MediaAlpha - Earnings Call - Q3 2021

Transcript

Operator (participant)

Good afternoon. My name is Emma, and I will be your conference operator today. At this time, I would like to welcome everyone to the MediaAlpha Q3 2021 earnings call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question-and-answer session. If you would like to ask a question during this time, simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question again, press the star one. Thank you. Denise Garcia, Investor Relations, you may begin your conference.

Denise Garcia (Head of Investor Relations)

Thank you, Emma. After the market closed today, MediaAlpha issued a press release and shareholder letter announcing results for the documents that are available in the investors' section of our website, 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 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 those reflected in those statements. Please refer to the company's SEC filing, 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 10th, 2021. In addition, on today's call, 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. Reconciliations of these non-GAAP measures to the most directly comparable GAAP measures are available 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 investor section of the company's website at investors.medialpha.com. Now I'll turn the call over to Steve for a few.

Steve Yi (Co-founder and CEO)

Thanks, Denise. Thank you, everyone, for joining this call. Our transaction value in the third quarter of 2021 was $255.1 million, an increase of 17% year-over-year. While this was a healthy growth rate in light of our outstanding performance in the second half of 2020, it fell short of our expectations as we face headwinds in our temporarily scaling back the marketing investments in response to higher-than-expected underwriting losses. These headwinds are what is also leading us to revise our guidance downward for the remainder of the year and remain confident in our future growth. Despite the general pullback, nine of our top 20 P&C insurance carrier partners increased their investments with us in the third quarter by 50% or more compared to the prior year period. We believe this illustrates the continuing strength of the insurance industry's secular shift to online direct-to-consumer distribution models.

In addition, our lean operating model puts us in an enviable position to invest in growth as others may be pulling back. We believe that these factors will enable us to scale rapidly once the carrier's very bright spot during the quarter was our higher-than-expected year-over-year growth of 44% in our health insurance vertical, which is unaffected by the trends in the auto insurance market. We continue to see outstanding performance in this vertical in the current open and annual enrollment periods and expect this team to have a very strong fourth quarter. During these times, we will continue to focus on what has made us successful: disciplined execution, a growth mindset, and putting our partners' needs first. We approached the last hard market with this as our foundation, and we must pull away from our competition by leaps and bounds.

We have no doubt that we will also come out of this period stronger than ever and ready to seize the opportunities ahead. With that, we'll open it up to.

Operator (participant)

A star then the number one on your telephone keypad. We'll pause for just a moment to compile the Q&A roster. Your first question comes from the line of Michael Graham with Canaccord Genuity. Your line is open.

Michael Graham (Managing Director and Director of Research and Investment Strategy)

Hey, thanks a lot. Just a couple of questions. The first one, Steve, maybe just comment on past experience with trough and rebound. You mentioned that nine of the top 20 grew by over 50% year-over-year, which is pretty astounding given the overall environment. I'm just wondering if you could comment on, was there a common thread for those carriers? Were these the ones who were already more fully embracing DTC, or is there any common thread to those carriers that?

Steve Yi (Co-founder and CEO)

Hey, Michael. Thanks. Great questions. With regard to our past experiences, I mean, we have been through this before, right? What we saw in the last cycle, that was back in 2015 and 2016, that cycle was driven by three big things: lower-than-expected gas prices, higher-than-expected employment, increase in distracted driving, all which led to higher-than-expected frequency. What you saw unfold there was a hard market cycle that lasted about a little over two years. I think this time around, I think what we're hearing from most of our carrier partners is that this underwriting cycle is going to unfold much more quickly. It makes sense when you think about what the reasons are behind this cycle, right? Because it's related to post-pandemic driving patterns, pandemic-related supply chain issues that's leading to severity issues, and then losses from major cat events like Hurricane Ida, right?

The one thing that we know about the duration of the cycle is that as many large carriers have announced, we do expect them to continue to take rate well into the first half of 2022. Having been through these cycles before for us, it is hard to foresee this market coming back in full until they are done with this rate-taking process. Now, as the profitability is addressed, again, having been through this before, we fully expect and know that the industry is going to revert back to growth more pretty quickly, in particular in our ecosystem because of the overall efficiency and how quickly they can scale back in our ecosystem. What we are focused on in this period is really about laying the foundation and the groundwork to accelerate out of this profitability cycle.

What the current carrier focus on profitability and efficiency enables us to do is to make additional progress with initiatives and integrations to boost efficiency that honestly get overlooked sometimes when carriers are just trying to grow. What this means is more granular conversion tracking integrations, better data passing integrations, I think, and enhanced interest and increased interest in carriers working with us as a supply partner to generate revenue from non-converting shoppers. Focusing all of these during a hard market cycle like this is one of the ways that we put distance on our competitors coming out of the last cycle, and we expect to be able to do that this time around as well. Now, Michael, your second question about 9 out of 20 of our carrier partners in the P&C vertical growing by over 50% quarter-over-quarter in Q3 or year-over-year in Q3.

