Root, Inc. (NASDAQ:ROOT) Q1 2024 Earnings Call Transcript

Root, Inc. (NASDAQ:ROOT) Q1 2024 Earnings Call Transcript April 30, 2024

Root, Inc. beats earnings expectations. Reported EPS is $-0.42, expectations were $-2.51. ROOT 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. My name is Regina, and I will be your conference operator today. At this time, I would like to welcome everyone to the Root, Inc. First Quarter 2024 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. [Operator Instructions] I would now like to turn the conference over to Matt LaMalva, Head of Investor Relations. Please go ahead.

Matt LaMalva: Good afternoon and thank you for joining us. Root is hosting this call to discuss its first quarter 2024 earnings results. Participating on today’s call are Alex Timm, Co-Founder and Chief Executive Officer; and Megan Binkley, Chief Financial Officer. Root recently issued a shareholder letter announcing its financial results. While this call will reflect items discussed within that document, for more complete information about our financial performance, we also encourage you to read our first quarter 2024 Form 10-Q. Before we begin, I want to remind you that matters discussed on this call will include forward-looking statements related to our operating performance, financial goals and business outlook, which are based on management’s current beliefs and assumptions.

Please note that these forward-looking statements will reflect our opinions as of the day of this call, and we undertake no obligation to revise this information as a result of new developments that may occur. Forward-looking statements are subject to various risks, uncertainties, and other factors that could cause our actual results to differ materially from those expected and described today. In addition, we are subject to a number of risks that may significantly impact our business and financial results. For a more detailed description of our risk factors, please review our most recent 10-K, 10-Q and shareholder letter. A replay of this conference call will be available on our website under the Investor Relations section. I would also like to remind you that during the call, we will discuss some non-GAAP measures while talking about Roots’ performance.

You can find reconciliations of those historical measures to the nearest comparable GAAP measures in our financial disclosures, all of which are posted on our website at ir.joinroot.com. I will now turn the call over to Alex Timm, Roots’ Co-Founder and CEO.

Alex Timm: Thanks, Matt. For those new to Root, welcome. I’d love to take a minute to tell you a little bit more about the company before I jump into our results. We believe drivers should have more control and understanding of their insurance, so we’ve built car insurance that is transparent, easy to understand and offers great prices. We do this through the Root app, where customers can see how they are driving, manage their policy and file a claim in seconds. We also do this through our partnership channel, where we meet customers where they are in their moment of need. This includes, for example, embedding our insurance product at the point of vehicle sale. This is all enabled through our data science and technology, which allows us to create seamless, flexible customer experiences at what we believe to be some of the best prices.

With that, I’d like to talk a little bit about the quarter. The first quarter of 2024 was an excellent quarter. For the first time in the company’s history, we generated operating income and positive adjusted EBITDA. We did this while doubling gross written premiums and policies in-force year-over-year. These results are a testament to our strong product offering, disciplined execution and the power of our technology. While pleased with this performance, we are far from achieving what we believe we can as a company. Over the long-term, we believe data science and technology will fundamentally change the way insurance is priced. And in the first quarter, we continued to significantly improve the predictive accuracy of our pricing and underwriting models.

As we grow, our data set grows, which allows us to retrain our models and deliver better prices to customers. In turn, with better prices, we are able to grow more efficiently, leading to a virtuous cycle. Also core to our strategy is continuing to build differentiated access to customers through our partnerships channel. Offering a 3-click purchase experience via our partner platform continues to drive differentiated access to customers and we’re pleased to have grown new writings in our partnership channel 68% year-over-year. The expansion of this channel is foundational to our long-term growth strategy. Our Direct channel also continued to have impressive growth in the quarter. We leverage advanced machine learning-based algorithms to optimize for our return targets.

Our data science machine is constantly looking to see how the competitive environment is evolving. As such, this channel fluctuates due to seasonality and competitive dynamics, and as anticipated, we saw competition increase in the Direct channel this quarter. We continue to optimize for target unit economics and believe being responsive to the changing environment is a smart way to profitably grow this business over the long-term, even though it may lead to quarter-over-quarter variabilities. In the first quarter, the path to gap profitability looks stronger than ever. We continue to be excited by the long-term growth potential of the business by adding additional partners, expanding our footprint and continuing to improve our prices and products.

