MediaAlpha, Inc. (MAX) Q4 2021 Earnings Call Transcript

MediaAlpha, Inc. (MAX 2.59%)
Q4 2021 Earnings Call
Feb 24, 2022, 5:00 p.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Ladies and gentlemen, thank you for standing by. My name is Brent, and I will be your conference operator today. At this time, I would like to welcome everyone to the MediaAlpha Q4 and full year 2021 earnings conference call. [Operator instructions] It is now my pleasure to turn today's call over to Denise Garcia, investor relations.

Please go ahead.

Denise Garcia -- Investor Relations

Thank you, Brent. After the market closed today, MediaAlpha issued a press release and shareholder letter announcing results for the fourth quarter and full year ended December 31, 2021. 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 2022, 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 24, 2022, 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 non-GAAP financial metrics.

These metrics include adjusted EBITDA, contribution, and contribution margin, and we present them 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 available 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.

Steven Yi -- Co-Founder and Chief Executive Officer

Thanks, Denise. Hi, everyone. Welcome to our fourth quarter and full year 2021 earnings call. I'd like to kick things off with a few key takeaways from our shareholder letter.

First, we reached a new and exciting milestone in 2021 by exceeding $1 billion in transaction value, an increase of 25% year over year. I'm particularly proud of this achievement given the current challenges in the property and casualty insurance vertical. Second, we had our strongest quarter ever in our health insurance vertical, driven by record carrier spend in both our Under 65 and Medicare insurance segments. Lastly, despite the challenges in the P&C insurance vertical, we firmly believe that the industry is continuing its powerful secular shift toward direct online customer acquisition.

As a leader in our industry, we are continuing to invest to be ready to accelerate our growth when the market recovers. Now, I have the great pleasure to introduce Pat Thompson, who joined us as our new CFO back in December. His breadth of experience across SG&A, corporate development, strategy, and analytics made him a standout candidate. And I can't think of a better, more complementary partner to help lead us through the next phase of our growth.

So with that, I'll pass it to Pat to say a few words before we open the call to your questions.

Patrick Thompson -- Chief Financial Officer

Great. Thank you, Steve. It's great to be here on my first call as MediaAlpha's CFO, and I'd like to thank the entire team for the warm welcome I've received since joining the company in December. I joined MediaAlpha from Expedia, where I spent 11 years in the online travel industry, which was one of the early industries to move online.

As I've been learning more about how insurance is currently bought and sold, I believe we are in the early innings of a similar online transition. Carriers are investing heavily in marketing analytics and improving their online purchase experiences. Price comparison sites like The Zebra and Insurify are gaining adoption. Personal finance apps, like Credit Karma, are adding insurance to their menu of financial products.

Yet, the insurance industry is only allocating approximately 20% of their ad budgets to digital channels. All other industries overall allocate roughly two-thirds of their advertising budgets to digital, which is in line with consumers' time spent with digital media. I believe that no company is better positioned than MediaAlpha to capitalize on this growth opportunity. We have gained market share organically over every time horizon since our inception in 2012, becoming a $1 billion-plus platform that is the largest online ad marketplace in the insurance industry.

As a two-sided platform, this scale is powerful. Suppliers want access to as many advertisers as possible. Advertisers want access to the most shoppers. More and better data enables more granular segmentation.

Essentially, as we grow or improve any part of our ecosystem, the outcomes improve for all of our stakeholders. My primary objectives at MediaAlpha are to accelerate this flywheel by extending our market share gains through both organic growth and M&A, while remaining focused on driving attractive, long-term EBITDA growth. Given these themes, we are planning to continue to make significant investments this year, which we believe will position us to accelerate our market share gains as the P&C insurance market recovers and our partners ramp their digital customer acquisition investments on our platform. We are excited to announce one strategic M&A investment today, which is our agreement to acquire Customer Helper Team, or CHT, for 50 million of cash plus up to an additional 20 million based on CHT's achievement of revenue and profitability targets over the next two years.

