MediaAlpha, Inc. (MAX) Q1 2022 Earnings Call Transcript

MediaAlpha, Inc. (MAX -3.46%)
Q1 2022 Earnings Call
May 05, 2022, 5:00 p.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good afternoon. My name is Emma and I will be your conference operator today. At this time I would like to welcome everyone to the MediaAlpha Q1 2022 earnings conference 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]. Thank you. Denise Garcia, head of investor relations. You may begin your conference.

Denise Garcia -- Investor Relations

Thank you, Anna. I feel the market closed today. MediaAlpha issued a press release and shareholder letter announcing results for the first quarter ended March 31, 2022. These documents are available in the investors section of our website and we will be referring to them on this call on our discussion today.

On our discussion today -- our discussion today will include forward-looking statements about our business and our outlook for future financial results, including our financial guidance for the second 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, May 5, 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 presented on a non-GAAP basis. 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 included in our press release and a 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 turn the call over to Steve and Pat for a few introductory remarks before opening the call to your question.

Steve Yi -- Co-Founder and Chief Executive Officer

Thanks, Denise. Hi, everyone. Welcome to our first quarter 2022 earnings call. I'd like to kick things off with a few key takeaways from our shareholder letter.

In the quarter, we generated $239 million in transaction value and 7.1 million in adjusted EBITDA, both of which were in line with our expectations. We continue to face significant headwind in our insurance vertical due to the decreased marketing spend by auto insurance carriers as they work through inflation related underwriting profitability issues. While the near-term timing of the market recovery remains difficult to predict. We remain confident in the unmatched ability of our marketplace to support the auto insurance industry's return to a growth focus as carriers profitability improves. We had another strong quarter in our health insurance vertical with year-over-year transaction value growth of 20%. We continue to see outstanding long-term opportunities in the circle, particularly in Medicare.

There are over 10,000 Americans becoming Medicare eligible every day, and these new cohort are shopping online and opting for privately administered Medicare Advantage plans at a higher rate than their older counterparts. As a result, Medicare Advantage enrollments are expected to surpass 37 million in 2026, up from 24 million in 2020. As health insurance carriers increasingly look to acquire these Medicare customers directly, we're excited to help our partners capture a growing share of its $1 trillion market opportunity. Lastly, we're excited to announce that we closed our acquisition of CHT on April 1st.

With CHT, we're now better able to leverage social media channels to help meet the growing call demand from health insurance carriers. And we're excited to have the CHT team on board. With that, I'll turn the call over to Pat to say a few words before we open the call to your question.

Pat Thompson -- Chief Financial Officer

Thank you, Steve. I'll now touch on a few more items before opening up the call to question. In March, we announced our first ever share repurchase plan, which commenced in mid-April, following a cooling off period. In terms of our capital priorities, our first priority is to reinvest in the business to capture the massive opportunity created by the insurance industry's transition to online policy sales.

Second, we will continue to pursue M&A to grow our marketplaces and capabilities and turbocharge [Inaudible]. The CHT transaction, which closed on April 1st and will begin contributing to our business in the second quarter, was a great example of such a transaction. Third, we will use excess cash to repurchase shares on an opportunistic basis. Turning to the quarter, we exceeded the midpoint of our guidance range across all of our Q1 guidance metrics. Then looking forward, our second quarter guidance reflects continued quick volume growth in our P&C insurance vertical, offset by the carrier spend declines Steve mentioned in his remarks, which are manifesting in lower prices. Outside of P&C, we expect ongoing momentum in our health insurance vertical, including results from CHT.

Although I will highlight that we had unusually high volume in last year's second quarter due to the extended open enrollment period in 2021. Given the continued constraints in P&C marketing budgets, we are planning a more measured rate of investment in headcount and other opex for the balance of 2022. And we expect overhead, excluding stock based compensation in Q2 to be one to $2 million below Q1 levels due largely to lower professional fees. As we look forward, while we don't know exactly when the carriers will complete their rate actions and realize improved profitability, we know they will. And when they do, we expect to see pricing increase as carriers look to drive growth in volume increases, consumers shop more in response to higher premiums.

And with our transparent and flexible platform, we are ready to capitalize. With that operator, we are ready for the first question.

Questions & Answers:

Operator

[Operator instructions]. Your first question today comes from the line of Andrew Kligerman with Credit Suisse. Your line is now open.

Andrew Kligerman -- Credit Suisse -- Analyst

Hey, good evening. I feel I touch on your view of transaction value in the second quarter guidance going down sequentially as cited in your letter due to push backs and spending due to seasonality. Could you -- and I know it's tough to kind of figure out. But could you give a little color on why that's happening? Because I get the sense that pricing is -- some of these companies have kind of gotten to close to an equilibrium level and some of the states are starting to be more attractive.

