MediaAlpha, Inc. (NYSE:MAX) Q4 2023 Earnings Call Transcript

MediaAlpha, Inc. (NYSE:MAX) Q4 2023 Earnings Call Transcript February 20, 2024

MediaAlpha, Inc. beats earnings expectations. Reported EPS is $-0.05, expectations were $-0.21. MAX isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Ladies and gentlemen, thank you for standing by. I would like to welcome everyone to the MediaAlpha Fourth Quarter and Full Year 2023 Earnings Conference Call. [Operator Instructions] I will now hand the call over to Denise Garcia, Investor Relations. You may begin your conference.

Denise Garcia: Thank you, Bhavesh. After the market close today, MediaAlpha issued a press release and shareholder letter announcing results for the fourth quarter ended December 31, 2023. These documents 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 first 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, February 20, 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’d 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: Thanks, Denise. Hi, everyone. Welcome to our fourth quarter 2023 earnings call. I’d like to make a few observations before turning the call over to our CFO, Pat Thompson, for his comments. After a difficult up and down year, we ended 2023 on a solidly positive note. Our fourth quarter results exceeded the high end of our guidance ranges across the board, driven by stronger-than-expected growth in our P&C insurance vertical. For the past several years, lingering pandemic-related inflationary pressures created the most difficult auto insurance market in decades. Going into 2024, we’re now confident that a sustainable industry recovery is finally underway. During December, we saw a major carrier make meaningful increases in their marketing investments, and this positive trend has accelerated into the new year.

Accordingly, we expect first quarter P&C transaction value to nearly double quarter-over-quarter, far surpassing typical seasonality, and we expect continued growth over the course of 2024 as more of our auto insurance carrier partners achieve target profitability and retrained our focus on customer acquisition. Q4 results in our health insurance vertical were in line with expectations, driven by continued strength in our under-65 business, which was offset by weakness in Medicare, as our partners face headwinds in adapting to recent regulatory changes as well as medical care cost inflationary pressures. We expect these broad trends in under-65 and Medicare to continue in the first quarter. Looking forward, we’re optimistic that 2024 is the beginning of great things to come.

Our unwavering focus on our partnerships and maximizing operating efficiency during what proved to be an exceptionally difficult market downturn, have laid the foundation for what we believe will be a period of significant top and bottom line growth. With that, I’ll turn the call over to Pat.

Pat Thompson: Thanks, Steve. I’ll begin with a few comments on our fourth quarter financial results and other recent business and market developments before reviewing our first quarter financial guidance and opening the call up for questions. As Steve mentioned earlier, our fourth quarter results exceeded the high end of our guidance ranges. Adjusted EBITDA increased 40% or $3.6 million year-over-year, driven primarily by higher contribution and continued expense discipline. Transaction value in our P&C insurance vertical was up 21% quarter-over-quarter, ahead of expectations as a major carrier ramped spend on our platform. Transaction value in our health vertical was roughly flat year-over-year, in line with expectations. Moving to first quarter guidance.

We are highly encouraged by the trends we have seen thus far. In P&C, we expect transaction value to nearly double sequentially far in excess of typical seasonality. Despite these increases, we expect transaction value in our P&C vertical to be down modestly year-over-year, as a major carrier is ramping customer acquisition at a more measured pace this year relative to their dramatic increase in the first quarter of 2023. In Health, Q1 is typically a seasonally weaker quarter with a smaller contribution from Medicare. We expect the trends Steve highlighted earlier to continue, with transaction value growing in the mid- to high single digits year-over-year. Overall for Q1, we expect strong year-over-year adjusted EBITDA growth, driven by higher contribution and continued expense discipline.

As a result, we expect Q1 transaction value to be between $175 million and $190 million, a year-over-year decrease of 6% at the midpoint. We expect revenue to be between $105 million and $115 million, a year-over-year decrease of 1% at the midpoint. Lastly, we expect adjusted EBITDA to be between $9.5 million and $11.5 million, a year-over-year increase of 45% at the midpoint. For overhead, we expect contribution less adjusted EBITDA to be approximately $500,000 to $1 million higher than Q4 2023. Touching briefly on expenses. We remain focused on driving efficiencies and have modest hiring plans for 2024. We, therefore, expect limited overhead growth for the full year, driving significant operating leverage as revenue growth picks up. Regarding share-based compensation, 2024 levels are expected to be approximately $20 million lower than 2023, as certain founder grants issued at the IPO were fully vested by the end of the year.

Finally, Q1 legal costs associated with the ongoing FTC inquiry are expected to be approximately $750,000. Turning to the balance sheet. We continue to prioritize financial flexibility and using excess cash to decrease net debt. We ended the quarter with $17 million of cash on hand, and our focus remains on reducing financial leverage through a combination of net debt reduction and adjusted EBITDA growth. With that, operator, we are ready for the first question.