CHT expands our owned and operated Medicare business and is a highly complementary asset due to our nonoverlapping Medicare carrier and broker partnerships and CHT's focus on social media channels, particularly short-form video advertising. With CHT, we are doubling down on our Medicare business, which stands to benefit from the aging U.S. population, greater online shopping among new Medicare cohorts, and the increasing popularity of privately administered Medicare Advantage plans. We anticipate that the deal will close in the next two weeks and will have a minimal impact on Q1 financials.

For the balance of 2022 following the closing, we expect CHT to contribute in excess of 25 million of revenue and 5 million of adjusted EBITDA. In conclusion, I couldn't be more excited about MediaAlpha's long-term growth opportunity. The insurance industry is still in the early stages of its digital transformation, and we are investing to grow our platform and market share and extend our competitive advantage. With that, operator, we are ready for the first question.

Questions & Answers:

Operator

[Operator instructions] Your first question comes from the line of Charlie Lederer with Wolfe Research. Your line is open.

Charlie Lederer -- Wolfe Research -- Analyst

Hi. Good afternoon. I guess my first question. As we think about your EBITDA margin with the headwinds in auto going in, is your 1Q guide kind of where we should expect margins to be as long as that's the environment? Or is there some seasonality in there? Thanks.

Patrick Thompson -- Chief Financial Officer

Yeah. And thank you for the question. I'm happy to kick it off on it. You know, the thing I would say on the margin for Q1, you know, that there are a number of forces at play in the business.

And I would say that, you know, we're in the midst of the P&C downturn right now that I think we have elaborated on quite a bit. I think our view is that those trends, you know, are continuing, and we believe they will continue through the balance of the quarter. And so as, you know, you look at the trends, I think you can see that. One thing that I would, you know, probably call out from a margin standpoint is that, you know, we continue to invest in the business from an SG&A standpoint and, you know, both in terms of adding people to the business to power our growth and also on the professional fee side to support our IPO in being a public company going through the SOX process for the first time.

I think our view is as the business recovers, we would expect to see margins start to -- EBITDA margins start to improve to look, you know, something -- somewhat more like historical levels. You know, we definitely believe they are depressed at the moment.

Charlie Lederer -- Wolfe Research -- Analyst

Thanks. That's helpful. And then I guess, can you just expand a little bit more on the healthcare acquisition, how it fits into your ecosystem, and how that deal came about?

Steven Yi -- Co-Founder and Chief Executive Officer

Yeah, you know, I'll start with that. Well, I think the acquisition, you know, for us was super attractive, one, for -- because of our outlook on the Medicare vertical. We're big believers in the overall secular trends in that space with larger numbers of seniors aging in every year, these newer cohorts, you know, opting in to Medicare Advantage at higher levels in older cohorts, as well as just a general level of internet savviness exhibited by the newer cohorts of Medicare consumers, meaning that they are increasingly starting their shopping and research experiences online. In addition to that, specific to CHT, what we love about that business is what they've been able to do to leverage social media channels, social media marketing, which is an area, quite honestly, that we haven't traditionally been strong in, in order to generate high-quality customer inquiries from Medicare consumers.

For us, what we're seeing in our marketplace is a growing appetite for calls from a lot of our Medicare carriers and their ability to really tap into the social media channel, which is vast, in really innovative ways, making it a really good fit for both our owned and operated business, as well as our health insurance vertical more generally. I'll say one other thing, which is that the culture of the company as we looked in and the cultural fit that we saw was a really important factor. You know, they are also a self-funded company. Very strong entrepreneurial spirits, a spirit that I can certainly relate to, as an entrepreneur myself, having started this company by funding it ourselves.

And as we scale, we really welcome this fresh injection of, you know, fresh entrepreneurial energy to the overall team. And I'm really looking forward to getting them integrated and seeing what we can do here.

Patrick Thompson -- Chief Financial Officer

And probably the other piece I would just add on that would be, you know, we believe it's financially attractive as well. And I think we've stated, you know, that for the balance of 2022 post-close, we expect in excess of 25 million of revenue and 5 million of EBITDA. So, you know, roughly a 10-month basis. So we believe the multiple is attractive relative to where we're at and relative to the growth potential of the business.

