MediaAlpha - Earnings Call - Q4 2020

Transcript

Operator (participant)

Hello, my name is Philip, and I'll be your conference operator today. At this time, I would like to welcome everyone to the MediaAlpha Q4 2020 earnings conference 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'd like to ask a question during that time, simply press star and then the number one on your telephone keypad. If you'd like to withdraw the question, press the pound key. Now we turn the call over to your host, Denise Garcia with Investor Relations. Please go ahead.

Denise Garcia (Head of Investor Relations)

Thank you, Philip. Our discussion today will include forward-looking statements about our outlook for future financial results, including our financial guidance for the first 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 8K 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 fourth quarter earnings release.

As a reminder, we publish 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.

Steve Yi (CEO)

Thanks, Denise. Hi, everyone. As you saw in our shareholder letter, we're pleased with our fourth quarter and overall 2020 results, and we anticipate a strong 2021. We're looking forward to discussing our most recent results with you, so we'll open the call to questions now.

Operator (participant)

Again, it's star one to ask a question. Your first question is from the line of Frank Morgan with RBC Capital Markets.

Frank Morgan (Managing Director and Healthcare Services Equity Research)

Good afternoon. I guess I'll start with your commentary in the release where you specifically called out the strength in your health insurance vertical and the record-breaking OEP that your AEP had just occurred. I know in the DTC brokers, the MA brokers that we spoke with, they commented a lot about in their fourth quarter results about the level of demand that they had gone out and created or bought. At the same time, in light of this heavy spend, there was also some chunkiness around breaking news stories in the presidential election. I'm just curious, how would that affect your business? Is that something you can capitalize on? Is that activity a benefit to somebody like MediaAlpha, or how does that dynamic play out, and what's the opportunity there? I'll ask a more specific modeling question.

Steve Yi (CEO)

Yeah, hey, Frank, could you repeat the question? Were you asking whether or not, I guess, the news cycle and the news that was hitting during OEP and AEP, whether that was a benefit to us at the market?

Frank Morgan (Managing Director and Healthcare Services Equity Research)

Yeah, was that a benefit? There was some commentary about there was a lot of chunkiness in their call volumes, and sometimes they just physically couldn't handle it. Yeah, just generally speaking, the effect of either elections or breaking news and any of those factors that could possibly happen during an AEP or an OEP, are those good or bad for your business?

Steve Yi (CEO)

Right. I think we saw a couple of things. One is that a lot of our supply partners were seeing media prices go up because of the election. That negatively affected some of our supply partners. We did hear that. It did negatively affect some of our demand partners as well, who then increasingly had to turn to a channel like ours for customer acquisition because the media pricing in some display channels or native advertising channels had gone up because of all the advertising related to the election. In terms of the chunkiness of what the news may have created in terms of consumer demand, I'll be honest, we did not really see that.

One way it may have manifested itself is that the tail end of OEP and AEP for us, where there's always a fair bit of activity, came in a lot stronger than we were projecting. I don't know if that goes to the observations that others were sharing with you, but certainly that aspect of what you're describing, I mean, we did see, and we did benefit from.

Frank Morgan (Managing Director and Healthcare Services Equity Research)

Gotcha. Maybe a modeling question here. Certainly, when I look at the numbers for the first quarter and really all of 2021, it seems like, at least relative to what we've modeled, the transaction value assumptions seem to be better, larger numbers, but the revenue guide seems to be generally in line with where we are. I'm just curious, is there any kind of dynamic at work there that might explain that? Is there any changes in things like transaction value or referral? Is there some mixed change or just any color around sort of the dynamic between the revenue and the transaction value? Thanks. That's all.

Tigran Sinanyan (CFO)

Thanks. This is Tigran. You're right to point that out. There's a bit of a mixed shift between open marketplace and private marketplace transaction value that's reflected in the Q1 and 2021 guidance. Just a reminder that that business model, that deployment exists, and we created it to support our at-scale supply partners who want to work directly with demand partners. We've seen a few of our partners kind of get to that scale, and we facilitate those types of relationships, right? It helps us continue to grow the top line and continue to grow the contribution margin dollars. It does create a bit of a shift between transaction value and GAAP revenue. We'll call the GAAP revenue from private marketplace transactions converts to GAAP revenue at a fractional rate, our take rate.

Operator (participant)

Your next question is from the line of Cory Carpenter from JPMorgan.