I think the common thread is that these are all carriers that were still relatively early in the adoption of direct-to-consumer marketing. We talk about the secular shift a lot. I would say that if there's one common theme, connecting those nine carriers, it's that they were in inning two or three of this adoption curve and not in inning six or seven.

Michael Graham (Managing Director and Director of Research and Investment Strategy)

Got it. That's super helpful. Thank you, Steve.

Steve Yi (Co-founder and CEO)

Sure. Thanks, Michael.

Operator (participant)

Your next question comes from the line of Daniel Grosslight with Citigroup. Your line is now open.

Daniel Grosslight (Senior Research Analyst of Healthcare Technology)

Hi, guys. Noting that there are increasing scrutiny on Medicare Advantage advertising requiring all Medicare Advantage marketing materials to be submitted to CMS prior to use. Just wondering if you guys have seen any slowdown in lead generations from your supply partners or your own interest assets from this?

Steve Yi (Co-founder and CEO)

Yeah, understood. Sorry, you broke up a little bit, but I think you're asking about whether the CMS pre-approval requirement for Medicare Advantage advertisements has led to any kind of slowdown in our ecosystem.

Daniel Grosslight (Senior Research Analyst of Healthcare Technology)

Yes.

Steve Yi (Co-founder and CEO)

Yeah. It hasn't. We're having a very strong enrollment period, and we haven't seen any material impact from these new CMS guidelines. I think first is our owned and operated websites aren't subject to the CMS pre-approval requirements. We do work with demand and supply partners, though, who are subject to those requirements. Those partners haven't pulled back with us in any way. In fact, some of those partners are the ones increasing their budgets two to three times what they were in the last enrollment period. I think the overall feedback that they're giving us is that getting the pre-approval for digital advertising copy has been a lot quicker than for offline ad copy, such as TV ad copy and radio ad copy.

Daniel Grosslight (Senior Research Analyst of Healthcare Technology)

Gotcha. Okay. Thank you. That is helpful. As a follow-up, we saw that the conversion in P&C was pretty different than we had expected. Just wondering what the private market dynamics were in P&C this quarter.

Steve Yi (Co-founder and CEO)

Yeah, that's a great question. What we saw in Q3 is that we had some large supply partners who scaled this tremendously over the years, established direct relationships with a couple of larger P&C carriers. That resulted in this shift. As you know, we don't provide guidance related to the mix of open and private marketplace transaction. I think this is exactly right. There can be near-term fluctuations that are largely partnership-driven. The thing to keep in mind, though, and the point I want to emphasize is that the growth of our private marketplaces is fundamentally a good thing for our business, and I would think for the industry as well. This product was designed for at-scale supply partners who just in broad strokes need more of a technology platform solution than a full-service marketplace solution.

The growth in our private marketplace partnerships, first and foremost, means that we've succeeded in helping these supply partners scale through our open exchange to levels that were really hard to imagine just a few years ago. We see the growing adoption of our private marketplace product by many of these at-scale supply partners. We take that to mean that we've been able to actually evolve our offerings to meet their changing needs because these are very important partners. Their needs are going to be different when they're a mid-size partner or smaller partner in the open exchange and when they're an at-scale partner. For these larger partners, keep in mind that our private marketplace is a strongly differentiated platform offering that no other company has been able to offer in any credible way. We have 9-10 such partnerships.

No one else has even one, and believe it's not for lack of trying. I think for us, it also leads to far more deeply integrated partnerships. These are some of the largest supply partners in the industry who then enter into a multi-year exclusive partnership with us to become a private marketplace partner. Now, keep in mind the dynamics here that will shift more to the open exchange. It will be the growth of new demand partners because new demand partners or mid-size demand partners typically can't support as many direct relationships as large demand partners can. It is going to be the growth of newer supply partners as well, smaller partners, mid-size partners as they scale, and then the increase in carrier partners because regardless of the scale of our carrier supply partners, the private marketplace product really isn't a product that's designed for them.

Over the long run for us, it's just really about maintaining a healthy balance of both of these models because it tells me that we're doing a pretty good job of serving the needs of both our small and mid-size supply partners as well as our largest ones.

Daniel Grosslight (Senior Research Analyst of Healthcare Technology)

That was super helpful. Thanks for the color.

Steve Yi (Co-founder and CEO)

Thank you.

Operator (participant)

Your next question comes from the line of Meyer Shields with KBW. Your line is now open.

Meyer Shields (Managing Director)

P&C, are you getting any or are you seeing any signs of concern about insurance companies wanting to raise rates but having some regulatory friction?