I am proud of our entire team for the dedication toward driving our success in this quarter. I’ll now turn the call over to Megan to discuss our operating results in more detail.

Megan Binkley: Thanks, Alex. Overall, it was an excellent start to 2024, with further improvements across nearly all of our key financial metrics. For the first quarter, our net loss was $6 million, an 85% improvement year-over-year. We are pleased to report for the first time a positive quarterly operating income of $5 million and positive adjusted EBITDA of $15 million. These metrics improved $35 million and $26 million year-over-year, respectively. This strong progress continues to be driven primarily by growth in net earned premium, continued loss ratio performance, a sustained fixed expense base and responsible deployment of marketing investment. As we’ve consistently noted, we do not defer the majority of customer acquisition costs over the life of our customer, which leads to accelerated expense recognition and relative to earned premiums.

We grew new writings fourfold and we more than doubled policies in-force, gross written premium and gross earned premium compared to the first quarter of 2023. We achieved this growth while delivering a gross combined ratio of 99.7%, marking the company’s first gross combined ratio less than 100% and a 23-point improvement year-over-year. The gross accident period loss ratio was 61%, a 4-point improvement year-over-year, driven by our continued investment in data science and technology. Note that we benefit from a favorable seasonality trend in Q1, as there are fewer miles driven in the winter months and also higher purchasing power, resulting from tax season refunds. In the first quarter of 2024, we see that 16% of our gross earned premium and reduced the difference between our gross and net loss in LAE ratios to 2 points for the quarter, reflecting a reduction of 21 points year-over-year.

Our improvements and reinsurance costs were made possible through our continued improvement in operating results. Overall, our results for the first quarter 2024, continue to reflect the sustained momentum towards management’s top priority of reaching profitability with our existing capital. The first quarter also marked the third consecutive quarter of positive operating cash flow. This is a result of improved net loss, continued growth and loss ratio performance, even though the first quarter is consistently a high relative cash outflow quarter. As Alex noted in his remarks, it was a strong start to 2024 as we maintained the disciplined execution of our strategy and continued to build upon the momentum we achieved in 2023. As our market value appreciates, we will incur incremental expenses related to tax liabilities from the vesting of employee equity awards.

The second quarter typically encompasses the largest proportion of vesting equity awards per year. As such, we expect to incur approximately $10.6 million in cash expenses in the second quarter to satisfy this tax liability. Moving forward, we intend to remain focused on thoughtful and disciplined growth and expect to continue investing in customer acquisition as long as targeted unit economics are achieved. We expect gross written premium levels in the second quarter to decrease relative to the first quarter due to seasonality and changes in the competitive landscape. Achieving GAAP net income profitability with our existing capital continues to be our primary objective. This quarter’s results show that we are well on our way. We are excited for our future, appreciate your time and look forward to your questions.

Operator: [Operator Instructions] Our first question will come from the line of Tommy McJoynt with KBW. Please go ahead.

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Q&A Session

Tommy McJoynt: Hey. Good afternoon, guys. Thanks for taking my question. So, you’ve demonstrated some really robust growth here in a policy count over the last few quarters, with that growth having started really in the third quarter of 2023. So, assuming most of those were six-month policies, can you talk about the retention that you’re seeing on those policies that were kind of recently acquired over the past nine months?

Alex Timm: Yeah. Thanks, Tommy. We’re continuing to see retention improve. Big driver of retention is price. And as we’ve continued, we were very early, thanks to a lot of our technology, we were very early in identifying a changing cost environment, which allowed us to take a lot of our rate increases early. So, what we’ve been seeing because of that is as our price has really stabilized over the last year or so, we’re continuing to see improvements in retention year-over-year.

Tommy McJoynt: Okay. Got it. And given some good visibility into really the broadly improving outlook across both you and your competitors, that certainly suggests that the competitive landscape will be intensifying, as you’ve noted. So, how do you envision your sales and marketing spend trending over the coming quarters, perhaps, on an absolute basis, would be most helpful?

Alex Timm: Yeah. Thanks, Tommy. First, I’d say, we’re very happy with our growth and where we’ve been year-over-year with doubling the count of customers that we’ve gotten, doubling our PIF as well as revenue. I’d say we are always looking at the competitive environment and monitoring the competitive environment, as well as seasonality and we do know that the first quarter, you see more auto insurance shopping and so you should expect that to accelerate sales and marketing spend in the first quarter relative to other quarters. And then, like we said, we’ve also saw competition come back. And one of the things that we do at Root is we are always looking at profitability and making sure that we are optimizing for profitability.