Cory Carpenter (VP of Internet Equity Research)

Hey, thanks for the question. Steve, if you want to, and then I'll have a follow-up with Tigran. Just hoping you could expand a bit on some of the trends you saw in the fourth quarter in the P&C vertical and just how you're thinking about the sustainability of that as the economy starts to reopen with more miles driven in 2021.

Steve Yi (CEO)

Hi, Corey. Thanks. Yeah, what we saw in the fourth quarter for our P&C vertical was just the continued strength of the demand in that vertical. As you know, if you follow the sector at all, the fourth quarter is typically a seasonally down quarter. To see demand go up in Q4 in P&C, certainly for us, was not something that we were anticipating, but obviously very happy to see. I think that speaks volumes for just the strength in the demand that we saw in the market in 2020. In 2021, I mean, what we're expecting is that the new baseline that's been set in 2020 will remain and that the growth will be back to more historical growth levels. I think what 2020 did, particularly for the property and casualty insurance space, was really accelerated the adoption of direct-to-consumer online channels.

You have heard that elsewhere. You have heard us talk about that. What we have seen is that as a lot of the offline channels have come back, offline marketing channels and customer acquisition channels like TV and sports marketing, we have seen the level of investment in our channel continue to go up from a lot of the carriers who may have accelerated their investment into our channel with shelter in place back in March and April of last year. For us, we think that is a very good sign that the growth that we saw in 2020 will stick around and form a new baseline upon which we will grow. I think that is what our forecasts reflect.

Cory Carpenter (VP of Internet Equity Research)

Thank you. Tigran, in the shareholder letter, you mentioned you expect to invest aggressively this year. Just hoping you could expand a bit on some of your key investment priorities. I think you mentioned employee hiring and then maybe just some of the perks and takes and how that impacts margins this year.

Tigran Sinanyan (CFO)

Sure. The hiring plan is, as you'd expect from us, about product and technology investments. I would say relative to many other companies, those will still look modest because the operating leverage in our business continues to be high. We're also investing in the agent channel, and that requires more headcount, sales-oriented headcount. Again, what we're seeing is that our sales and marketing costs relative to revenue will remain in that healthy 2% range. From an overall margin perspective shift, we do not see our headcount plans and hiring plans really affecting the EBITDA margin. What you're seeing there in 2021 is reflective of public company costs increasing year over year. In 2020, we had two months of that. In 2021, you'll see the full year effect of that.

Cory Carpenter (VP of Internet Equity Research)

Okay. Great. Thank you both.

Steve Yi (CEO)

Thanks, Corey.

Operator (participant)

Your next question is from the line of Mike Zaremski with Credit Suisse.

Hey, hi, guys. This is Charlie. I'm for Mike. I guess first, can you tell us whether there were any new carrier additions in the fourth quarter that maybe helped growth or any other dynamics you could call out?

Steve Yi (CEO)

Thanks, Charlie. No, no one notable who were new in Q4. I mean, remember that we're already working with all of the major carriers in all of the insurance sectors that we're in. For us, the growth is really coming from growth from existing partnerships and the day-to-day focus that we have in delivering value to our existing partners.

Got it. I guess just on the contribution margin, is this kind of like a good run rate to think about now, or are there, I guess you mentioned the private versus open shift. Is there anything that would impact the contribution margin in 2021?

Hey, Charlie, I think this is a good run rate to think about. Our guidance reflects all the kind of perks and takes that we expect to impact contribution margin. Remember, part of the driver of that is going to be mix and mix of supply and mix of vertical. In Q4, you saw that contribution margin increase sequentially to 16.2% from 14.3%. Part of that is the open enrollment periods for health and Medicare and the seasonal uptick there. From here forward, what we're modeling is the mid 15% range for contribution margin. We think that's appropriate.

Got it. Thank you. That's helpful. Thanks, guys.

Thanks, Charlie.

Operator (participant)

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

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

Hey, good evening, guys, and congrats on the great strong finish to the year. A quick follow-up on one of the earlier questions first, please, which is this dynamic of transaction value growing faster than revenue seems to be most pronounced in Q1 and just based on your guidance, and then it looks like it moderates as we go through the year. Do I have that right? Is there a story to tell there or anything to focus on?

Tigran Sinanyan (CFO)

Hi, this is Tigran. You've got that right. The dynamic there is, as partners reach a certain scale, and we're agnostic to whether they're working with us through our open marketplace or private marketplace. As they scale, we'll facilitate those relationships, and we've seen a bit of mix move to the private marketplace. That is a reflection of the demand-side environment. That demand-side environment, we expect to remain strong. What that does is then drive new supply partners into the ecosystem, which will largely be open marketplace. It will then moderate and kind of come back to a 70/30 split between open marketplace transaction value and private marketplace transaction value. We're really focused on growing that key top line metric. That represents the gross investment and customer acquisition from all of our partners. It reflects our share in the broader market.