Charlie Lederer -- Wolfe Research -- Analyst

Thanks for the answers.

Steven Yi -- Co-Founder and Chief Executive Officer

Thank you.

Operator

Your next question comes from the line of Meyer Shields with KBW. Your line is open.

Meyer Shields -- KBW -- Analyst

Great. Thanks. I want to start, if I can, on the health insurance side. In other words, a ton of churn in the quarter.

And for a lot of the public brokers, it was a pretty difficult quarter. I was hoping you could talk through how that impacts lifetime value estimation, and your expectations for whether that level of churn is likely to continue.

Steven Yi -- Co-Founder and Chief Executive Officer

Listen, I mean, let's take a step back. You know, when we think about Medicare, I mean, first and foremost, we think about those secular trends, you know, that I talked about in the last question, we still are big believers in them. And it was a really strong performer for us this year. With respect to some of the churn that you've been hearing about from some companies who are in this space, you know, for us, we have a very diversified base of demand partners or advertisers.

While we can't disclose the specific mix, it's a pretty fair split between both carriers, as well as brokers, with the overall trend being toward direct spending from carriers because of the secular trends of carriers moving gradually toward direct online customer acquisition. And one evidence of that was that in this past quarter, spending from carriers, both for Medicare and Under 65 was at record levels for us. You know, with respect to customer lifetime value and the ability to really assess that based on renewal rates that are coming through, for us, we really welcome the advertisers who are looking more closely at that because what our channel allows advertisers to do is just really granularly assess the customer lifetime value on a publisher-by-publisher basis and then match that to the customer acquisition cost. And the ability for carriers as well as brokers to do that on a very granular level is really one of the hallmarks of our marketplace.

And so we welcome, you know, brokers as well as carriers in their efforts to really get a better bearing on expected lifetime value. So, Meyer, I don't know if that answers your question or if there's anything more specific I can tell you.

Meyer Shields -- KBW -- Analyst

No, I think it does. I want to think through what you said, but I think it's helpful. A follow-up, if I can, just switching to P&C. Last quarter, you talked about how there was still like a bunch of companies in the top 20 that were increasing their spend.

I was hoping you could update that or give us some sort of update on that cohort.

Steven Yi -- Co-Founder and Chief Executive Officer

Sure. I mean why don't we step back and just give you our outlook on just generally how that market is doing, right? You know, not much has changed, you know, since the outlook that we shared with everyone last quarter. It's still a super dynamic underwriting environment, you know, particularly with respect to severity because as we all know, inflationary pressures have persisted through '22. Now, you know, carriers are making pretty good progress with pricing increases.

And we generally agree with others who are talking about a second half recovery, and I think that's directionally correct. But I think really when you peel things back a layer, you start to understand that the situation is a little bit more complicated than that. I mean, first of all, you have the basic issue of being -- having to predict the exact timing of each carrier's rate approvals across multiple states, right? You have dozens of carriers seeking rate increases in dozens of states. And all of these states have slightly different perspectives, the types of rate increases that they're open to allowing, right? In addition to that, when carriers actually take the rate increases, some of the carriers who are early to take them actually become less competitive.

And so their conversion rates go down for the simple fact that their price is now higher than everyone else's. And so sometimes, those conversion rates stay down until more carriers that follow suit can take in rate themselves. And then when the rate actions have been taken, like, really how quickly they earn through to actually improve underwriting profitability will vary by carriers because each carrier has a unique mix of, you know, six- to 12-month policies. And it's really upon the renewal that these pricing increases take effect, right? And so you have to consider all of these factors, right, when you start to think about exactly, you know, when each specific carrier will start to return to more normal levels of growth marketing investment.