Steve Yi (Co-founder and CEO)

I could answer that pretty quickly. That is something that we're seeing mostly, quite honestly, and just in the trade press and not any specific feedback that our partners are giving us.

Meyer Shields (Managing Director)

Okay. Perfect. I don't know whether this is manifesting itself at all, but a number of the, I guess, senior health brokers are struggling with retention. I was hoping you could walk us through what impact that has to MediaAlpha, if any.

Steve Yi (Co-founder and CEO)

Those brokers are both demand and supply partners of ours. Again, to the extent that they're going to struggle with retention, that would lead them to actually assign potentially a lower expected lifetime value to the customers that they require. That would lead them to pull back on the bids that they have in our ecosystem. For us in our channel, we're not seeing that. In fact, we're seeing actually some of the biggest budget increases coming from these brokers in our ecosystem. Keep in mind, the vast majority of the demand is also directly from the carriers themselves and not from these types of brokers.

Meyer Shields (Managing Director)

Okay. Perfect. Thank you so much.

Steve Yi (Co-founder and CEO)

Yeah. Thanks, Meyer.

Operator (participant)

Again, if you would like to ask a question, press star, then the number one on your telephone keypad. Your next question comes from the line of Frank Morgan. Your line is with RBC Capital Markets. Your line is now open.

Frank Morgan (Managing Director and Healthcare Services Equity Research Analyst)

Good afternoon. It sounds like in terms of the cycle itself on the P&C side, that 2023 is the year where hopefully things get back to normal. Is there a lag from the time the underwriting improves and where marketing spend goes up, or is it pretty much simultaneous with the improvement in the underwriting margins? What would be your experience from past cycles on that?

Steve Yi (Co-founder and CEO)

Yeah. Hey, Frank. I would not characterize it as the market coming back in 2023. I would characterize it as we do not know exactly when it will, right? I mean, we do have some partners telling us that they expect to be back in the early part of this year again. We have other partners telling us they will be back later. We also see the rate filings and the pace of the approvals that are happening. We see that companies announcing that these rate takings will continue well into 2022, right? When it does come back, we tend to see little to no lag from taking rate to coming back to marketing. Honestly, that is actually a partner just told us that yesterday.

There may be some differences this time around because there is a bit of uncertainty around what the severity is going to look like. Keep in mind the underlying issue here, Frank, which is that we're emerging from a once-in-a-lifetime pandemic, and a lot of the patterns that people are seeing, both in terms of frequency and severity, are kind of once-in-a-lifetime events that have been hard to predict. What the carriers are telling us, they'll be back very quickly after the rates are taken, if not simultaneously with the rates being taken. Keep in mind that other factor is that this industry is dealing with something that's an uncertainty that is new to a lot of people.

Frank Morgan (Managing Director and Healthcare Services Equity Research Analyst)

Understand. Just one more on this topic. I think last quarter, you called out two of the large of your top carriers. Were you saying that more than two, that that number has increased since last quarter in terms of those who are either contemplating or have cut budgets?

Steve Yi (Co-founder and CEO)

Yeah, Frank. That's right. That's right. I think we started to see the early signs, right? Those are early signs that we were seeing in Q3, right? There is one aspect of this cycle that I alluded to, which is different from the last one, which is it did unfold quickly and more uniformly across all carriers or most carriers than in the last cycle. It is really because there's a multitude of factors, but really that unexpected severity stemming from supply chain issues that are pandemic-related that a lot of carriers weren't foreseeing.

Frank Morgan (Managing Director and Healthcare Services Equity Research Analyst)

Gotcha. I guess having diversity is a good thing now with the strength you're seeing on the health side of the business. Maybe just one question there. Earlier questions are in churn, but I'm just curious, as we've listened to the DTC Brokers report this season, there does seem to be a bigger focus on quality of new business that they add. I'm just curious, does that maybe even drive more demand for you if the desire to have quality members come on board to reduce churn? Does their consumption of leads go up, or how do you think that would affect the business?

Steve Yi (Co-founder and CEO)

I think it would affect the business positively. I think that that's part of why we're seeing very high levels of demand from some of those broker partners that you're referring to. We're seeing demand at levels of two to three times previous periods from those demand partners. As they focus on quality, to the extent that their budgets with us and their investment with us is going up, I think it says exactly what you're alluding to.

Frank Morgan (Managing Director and Healthcare Services Equity Research Analyst)

Okay. Thank you.

Steve Yi (Co-founder and CEO)

Thanks, Frank.

Operator (participant)

As a final reminder, if you would like to ask a question, press star, then the number one on your telephone keypad. There are no further questions. This ends today's conference call. Thank you for all attending. You may now disconnect.