So why is it still coming off in 2Q? And then secondly, do you think you could see a significant pickup in 3Q on this property and casualty shopping?

Steve Yi -- Co-Founder and Chief Executive Officer

Hey, Andrew, this is Steve. Thanks for your question. Yes. I would say that -- I don't know that the industry's reached the point.

I think what you're seeing is that there's been a prolonged inflationary environment, and you're seeing continued elevation of claims costs. And for some carriers, this is leading them to take higher rate increases than they originally planned. It's a dynamic environment. And I think in any underwriting cycle like this, you are going to see different timing and magnitude of rate taking between different carriers.

And so I think you are seeing some early positive signals from carriers who took additional rate or more rate early on in the cycle. But then on the other hand, you're hearing from some carriers that the rates that they initially took or planned on taking weren't sufficient, and that higher rate taking is needed. And so I think the overall underwriting environment remains fairly uncertain and dynamic. But we do share an overall outlook that we'll start to see improvement in the second half of this year.

But I think, the expectations of the [Inaudible] insurance industry will pivot back to growth mode and resume normal marketing levels. Our assessment now is that that will likely take longer than most had originally anticipated.

Andrew Kligerman -- Credit Suisse -- Analyst

I see, Steve. So if I understand what you just said, so maybe second half, you'll see improvement, but not the kind of growth you really need to get in a good, profitable mode. That might take a little longer, right?

Steve Yi -- Co-Founder and Chief Executive Officer

I think that's right. And I think that it will take longer than some of the original expectations that you heard in the marketplace.

Andrew Kligerman -- Credit Suisse -- Analyst

Got it. And then just one other follow up on expenses. So I was kind of running through the financials. And and you mentioned that equity-based compensation, I think that's going to be around -- it was 13.8 in the quarter versus 10.6 million year over year.

I looked at G&A, that was about 17.1 million in the quarter versus 15.7 last year in the quarter. I guess my question is, can you help me understand this expense growth given the tough environment for growing transaction value? Maybe talk a little bit about these expenses and why they came up.

Pat Thompson -- Chief Financial Officer

Yes. And , Andrew, this is Pat. Are you talking about quarter over quarter or a year over year numbers?

Andrew Kligerman -- Credit Suisse -- Analyst

Year over year. Unless -- yes.

Pat Thompson -- Chief Financial Officer

Yes. Right. The thing I would say on expenses is, keep in mind, we were -- we have always been a lean company and we went public in late 2020 and we were well under 100 employees when that's when that happened. And so almost from the get go at the time we became public, we've had to build out all of the public company infrastructure as has been well in excess of $10 million of incremental cost that we've layered in really over a kind of a five quarter period, five or six period. Last year we were also investment mode in terms of taking up headcount to support business growth as well to kind of lay a lot of the foundations for success across the next cycle.

So I think you saw both of those trends manifest in overhead growth over the course of the last year. And the Q1 of this year was something of a high watermark for us, particularly on the non people cost side as we spent a good bit on professional fees to get over the hump that first year SOX and kind of processes that are relatively new to us as a public company. In our view is that those numbers are going to come down in Q2 and that we've -- we're doing some rebased lining of the business. The other thing I would say going forward is -- and I think we used the term more measured investment in headcount. And I think we're not going to give firm guidance on what that means, but I would expect very minimal growth on that side just given some of the hard market conditions we're experiencing P&C where we feel like we're adequately staff to support growth.

But we won't hesitate to add heads here and there where we think that can be revenue generated and pay back quickly.

Andrew Kligerman -- Credit Suisse -- Analyst

Very helpful. Thanks, Steve and Pat.

Pat Thompson -- Chief Financial Officer

Thank you.

Operator

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

Daniel Grosslight -- Citi -- Analyst

Hi, guys. Thanks for taking the question. I focus on the health segment for a little bit. It seems like that is holding up nicely indeed.

So you did pretty well this ATP. I want to try to square that with some of the commentary from the e-brokers, which again has been pretty difficult in terms of their investment in marketing this year ahead of this year's ATP, which will happen in the fourth quarter. In fact, that quote was on their call this morning saying they're going to cut expenses, 200 million, most of which will be a cut to marketing this year. So I was wondering if you can help square the strength that you're seeing in the health segment with some of the pullback that the e-brokers are taking this year, and maybe help frame what percent of transaction value in health, particularly on the Medicare side, is coming directly from the carriers themselves versus the e-brokers.

That'd be very helpful. Thank you.