You know, the thing that we do know is, you know, based on our experience in the industry is that when the market turns, right, one of the hallmarks of our programmatic marketplace with hundreds of supply partners is really how rapidly carriers can take all the spend when the market turns. I mean, this happened during the last hard market cycle. This happened during the first COVID, when we had a sudden and a massive acceleration in the migration of offline advertising dollars online. And so it's been our experience, too, that the speed and steepness of the churn to a growth income environment can also be hard to predict.

But obviously, in this case, it's kind of very positive.

Meyer Shields -- KBW -- Analyst

OK. That was very thorough. Thank you very much.

Operator

Your next question comes from the line of Daniel Grosslight with Citi. Your line is open.

Daniel Grosslight -- Citi -- Analyst

Hi, guys. Thanks for taking the question. I'd like to go back to the health segment and the challenges in the e-broker channel specifically. I know you mentioned you can't really break out your exposure to the e-brokers.

But I guess I'm more concerned around 2022 AEP given if you look at what the publicly traded folks have said, you know, they're really titrating growth down from 30%, 40%, even 50% to market growth, which would be around 10%. So a pretty dramatic drop in lead consumption for 2022 AEP. So I'm just curious if you think that your direct carrier partner consumption and your Under 65 consumption can offset those pressures and you'll be able to maintain growth in kind of that 30% transaction value range for 2022. Or are we going to see a little bit of a deceleration in growth for next year's AEP?

Steven Yi -- Co-Founder and Chief Executive Officer

No, thanks, Dan. Well, I mean, what I can tell you is that we're not expecting a slowdown of our Medicare business this year. You know, it's early, but we're off to a strong start in 2022 with our Medicare segment with spend being up year over year from both carriers as well as the Medicare brokers. So, you know, with respect to, I think, the closer look that a lot of the Medicare brokers are taking with their marketing sources and the expected lifetime value from each of their marketing sources and really deaveraging and taking a granular look at that you know, again, as I alluded to in an earlier answer, I mean, that type of development is something that we welcome because that's exactly what our marketplace was built to enable.

And so we've gone through these types of cycles within the P&C space as carriers have gotten smart about really deaveraging like how their expecting -- what the value of a policy that's acquired in our channel is, right, and then applying expected lifetime value on deaverage basis to then really refine, you know, what they're bidding for these very granular, you know, consumer segments across hundreds of different supply partners. And so I think we're very well-built to continue to support either the same or a higher level of investment from a lot of the Medicare brokers as they really reassess, right, what the efficient marketing channels are and which ones are the less efficient ones. And again, I'll point to what we're seeing now, again, which is early, but we've maintained a pretty strong level of spend, again, both from carriers, as well as the Medicare brokers thus far this year.

Daniel Grosslight -- Citi -- Analyst

OK. That's helpful. And then on CHT, are you able to break out what percent of their business has done with the carriers directly versus the third-party brokers?

Patrick Thompson -- Chief Financial Officer

Yeah. And I'm happy to take this one, Dan. That is not something we're disclosing at this time.

Daniel Grosslight -- Citi -- Analyst

Got you. OK. OK. And then last one for me.

On the other revenue, can you break out how much of that is due to travel? And any expectations for travel to pick up in 2022 as the pandemic wanes?

Patrick Thompson -- Chief Financial Officer

Yeah. And I can also take that one, Dan. We don't break out how much of it is travel versus education versus financial services, but it's a, you know, chunk of all three, and none are the vast majority of the overall. And, you know, the thing I would say on travel is COVID really hit that business hard for the market but us in particular.

And, you know, we've seen some growth off the bottom in 2021, and we're still seeing that today. And so the growth rates are pretty good, but it's off of a pretty low base. And I think it's, you know, a business that kind of, you know, time will tell what it gets back to as the travel market fully normalizes.

Daniel Grosslight -- Citi -- Analyst

Got it. Appreciate the color. Thanks, guys.

Operator

[Operator instructions] Your next question comes from the line of Cory Carpenter with J.P. Morgan. Your line is open.

