Charlie Rodgers: Hi, guys. This is Charlie on for Yaron. Congrats on the quarter. I was just curious if, you guys were able to achieve $15 million in positive adjusted EBITDA this quarter. Conceptually thinking through it, should we anticipate this to be a step change or should we expect the potential for EBITDA to be negative quarter-over-quarter or here and there going forward?
Megan Binkley: Thanks, Charlie. That’s a good question. So, as we sit here today, I mean, Q1 was really a material milestone for the business for us to print both positive operating income and positive adjusted EBITDA of $15 million in the quarter. And look, this has really been several years in the making, right? We’ve had relentless focus on pricing and underwriting, and that’s led to material improvements in our loss ratio. Our loss ratio is in a healthy spot and we’re going to continue to focus on driving profitable growth. And as we mentioned earlier, I mean, we’ve remained opportunistic in terms of how we will deploy marketing investment going forward and as we see opportunities to continue to grow share profitably, we’ll continue to do that in a prudent and very disciplined manner.
On the expense side, we’ve been very diligent in right-sizing that spend. We’ll continue to scale on fixed expense, and we are making modest investments in certain areas of the business in 2024, both to support the growth that we’ve seen over the last 12 months and to continue advancing our product and driving profitable unit economics. So I guess to more directly answer your question, I mean, we’ve remained confident in our path towards GAAP profitability in the near-term. But as we noted in our opening remarks, there are three things that we really want to make sure that you keep in mind for Q2. One, we’ve already covered, right? We expect growth to be softer in Q2 versus Q1 due to seasonality and due to competitive landscape changes.
So that means we are expecting sales and marketing expense to be lower in the second quarter. Secondly, on the loss ratio, as expected, we do expect that Q2’s loss ratio will be elevated compared to Q1 and that’s really driven by seasonality. I mean, every year we see the loss ratio tick up a bit in Q2 and that’s really because people are driving more, right, as we get into the spring and summer months. And then lastly, we informed you of a high quality cash expense that we incurred at the beginning of April, whereby because of our stock price appreciation, we incurred around $10.6 million of tax liability related to the vesting of RSUs and PSUs. So April is the highest vesting month that we have on an annual basis and the bulk of that tax liability, around 75% or 70% of that is going to run through your G&A line item on the P&L and the remaining will hit T&D.
So we’ve included some more information in our 10-Q disclosures to really help the users of the financial statements really understand what the magnitude of what that could be for the remainder of the year. But we do remain confident in our trajectory towards GAAP net income profitability in the near-term.
Charlie Rodgers: Great. And thanks for breaking that out by line item on the vesting expense there. So another question, if you guys have had two consecutive quarters now where sessions have been kind of below that 20% watermark, I think 16% and 18%, how should we think about that going forward?
Megan Binkley: Yeah. Thanks, Charlie. Good — excellent question. We continue to focus on our reinsurance strategy over the long-term. I think anytime we talk about reinsurance, I think, it’s important to keep in mind that we do anticipate continuing to purchase the per risk and cat reinsurance covers to really protect the business from volatility. But as we look forward, if we see something opportunistic in the reinsurance markets, we will want to take advantage of that, right? We — as we sit here today, we don’t intend to see more than 25% of our GEP, but we want to make sure that we’re giving ourselves optionality. We are constantly looking to optimize our capital structure and as our results have continued to improve.
So we’ve got multiple decision points throughout the year to either increase or decrease our sessions depending on both our appetite for reinsurance and the external environment. So our goal is really to maintain flexibility across all of our capital structure options.
Charlie Rodgers: Okay. Thanks. And just one last one if I could sneak it in. So this is kind of going off of Tommy’s question on retention. Looks like you guys are seeing improvement year-over-year, but how should we think about that relative to pre-IPO levels?
Alex Timm: I would say that it’s continued to improve, actually. So if you think about the history of the company going back longer term, I would say, it’s modestly improved since sort of that time period. And the reason for that is when you think about the areas that we went through, right, when we saw a lot of inflation occur, we had to take a significant rate that then caused obviously retention to come down significantly, and then as again, we’ve seen more normalized levels. We’re seeing that come up. And we are actually shifting our mix towards a higher retaining customer segment that’s driven by both improved pricing models and then also our partnerships channel. So you should expect actually modestly better retention even than pre-IPO.
Charlie Rodgers: Great. Thank you, guys.
Alex Timm: Thanks, Charlie.
Operator: Your next question will come from the line of Hristian Getsov with Wells Fargo. Please go ahead.
Hristian Getsov: Hi. Good afternoon. I had a question on the — so the extra competition in the Direct channel, I guess, does that incentivize you guys to kind of be a little bit more aggressive on the partnership side, just potentially kind of looking for a few more partners and I’m guessing kind of like the unit economics, just given that there’s not really — I mean, I guess, maybe there is some sort of marketing on it, but for the most part, it’s kind of just directly through their channel. Does that kind of like incentivize you to kind of like build that channel a little quicker versus kind of like waiting for the Direct channel to kind of clear up from all the competition?
