EverQuote, Inc. (NASDAQ:EVER) Q1 2024 Earnings Call Transcript

EverQuote, Inc. (NASDAQ:EVER) Q1 2024 Earnings Call Transcript May 6, 2024

EverQuote, Inc. beats earnings expectations. Reported EPS is $0.05356, expectations were $-0.07. EVER isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Thank you for standing by. My name is Mark, and I will be your conference operator today. At this time, I would like to welcome everyone to the EverQuote First Quarter 2024 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] Thank you. I would now like to turn the call over to Brinlea Johnson, Investor Relations. Please go ahead.

Brinlea Johnson: Thank you. Good afternoon and welcome to EverQuote’s first quarter 2024 earnings call. We’ll be discussing the results announced in our press release issued today after the market closed. With me on the call this afternoon is Jayme Mendal, EverQuote’s Chief Executive Officer; and Joseph Sanborn, Chief Financial Officer of EverQuote. During the call, we will make statements related to our business that may be considered forward-looking statements under federal securities laws, including statements concerning our financial guidance for the second quarter of 2024, our growth strategy and our plans to execute on our growth strategy, key initiatives, our investments in the business, the growth levers we expect to drive our business, our ability to maintain existing and acquire new customers, our expectations regarding recovery of the auto insurance industry, and other statements regarding our plans and prospects.

Forward-looking statements may be identified with words and phrases such as we expect, we believe, we intend, we anticipate, we plan, may, upcoming, and similar words and phrases. These statements reflect our views only as of today and should not be considered our views as of any subsequent date. We specifically disclaim any obligation to update or revise these forward-looking statements, except as required by law. Forward-looking statements are not promises or guarantees of future performance and are subject to a variety of risks and uncertainties that could cause the actual results to differ materially from our expectations. For a discussion of material risk and other important factors that could cause the actual results to differ materially from our expectations, please refer to those contained under the heading risk factors in our most recent quarterly report on Form 10-Q or annual report on Form 10-K that is on file with the Securities and Exchange Commission and available on the Investor Relations section of our website at investor.everquote.com and on the SEC’s website at sec.gov.

Finally, during the course of today’s call, we will refer to certain non-GAAP financial measures, which we believe are helpful to investors. A reconciliation of GAAP to non-GAAP measures was included in the press release we issued after the close of market today, which is available on the Investor Relations section of our website at investors.everquote.com. And with that, I’ll turn it over to Jayme.

Jayme Mendal: Thank you, Brinlea, and thank you all for joining us today. 2024 is off to a strong start. In the first quarter, operating results exceeded the high end of our guidance range for revenue, variable marketing margin, and adjusted EBITDA. We achieved record levels of net income, adjusted EBITDA, and operating cash flow. These results were made possible by the actions we took in 2023 to strategically realign the business and return to our roots as a capital efficient digital insurance marketplace. Since the middle of last year, we have observed auto insurance carrier underwriting profitability steadily improving. With this trend persisting into 2024, carriers have continued to reactivate campaigns, restore budgets, and reopen their state footprints in our marketplace.

Actions and messaging from carriers indicate that the majority are either starting to or planning to restore greater emphasis on growth. Given the year’s long volatility in the auto insurance market, we maintain caution while noting that we believe a sustainable auto recovery is in fact underway. Against an improving industry backdrop, our team continues to execute effectively, as evidenced by our bottom line performance. Alongside sequential growth and carrier revenue, we had strong growth in agent revenue compared to the fourth quarter. And as provider budgets increased, our performance marketing agent continued to optimize in real-time, driving volume and variable marketing margin growth. The progress extended into our home vertical as well, as we achieved record home revenue in the first quarter.

Q1 also marks numerous milestones in rebuilding technology infrastructure for future speed and scale. We moved most of our traffic to a new site infrastructure, began migrating customers to a new agent platform, and now have the majority of our traffic bidding migrated to our new ML-powered bidding platform. These changes will enable faster feature development and greater employee productivity in the future. More importantly, this sets us up to accelerate progress in areas ranging from site experiences to AI-powered bidding, to new agents’ products and features. I want to thank the EverQuote team for the incredible tenacity they demonstrated and continue to demonstrate through the recent hard market cycle. This period of unprecedented market conditions dating back to 2021 has been an extended challenging stretch for EverQuote, but we are emerging stronger.

The team which has led us through this challenging period is battle-hardened and energized by the results we’re beginning to see. It’s this team which gives me confidence in EverQuote’s pursuit and eventual achievement of our vision to become the largest online source of insurance policies by using data, technology, and knowledgeable advisors to make insurance simpler, more affordable, and personalized. I’ll now turn the call over to Joseph to discuss our financial results.

