MediaAlpha, Inc. (NYSE:MAX) Q1 2024 Earnings Call Transcript

MediaAlpha, Inc. (NYSE:MAX) Q1 2024 Earnings Call Transcript May 4, 2024

MediaAlpha, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: 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. 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] I would now like to turn the conference over to Alex Liloia. Please go ahead.

Alex Liloia: Thank you, Jericho. After the market closed today, MediaAlpha issued a press release and shareholder letter announcing results for the first quarter ended March 31st, 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 1st, 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.

Steve Yi: Hey, 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-ups 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 is 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 continue 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 nine 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.

Patrick Thompson: 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.

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Q&A Session

Operator: Thank you. And your first question comes from the line of Michael Graham with Canaccord. Please go ahead.

Michael Graham: Hey, thanks a lot, and 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 water mark could be for the business in this early cycle. Like, if we look back at your historical transaction value results, you sort of peaked in the middle part of 2021, and you were sort of like on a run rate well north of a billion dollars. And I’m just wondering, like, do you think the industry is set up for you to be, you know, at that level when this next cycle peaks or larger or just like, how are you thinking about that, that topic?

Steve Yi: Hey, Michael. Yeah, 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, currently 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 currently 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 advertisers, carriers will be 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.

Currently, 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, you know, rates are going up about 20% to 22% year-over-year. There are carriers who are still taking rate this year and will 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 into next.

I think the thing that we’ve 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 snapback in pricing to a couple of things. I think one is just the appetite that these carriers have after having sat with sidelines for the better part of three 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 front, again, we’ve been pleasantly surprised at 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, New York, New Jersey, kind of comeback online, again the 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 the color that you were looking for?

Michael Graham: It does, Steve. Thank you. And that was a complete answer, so I’ll defer to the next caller. Thanks so much.

Steve Yi: Thanks, Michael.

Operator: Our next question comes from the line of Mike Zaremski with BMO Capital Markets. Please go ahead.

Michael Zaremski: Thanks. Good afternoon. 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 it. Clearly, you gave us 2Q guide. And I believe historically there has been seasonality around tax refund season. Maybe, that’s, you know — obviously that would be encapsulated in the 2Q guide, if that is true. But anything on the seasonality front we should keep in mind.

Patrick Thompson: Yeah. And, Steve, do you want me to take this one?

Steve Yi: Yeah, go ahead, Pat.

Patrick Thompson: Perfect. Yeah. So, Mike, thanks for the question. And I would say that, I think our two 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 then Q4 tends to be a bit lower than that. And I think we’ve given the guidance in the past that in a typical year, we would expect Q1 to be 15% to 25% bigger than 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 leads 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. Wouldn’t doubt that it could be hard to tease out as the business recovers as well.

Michael Zaremski: Okay, got it. Yeah, 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 and kind of making sure the revenues are there before kind of reinvesting, or are you guys, right, good enough line of sight that we should just be thinking 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.