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

Okay. That's helpful, Tigran. Thank you. A broader question, if I could, your guidance for pretty rapid growth in Q1, I'm looking mostly at transaction value. A much lower growth rate for the full year kind of leads me to believe that there should be a good opportunity to outperform that guidance is my interpretation. As we look at the growth rates you had for some of your verticals exiting this year, 76% in P&C and 46% in health and 27% in life, could you maybe just at a high level talk about when you thought about the guidance for this year, growth rates in those verticals relative to how they did sort of exiting this year, do you expect them all to slow down the same amount or some to kind of grow faster?

Are there any high-level thoughts you could share around the verticals as we go through the year?

Steve Yi (CEO)

Yeah. Hey, Michael, it's Steve. At a high level, I think what you're seeing in our numbers and our forecast is us starting to overlap periods when we did see a rapid acceleration of investment dollars going from offline marketing channels to online. That was in part or in large part due to COVID. As I mentioned earlier, I think we do expect growth to normalize. We're expecting a very good year. We expect growth to normalize from the baselines that were set in 2020. At a high level, I think that's really what you're seeing in terms of the growth rates on a quarter-by-quarter basis.

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

Okay. Thank you [so much]. Have a good night.

Steve Yi (CEO)

Thanks, Michael.

Operator (participant)

Your last question is from the line of Daniel Grosslight with Citi.

Daniel Grosslight (Senior Research Analyst)

Hi, guys. Congrats on a strong end to the year. I really appreciate the economy of these calls. I guess going back to the health segment question, I'm curious what's built into the guidance in 2021 as we think about AEP for plan year 2022, given we might see a return of more face-to-face sales in the agent force. How to think through next year's AEP?

Steve Yi (CEO)

Next year, are you talking about the 2020? You're talking about 2021.

Daniel Grosslight (Senior Research Analyst)

2021 AEP for plan year 2022.

Steve Yi (CEO)

Yeah. Understood. Listen, I mean, yeah, I think there'll be some of that, right? What we've seen are online-only processes for some Medicare products. We've seen the growth of online applications and online shopping processes from the new cohorts who are aging into Medicare. We're seeing that at higher levels than the older cohorts. We're seeing a greater propensity for these newer cohorts to opt for Medicare plans or privately administered Medicare plans, most notably Medicare Advantage. I think you're right. I mean, there will be some reversion back to face-to-face shopping. I do think that a lot of the positive trends and secular trends will continue. We're expecting for a very good AEP this year.

Daniel Grosslight (Senior Research Analyst)

Got it. Okay. As we think about the other segment, it seems like folks are itching to start traveling again, and that the vaccine rollout is going well. Can you talk about what's assumed in travel for 2021?

Steve Yi (CEO)

I'll say at a high level, little. It's really because we do see the numbers on our side ticking up. If you look at the TSA stats, you'll see our numbers going up in line with what you're seeing in terms of U.S. domestic air travel. I think it's still too early to say exactly what the timing of that return is going to be, whether what the second half of this year is going to look like, and whether it'll take six months or nine months for things to get back to normal, or will it take 24 months?

Daniel Grosslight (Senior Research Analyst)

Okay. Safe to say a reversion to normalcy isn't baked into your 2021 guidance.

Steve Yi (CEO)

That's right. I think that's it. Yeah.

Daniel Grosslight (Senior Research Analyst)

Okay. Lastly, I saw the rollout of the new agent channel on your website. It looks like an interesting product. Can you just talk about what you're assuming for contribution in that channel, the agent channel for 2021, and which segment that will largely show up in?

Steve Yi (CEO)

No, we're not anticipating strong financial contribution from that business this year. We're focused on innovation, product innovation. We're working with a few hundred agents already. We're focused on getting their feedback and really finding a new way to serve this important market. In terms of when you start to see that impact layer in, where you'll see it first is in the T&C.

Daniel Grosslight (Senior Research Analyst)

Got it. Okay. That's it for me. Thanks, guys.

Steve Yi (CEO)

Yeah. Thanks.

Operator (participant)

Your next question is from the line of Cory Carpenter with JPMorgan.