And so, as you see competition return or enter increase, you will see us pull back so that we’re constantly and diligently driving the company towards profitability. I think you saw that this quarter and it’s evidenced by our operating income trends as well.

Megan Binkley: Yeah. And Tommy, if I could, I mean, just to reiterate what Alex stated. I mean, Q1 is just another strong proof point that our model is working, right? We’ve delivered the best results in Q1 and company history, right? And when you look year-over-year, we’ve more than doubled our GWP, our GEP, and our PIF count on a year-over-year basis. So, we are confident that we can continue to grow. But I want to make sure that it’s clear that the growth going forward will moderate if we’re not reaching our unit economic profitability returns, right? Our growth will continue to be very prudent and disciplined. We’re not sacrificing our capital position for unprofitable growth. So, while we do expect that sales and marketing will be less in subsequent quarters based on seasonality, we’ll continue to be opportunistic with respect to direct marketing spend and we’re actively focused on optimizing our marketing bidding strategy, both within our existing channels and also testing new channels.

And we believe that we’ve got ample growth levers that we can pull. Currently, we’re only in 34 states. We would like to be national at some point and we’re continuing to invest in our differentiated distribution. So, our partnership channel does continue to grow. It’s been growing. We’re continuing to onboard and launch new partners. So, we’re consistently focused on gaining profitable market share.

Tommy McJoynt: Appreciate the thoughts. Thanks.

Alex Timm: Thanks, Tommy.

Operator: Our next question will come from the line of Andrew Kligerman with TD Securities. Please go ahead.

Andrew Kligerman: Hey. Good evening and congrats on another great quarter. I guess, my first question is around renewal premium as a percent of gross premium declining to 39%. As that happens, and you’re writing a lot more new business, should we be thinking, for most of the companies we cover, we think about a new business penalty. So, should we be thinking that, that terrific gross accident period loss ratio of 61%, that could rise up a bit, a few percentage points, and if so, maybe a little guidance if you could?

Alex Timm: Yeah. I’d say we absolutely have, we see similar things and there is a new business penalty where loss ratio on new business in that first six-month term is higher than renewal business. We’re very pleased with our loss ratio and where it is, and we think we’ve been very diligent in pricing the business. And so, we feel good about where that loss ratio is, and again, we’ve been growing now pretty significantly for many quarters. So, a lot of that new business loss ratio penalty that you — you’re already seeing that really in our current quarterly results.

Andrew Kligerman: I see. Thank you for that, Alex. And then with regard to the competitive environment, as you cited earlier in the call that the last month of the first quarter, you saw a little dip in the premium growth, and then Megan added later on that, that gross written premium sequentially would probably decrease in the second quarter. Could you give us a sense of what you might — what we might expect in the second quarter, any sense of how it’s shaped up so far and how it might compare with the first quarter?

Alex Timm: yeah. Thanks, Andrew. I think from both seasonality and from competitive dynamics in these channels, you will see more new writings generally in the first quarter than you will in the second quarter and that then will lead to a higher amount of written premium in our first quarter than in our second quarter. That said, obviously, with the material growth in PIF, you’re still going to see very strong earned premium growth and definitely year-over-year growth. And so, we feel good — retention is strong as well, so we feel good with where we are, but you should expect sort of second quarter for there always to be some seasonality impacts. I think particularly with where we are now, some competitive returns, which will cause in the second quarter that written premium to be lower than it was in the first quarter.

Andrew Kligerman: But it doesn’t sound dramatic though, right, Alex? Is that what I should read into it?

Megan Binkley: Andrew, we’re not putting a quantification at this — on it at this point. I mean, we’re continuing to be opportunistic in terms of how we deploy direct marketing spend. And look, we’re laser focused on profitability and protecting the business long-term. So, we’re not in a position where we’re going to write policies for the sake of growth and we think this is a smart way to grow the business over the long-term and not lose focus to really drive quarter-over-quarter fluctuations.

Andrew Kligerman: Makes sense. Thank you.

Operator: Your next question comes from the line of Yaron Kinar with Jefferies. Please go ahead.