Joseph Sanborn : Thank you, Jayme, and thank you all for joining. I will start by discussing our financial results for the first quarter of 2024 before providing an update on what we are currently seeing in the auto insurance sector and our guidance for the second quarter. We had a strong start to 2024 and exceeded first quarter guidance across all three of our primary financial metrics of total revenue, variable marketing margin or VMM and adjusted EBITDA. We produced a record level of net income as well as a record level of adjusted EBITDA. These results were driven by continued strong execution of our operating teams against an improving auto carrier landscape. Total revenues in the first quarter were $91.1 million, driven by stronger enterprise carrier spend of more than 150% from Q4 levels.

Revenue from our auto insurance vertical was $77.5 million in Q1, representing roughly 85% of revenues in the period and a sequential increase of 72% from the fourth quarter of 2023. Revenue from our home and renters insurance vertical was $12.7 million in Q1, a sequential increase of 29% from the fourth quarter of 2023. VMM was $30.8 million for the first quarter, up nearly 50% from the fourth quarter of 2023. The VMM as a percentage of revenues in the quarter was 33.8% and as expected declined from the record level of the previous quarter as we experienced a more costly advertising environment which was partially offset by continued strong execution by our traffic teams and the ongoing benefits of our investments and our bidding technology.

Turning to operating expenses and the bottom line. We continue to be very disciplined in managing expenses and driving incremental efficiency across our operations. Our efforts to streamline the business have led to improved execution and greater operating leverage. Cash operating expenses which exclude certain noncash and other one-time charges were in line with expectations of $23.2 million in the first quarter or 23% decline from the first quarter of 2023. In the first quarter, we reached a milestone of generating positive GAAP net income for the first time since the third quarter of 2019, reporting a record high of $1.9 million. Adjusted EBITDA reached a record $7.6 million in Q1, a 41% improvement year-over-year on 17% lower revenues, reflecting the strong operating leverage that we have created in our model since our June 2023 strategic realignment.

Adjusted EBITDA, as a percentage of revenues, reached 8.3% in the quarter, as the rapid increase in auto carrier recovery in Q1, coupled with our tight expense discipline led to VMD overperformance flowing through to Adjusted EBITDA. We remain steadfast in our commitment to efficient operations, and as we gain greater confidence in the sustainability of the recovery, we expect to modestly increase investment to support our future growth. As a result, as we progress through the second half of this year, adjusted EBITDA margins are likely to moderate but remain above pre-downturn levels. We delivered operating cash flow of $10.4 million for the first quarter, ending the period with cash and cash equivalents of $48.6 million, up from $38 million at the end of the fourth quarter of 2023.

Adjusted EBITDA will continue to be a close proxy for operating cash flow going forward subject to normal working capital adjustments. Before turning to guidance, I want to provide an update on what we are seeing in the auto insurance industry this year. During our February call, we’ve shared that many of our carrier partners have recently reiterated their prior comments to us of wanting to return to acquiring new consumers during the course of 2024. We are pleased to see this more growth-oriented mindset has taken hold, which has led to a strong start for the year with more auto insurers beginning to return to our marketplace. We are increasingly optimistic that auto recovery will be more sustainable this time around. However, we are cognizant that there is no playbook for how our carrier partners will emerge from what several insurance executives have referred to as a once in a generation downturn.

Given these dynamics, we expect unpredictability to persist in the near term, which makes it increasingly challenging to look at historical seasonal patterns to predict our outlook for the remainder of the year. We continue to execute on the strategy and accomplish the goals we laid out last year following our June strategic realignment. We committed to restoring consistent quarterly cash flow from operations in the first half of the year, followed by our return to our pre-downturn adjusted EBITDA margins in 2024. I am pleased to share that we achieved both of these goals within the first quarter ahead of our expectations. Furthermore, we expect our operations to continue to generate cash flow and quarterly adjusted EBITDA margins to remain at or above pre-downturn levels for the remainder of this year.

Turning to our guidance, for Q2 2024, we expect revenue to be between $100 million and $105 million. We expect VMM to be between $31 million and $33 million, and we expect adjusted EBITDA to be between $7 million and $9 million. In summary, we entered 2024 with deep conviction that EverQuote is extremely well-positioned to directly benefit as sustainable auto carrier recovery takes hold and persists. We delivered strong performance in the first quarter like senior guidance thrust, revenue, VMM, and adjusted EBITDA. Our ability to achieve record levels of net income and adjusted EBITDA in the first quarter demonstrate our efficient business model. We will continue to focus on strong execution and remain steadfast in our commitment to efficiency while strategically investing and positioning EverQuote for future growth and success.

Jayme and I will now answer your questions.

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Q&A Session

Operator: [Operator Instructions] And your first question comes from the line of Ralph Schackart with William Blair.

Ralph Schackart: Hi, good afternoon. Thanks for taking the question. Jayme, maybe if you could provide some perspective, if you could, please, just in terms of how broad based the recovery you’re seeing, in terms of number of carriers, increasing number of states, just any sort of like operational metrics you might be able to add to the obviously really strong performance in the quarter. Then I have follow-up for Joseph.