Cory Carpenter (VP of Internet Equity Research)

Hey, sorry. I just wanted to squeeze one more in. Maybe I wanted to go a little more on the agency channel. I mean, maybe could you just talk at a high level about the opportunity you're going after there? And then as we think about the next year, I know you're not expecting much revenue, but just in terms of rollout, what could it look like? Kind of what are the key learnings so far? And what are some of the upcoming milestones for that business? Thank you.

Steve Yi (CEO)

Yeah. The high-level story there, Corey, is that as much as we talk about direct-to-consumer, as much as we talk about insurance carriers and P&C going direct and then other sectors going direct, well over half a bottle of insurance policies are still sold through agents right now. It is an important market. It is an important distribution channel. It'll remain so. It's just a channel that we haven't worked with. As you know, some of the other publicly traded companies in our space, they have roughly 40% or so of their insurance revenue coming from the work directly with agents.

The reason that we're getting into it is because we think that there's room for innovation here and to do things differently and to have the same kind of transformative effects with our approach to the space that we had when we first entered into the space working directly with insurance carriers. In terms of milestones, really for us, what we're focused on is just building a better product, having a better experience that agents have, giving them more control over exactly how they're connecting with consumers. Right now, I think if you ask anyone in the space, that consumer experience is not good.

I think if you're looking for directionally what kind of innovation that you're going to see from us, it will all start with having a better consumer experience because any agent who buys leads from a current lead generator will tell you that a good consumer experience results in a good referral, and a bad one results in a bad one. Right now, there's just way too much bad consumer experience right now for the leads and calls that are being generated and sold to agents.

Cory Carpenter (VP of Internet Equity Research)

Helpful. Thank you.

Operator (participant)

Your next question is from Mike Zaremski with Credit Suisse.

Michael Zaremski (Senior Equity Research Analyst)

Hey, thanks. I jumped on late, but I have one question as a follow-up to Corey's on the agent channel. Curious if you can give us any color on the TAM of the current agent lead channel. Is that, are there a lot of competitors there that are doing this, or is this a small space currently that is mostly kind of greenfield opportunity that you guys are going to try to open up, or is it both?

Steve Yi (CEO)

No, I think the best way to think about the baseline TAM is to look at the publicly traded companies in our space, companies like LendingTree, MediaAlpha, and apply that percentage I mentioned, about 40% or so of the revenue coming from P&C insurance as being from agents. You do have a number of large private companies who are focused on this space. It is a big part of the marketplace. I mean, I think you can look at it as if half or so or more than half of insurance policies are still being sold through agents. I think you can think about the total addressed market opportunity in those terms in terms of just how much marketing spend there is in P&C insurance.

Michael Zaremski (Senior Equity Research Analyst)

Okay. Just following up, I think we understand your analytics are probably better than a lot of your peers. When the agent, let's just say you put a quote in from an Allstate agent, when an agent is considering lead options, I think price is one factor. Would you say that your leads might be more price competitive versus your competitors? Or is there kind of any kind of special sauce to kind of why your lead generation software might be a little bit better than others?

Steve Yi (CEO)

I would say, I'll answer the first question first, which is easier, which is I think that one difference is that the agents are going to have full control over exactly what they want to pay. That's not always the case right now. Usually, in this space, they're price takers. We're just not big believers in that as a long-term business model. In terms of what we'll do differently, I think what you'll see is that because we don't have the burden of being an incumbent in this space and having revenue and generating revenue on a lot of revenue from a business model that's based on a suboptimal consumer experience, I think that you'll see us innovating and providing for a way to refer and connect interested shoppers with agents in a much more consumer-friendly way.

That's going to naturally lead to, I guess, higher quality referrals or leads. In that case, if there are enough agents there to create a competitive marketplace, then they'll bid whatever they feel is appropriate for every lead coming through. I can tell you right now that the pricing is not the issue. It's the quality of the leads and what they get. You should not have to sift through 100 leads and call 100 consumers that you're accessing through this model now to get one policy or two policies.

Michael Zaremski (Senior Equity Research Analyst)

No, that's fair. We've heard many agents talk about the leads just didn't pan out. They should money, I guess, would be the.

Steve Yi (CEO)

That matters. Absolutely. Absolutely.

Michael Zaremski (Senior Equity Research Analyst)

All right. Thank you very much. I'm looking forward to learning more about the year.

Steve Yi (CEO)

Yeah. Thanks, Mike. Good luck.

Operator (participant)

There are no further questions. That does conclude today's conference. Thank you for participating. You may now disconnect.