaction value. I know 4Q is probably more weighted towards health, which is more open market, but just going forward, is the trend towards more private market transaction? As smaller supply partners come online, are they increasingly going to the private market, or are they sticking with open market?

Steven Yi (CEO)

Hey, Daniel, it's Steve. Let me take the first crack at that question, which is, I mean, you pointed out all the right things. The growth from smaller or newer supply partners, as well as smaller and newer demand partners, i.e., a lot of traditional agency writers who are now really jumping into direct customer acquisition for the first time, we do expect to see more growth in our ecosystem coming from those types of partners. To your question, those types of partners are the ones who our Seller Exchange product, which is what we call our private marketplace product, is not meant for. Sorry, I should have said it differently. The private marketplace product is not really meant for those small, medium-sized, or newer demand and supply partners.

It's really ideally suited for larger supply partners who want to work with some of their very largest demand partners directly. Just in the nature of how I described that, right, this is why we don't focus on this metric much, because in any given quarter, there's a large supply partner who will start to work directly with one or two large insurance carriers. I mean, this could impact the metric pretty meaningfully in any given month or quarter. In addition to that, our supply partnership team obviously is constantly working to bring on new supply partnerships. If we get a large supply partnership and that large supply partner is one that's ideally suited for a Seller Exchange product, we want to best service that partner really without any consideration for the transaction value, the revenue mix, or the open exchange, the Seller Exchange mix.

This is all the reasons behind why we just really focus on transaction value and do not worry about the mix much. To really loop around to your question, we still think that the equilibrium point is somewhere below where we are now, right? Again, in the near term, we could see this fluctuate in one direction or another.

Daniel Grosslight (Analyst)

Okay. That's helpful. As I look at your guidance for what's implied for 4Q, it's a pretty big step up in both transaction value and revenue on a sequential basis from 3Q. Is that mostly due to AEP for Medicare, or are there other things that are driving that sequential increase in 4Q?

Patrick Thompson (CFO)

Daniel, I think you've got that story right, which is in Q4, right, we expect a seasonal mix shift with the growth of the health and Medicare business due to OEP and AEP. It's concentrated in Q4 really over a couple of months. Those verticals tend to be higher open marketplace transaction value because our owned and operated websites are a larger component of the mix. It's really the seasonality pattern that we expect from here out that's driving that step up that you're seeing in terms of transaction value, revenue, and revenue as a percentage of transaction value. Because O&O is a component there, it tends to be higher margin as well from a contribution perspective. That trend really flows down through from transaction value, revenue, contribution, and to EBITDA. We saw this last year as well, right, in Q4.

The impact was a little more muted because if you remember, we had outside investment allocations in Q4 last year in P&C. We do not have visibility yet into those types of allocations of budget. What is reflected today is a return to that normalized seasonality pattern that we would expect from Q3 to Q4.

Daniel Grosslight (Analyst)

Yeah. Very helpful. Thanks, guys.

Steven Yi (CEO)

Thanks, Daniel.

Operator (participant)

There are no further questions at this time. This concludes today's conference call. Thank you for participating. You may now disconnect.