Jayme Mendal: Sure. Thanks, Ralph. So if you take a step back, I think sort of across the board, you’re seeing broad based improvement in carrier underwriting profitability. So that’s been steadily improving over the last year. I think auto carriers have taken 20-ish points of rate, and you’re seeing across the number of carriers, double digit percentage point improvements in their combined ratios. So I think we are — the industry itself is certainly getting back to a more broad-based position of health, which is the primary leading indicator to reentry back into the marketplace. Within our marketplace, I guess datapoint I can share is we’ve seen all the top 10 carriers from Q4 have stepped up their spend into Q1. And there is a broad base of carriers that are reactivating campaigns, restoring budgets, reopening state footprints in our marketplace.

Now, if you just look at the performance, we’ve seen so far this year and the guidance we’re providing for the second quarter, what that demonstrates is that a recovery that has happened quite faster than we expected in the first part of this year. And so I think a good bit of that recovery is somewhat front-loaded relative to how we expected the year to play out. And there is certainly one major carrier that has leaned in very aggressively, but by and large we’re seeing a more broad-based recovery than we were seeing this time last year.

Ralph Schackart: Okay, that’s really helpful. And then, Joseph, historically, I know this is unpredictable, like you talked about on the recovery path, but historically you’d see a strong Q1 seasonally maybe down Q2, up Q3, maybe Q4 is down. Just can you help us kind of think about sort of the shape of the rubbery new recovery as we think about sort of modeling out 2024?

Joseph Sanborn : Sure, happy to Ralph. So let me just maybe start this thing about how would the year unfold to date, as Jayme said, relative expectations. The normal seasonal pattern, as you just described, start the year, that’ll be a good start to the year, Q2 down, Q3 up, Q4 down. Given what’s actually transpired, it’s been a much stronger start to the year, as Jayme mentioned. And it’s really been led by a handful of carriers who have been aggressively expanding their state footprint more quickly. And resulting is having, obviously, a strong Q1, but then you look at our Q2 guide. Q2 guide implies auto returning to peak — near peak levels that we started Q1 of 2023. So as a result, we see this growth as we expected for 2024 being more front-end loaded.

And so we think about how — for the second half of the year, what does that imply? So we think about the carriers are more aggressive in coming into the marketplace more aggressively. There’re relatively few additional states to open at this point, in part because some of the opportunities, some of the more challenging states, some of the larger states, but the timing of those is still TBD, and some are saying it won’t be until 2025. And then as we look at the broader range of carriers out there, we certainly see enthusiasm for getting back to growth mode, but the specificity of their plans for the second half is still uncertain, right. So we put this all together. The way we think about it is we expect to have strong year-on-year growth in the second half of the year.

But we are not currently expecting the sort of seasonal pattern of sequential improvement from Q2 to Q3 applied this year, just given the front-end loaded nature of the recovery so far. So that’s what we can give you right now based on what we’re seeing.

Operator: Your next question comes from the line of Michael Graham with Canaccord.

Michael Graham: Thank you and congrats on the strong results. Maybe just to follow up on Ralph’s question. One of the other players in the industry had suggested that volumes were recovering, but pricing was especially strong here in the early phases of this recovery. So I just wonder if you could comment on the role that practicing might be playing and whether that means this recovery is more sustainable, less sustainable. And then I just wanted to ask a quick question on operating leverage. I know you mentioned that in your prepared remarks, but you had such good flow through here in the quarter. How are you thinking about the ability to keep delivering that flow through the year?

Jayme Mendal: Sure. Thanks, Mike. I’ll take the first question, and then I’ll turn it over to Joseph on the operating leverage question. So we continue to see, as it relates to volume, we continue to see elevated levels of shopping persisting into Q1. And we would expect that to really persist over the course of this year. Rate cycle unfolds, people get renewal notices, those renewal notices are coming in with rates that are meaningfully higher than what people are paying, and that triggers shopping behavior. So for as long as the rate cycle is unfolding, and you’ve got to remember there’s a six to twelve month lag from when a rate increase goes into effect to when the renewal notice may flow out to the customer, for as long as that remains in effect, we expect to see these elevated levels of shopping behavior.

And so we’re kind of planning for heightened levels of shopping in 2024, and then in 2025 gradual returns to more normalized levels of shopping activity. As it relates to pricing, pricing is, it’s stepped up meaningfully from Q4 to Q1. It is operating at healthy levels by historical standards. And we expect some stability in higher pricing levels, assuming the auto recovery continues to maintain its foothold. So we’re benefiting from a combination certainly sequentially of higher volume and higher pricing.

Joseph Sanborn: So with regards to operating, let me just give you a little color. So we, following our strategic realignment last summer in June, we really focused on driving operating leverage in the business. I think what you saw in Q1 was representative of what we have done. We got a record level of adjusted EBITDA and actually also a record level of net income. The adjusted EBITDA margin in the business was 8.3% in Q1. As we think about how we’re going to expand the expense base revenue and the implications for the EBITDA margin, I have to point out a couple things. We think operating expenses, cash operating expenses, refer to them will have modest increase as we progress through the year, and we’ll be very disciplined as we do that.