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Q&A Session

Operator: [Operator Instructions] Our first question comes from the line of Cory Carpenter of JPMorgan. Please go ahead.

Cory Carpenter: Hi, thanks for the question. Steve, I wanted to ask, in your view, what’s different this time around? You mentioned a sustainable recovery is underway. So kind of what’s different in what you saw this time last year that you would call out? And then secondly, you called out one major carrier ramping spend at the end of 4Q. Curious what you’re seeing from other carriers as the years progressed. Thank you.

Steve Yi: Hi Cory. Sure. Yes. So I think what’s different this time around is it’s pretty evident when you look at the underlying profitability of all the carriers in the industry. What you’ve seen is really the second half of ’23 being far better than the first half, and carriers such as Progressive, Allstate, really everyone who’s coming out with their Q4 results showing stronger results in the second half of ’23 and particularly strong results in Q4 of ’23. That’s really leading into, I think, justifiable optimism or justified optimism as for where their rates are going into ’24. I think as you look back into where the industry was in ’22 coming into ’23, I think you’re just going to see a far different picture from a profitability perspective.

And I think that goes to the second part of the question that you had as well, which is that in terms of other carriers, we do see sort of broad-based sentiment that the market has turned. We’re engaged in positive growth discussions with almost all of our major carriers. Certainly, the — currently, the recovery has been driven by one primary direct writer. But we are starting to see an uptick in spend from many of our major carriers, and we expect that to really continue through ’24 and into ’25.

Cory Carpenter: Okay. Great. Thank you.

Operator: Thank you. Our next question comes from the line of Michael Graham of Canaccord Genuity. Please go ahead.

Michael Graham: Yes. Thank you. It’s great to see the recovery taking shape. I wanted to ask a question on what kind of operating leverage you think you might be able to see as we move through the year? You just guided to, I think, 9.5% EBITDA margin, which is great and pretty consistent with what you were doing sort of a couple of years ago before the downturn, and I know you have cut some costs sort of from then until now. So just wondering if you could kind of frame out how you’re thinking about operating leverage, if we’re fortunate enough to see this recovery gain momentum throughout the year.

Pat Thompson: Yes. And Michael, this is Pat. Thank you for the question. So I would probably take that question in a couple of chunks. First piece would be to say that we’re generally in the business to give guidance kind of one quarter at a time. So there’s not going to be any firm numbers kind of beyond Q1 that we’ll share. But probably a couple of things I would point you towards. One would be that this is a largely fixed-cost business. And as transaction value goes up, revenue tends to go up as well and contribution tends to go up and overhead tends to be relatively more fixed. And I think we’re in a spot where we don’t have grandiose or ambitious hiring plans. Of course, we’re going to be adding capacity in a few places, but we’re not planning on anything, no step function change in our overhead base over the course of this year.

And regarding kind of the overhead guidance we did give for the year of modest growth would kind of point you towards the comps on that, which was on May 1 of last year, we did a risk. So our Q1 overhead guidance has us down versus Q1 of 2023. Q2, the comp got a little harder because we had some of the risk benefit in there. And Q3 and Q4 were kind of run rating at the lower level. And so as you think about this year, Q1 will be down year-over-year and then the growth rate will kind of step up as we go through the year and wouldn’t be — we probably expect Q3, Q4 overhead to be a bit above where we’re projecting for Q1. And so hopefully, that gives you some color on OpEx to be able to kind of forecast what the take rates could look like as the business recovers.

Michael Graham: Yes, that’s helpful.

Pat Thompson: Thank you, Pat

Operator: [Operator Instructions] Our next question comes from the line of Tommy McJoynt from KBW. Please go ahead.

Tommy McJoynt: Hi, good afternoon, guys. Thanks for taking my questions. Are there any lessons learned sort of thinking about the — this cycle relative to the last hard market and kind of exiting 2017 into 2018 and beyond? Just putting that kind of in context how we can think about the buildup and the ramp of the recovery in personal auto spend. And if you could put that answer in the context of acknowledging that, just the overall pie, I guess, of the overall personal auto premium market size is evidently much larger right now than it was back then. So if you could just kind of put that in context as we think about building our forecast.

Steve Yi: Yes, sure. That’s nice. I think the most important takeaway that I have from the last hard market is really about how unpredictable the recovery can be and the magnitude of the potential recovery, really making that transition from the last hard market in 2016 and ’17 into 2018,, that was our biggest growth year in the history of our company. And so the timing of this recovery, I think it’s still to be determined. And I think that’s really a testament to how unpredictable the cycle has been and how much deeper this hard market cycle was than the last one where really, carrier advertising spend remained flat as opposed to this time around; whereby some estimates, overall, auto insurance, carrier advertising spend went down by 35%, 40%.