Bryan Smilek -- J.P. Morgan -- Analyst

It's Bryan Smilek on for Cory. Thanks for taking my question. You know, you mentioned that '22 is shaping up to be an investment year. Can you just parse out, you know, what your key growth priorities are into the new year? And then specifically, what are the next steps in scaling the agents business? And just thinking about health, do you see further potential for M&A going forward? Thanks.

Steven Yi -- Co-Founder and Chief Executive Officer

Yeah. Thanks. So we're -- so your first question about where we're investing. You know, I'll say, first and foremost, we're always investing in our people and technology, right? We have from day one.

We continue to do that now. I know you're hearing a lot of, you know, uncertainty from us about, you know, what the near term is going to bring, right, in the P&C vertical. But what that -- you know, what the [Inaudible] is just an overwhelming confidence in having been in this business for now close to a decade of what the long-term trends will be and how these types of markets, again, while difficult to predict in the near term, are very easy to predict what happens in the long term if you've been through these types of cycles before. And so for us, a lot of the investment is really about continuing to invest in the people, technology, and our products to really best serve our partners.

Now, to get more specific. You know, organically, we're investing on really enhancing our owned and operated capabilities. And obviously, inorganically, you know, you see this with our acquisition of CHT. We're also investing in product development to better support improved consumer shopping experiences for a lot of our supply partners who are increasingly looking to offer a better rate-based consumer experience for their customers.

And we're always investing in deeper integrations, but also have now a focus on building down-funnel partnership capabilities with carrier partners, which is a particular need for a lot of new carrier partners, both across P&C but also in health and life insurance of carriers who are newer to direct-to-consumer marketing, who would benefit from more integrated down-funnel solutions. Now, let me shift here and talk a little bit about the agent business. We still see the agent business, i.e., working directly with agents to sell them leads and calls. We still see that as a really interesting opportunity, certainly over the long term, and we continue to invest.

We've narrowed our focus a bit based on what we're seeing in this marketplace and what we've learned from this marketplace over the past year. I think, more importantly, in the current market environment, we're just super focused on laying the foundation, right, and improving the foundation of our core business, the core carrier business to put ourselves in a position, right, to really accelerate our market share gains and our competitive position upon the return of the market because we've seen this before, right? We've done this before in past cycles. We know the types of investments that we have to make, right, types of integrations and recommendations that carriers that we're open to now. And so we're really busy just laying that foundation because ultimately, you know, when the market turns, the growth is all going to be from the carriers really returning to their normal growth-oriented levels of spend, right? And that's where we see the greatest area of investment right now in the middle of this market cycle.

Patrick Thompson -- Chief Financial Officer

Great. And I can hop in on the M&A portion. And so just to give you a little bit of color on how we're thinking about M&A generally, historically, MediaAlpha has always had a very high bar regarding M&A. And the CHT deal is the third deal that we've ever done and the largest one we've done from a purchase price perspective.

And so the thing I would say is like our bar is high, and it will remain high, and that we'll buy things that we understand, that we like and that we think can add value. I would also say that, you know, I have experience of being at a company for a long time that generated significant returns from M&A and have also, you know, seen companies that have destroyed a lot of value from it. So, you know, to the extent that we find good businesses that are complementary to us, that fit into our strategy and that we can buy them at an attractive price so that's financially attractive, we're going to go hard after those assets. And if we're not finding anything that meets those criteria, we won't be going hard at it.

And so, you know, I think we'll kind of be pursuing the path we're on right now, and, you know, we'll see how it plays out over time.

Bryan Smilek -- J.P. Morgan -- Analyst

Thanks for taking my questions again.

Steven Yi -- Co-Founder and Chief Executive Officer

Thank you.

Operator

[Operator signoff]

Duration: 28 minutes

Call participants:

Denise Garcia -- Investor Relations

Steven Yi -- Co-Founder and Chief Executive Officer

Patrick Thompson -- Chief Financial Officer

Charlie Lederer -- Wolfe Research -- Analyst

Meyer Shields -- KBW -- Analyst

Daniel Grosslight -- Citi -- Analyst

Bryan Smilek -- J.P. Morgan -- Analyst

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