Steve Yi -- Co-Founder and Chief Executive Officer

Got it. Yeah. I'll just answer that first question really quickly that we're fairly well diversified between brokers and carriers in the Medicare space and healthcare overall or health insurance overall. I think with regard to the the media, our question about the broker channel, how to reconcile what you're hearing on that side with our performance, I think what you need to do is look under the covers because it's not really one story. And to get a full picture, it really requires coursing through different segments of their marketing channels that have worked well for them and happen. And so certainly I think the sector as a whole are really reevaluating different marketing channels and the effectiveness, the expected lifetime value of channel A versus channel B and taking a far more closer look than they did before so that they can more accurately match customer acquisition cost with expected lifetime value. And certainly for us, we welcome that because as a transparent programmatic marketplace, that's exactly what our platform and our marketplace was designed to optimize to.

I think even even getting more specific, what you're hearing is that the online enrollment channels from these brokers have actually performed very well as they take a closer look. And so what you'll see on our end is that with the broker segment, that the amount of clicks that the broker segment has been buying has actually been up fairly strong the year over year. And as you know, our marketplace works for both quick calls as well as lead. But clicks is really one area of focus for us.

And so with regard to the brokers focus on what channels are working very well and what kind of aren't working as well. I think early on that's really played into our favor and in getting them to in aggregate increase their level of investment with us. All the while, they might be pulling back in other channels and really taking a closer look at their marketing spend.

Daniel Grosslight -- Citi -- Analyst

Got it. That's helpful. And can you just confirm if CHT is included in your near 2Q guidance? And if so, how much? And for the full year, do you still anticipate revenue from CHT of around 25 million?

Pat Thompson -- Chief Financial Officer

Yes. Dan this is Pat. CHT included in our Q2 guidance. The annual guidance is the same as what we gave last quarter at the time of signing, which was 25 -- in excess of 25 million of TB in revenue and in excess of 5 million of adjusted EBITDA. And we aren't providing a breakout of what CHT -- we expect CHT to produce in the quarter.

The one thing I will say is that that business is very Medicare centric and the Medicare business tends to have a relatively pronounced peak in Q4. So the profile of that business will be very back updated for us over the remaining three quarters.

Daniel Grosslight -- Citi -- Analyst

I understood. Thanks for the color, guys.

Pat Thompson -- Chief Financial Officer

Excellent. Thanks, Dan.

Operator

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

Meyer Shields -- KBW -- Analyst

Thanks. Going back to the P&C vertical, if I can. How did we think about the line of sight that you have? In other words, are there signs of advance notice or is it just if company exercise that they really want to go in a particular state and all of a sudden they start bidding up for clicks? You'll see it that way.

Steve Yi -- Co-Founder and Chief Executive Officer

No. I think the way -- Meyer, this is Steve. The way it works is because this constant dialog and we're checking with our partners that have weekly or at the very least biweekly calls with them and ample notice of what they're seeing when they expect to turn on certain states. And so it's never as simple as, hey. All of a sudden five states get turned on.

I mean, we're -- we hear about it well beforehand.

Meyer Shields -- KBW -- Analyst

OK. That's helpful. Eventually, if breaking down, I think in your opening comments, Steve, you talked about lower price per clicks, but number of clicks going up, the more detail we can get on that.

Steve Yi -- Co-Founder and Chief Executive Officer

Yeah. I think what it means is that we have a great base of supply partners. You know, companies like Zebra, over 35 insurance carriers. So and I think that what it also means is that the shopping demand or consumer shopping today remains strong.

So as you know, what happens is when prices go up, consumers shop more as those rate changes take effect. It's difficult to tie back specifically. Our volume increases year over year in Q1 to the rate taking that got kicked off in Q3 and Q4 of last year. But I think what you will see is with the magnitude of the rate changes that are taking effect in this cycle, again, overall being higher than expected, I think what you're going to see is that that's going to lead to a far stronger or correspondingly stronger consumer demand for our consumer shopping activity as those rate changes take effect.

I mean, usually what happens is if you take anything over 5% in terms of rate, then that tends to stimulate shopping behavior from your existing policyholders. Anything over 10%, then what you see is a nonlinear increase of shopping behavior. And I think what we're talking about in this cycle is many carriers in many states taking rates well into the double digits.

Meyer Shields -- KBW -- Analyst

OK. Perfect. Thank you so much.

Operator

[Operator instructions]. Your next question comes from the line of Michael Graham with Canaccord. Your line is now open.

Michael Graham -- Canaccord Genuity -- Analyst

Thank you. Hey, guys. I just wanted to ask a couple of the other players in the space throughout two-thirds -- we think we're two-thirds of the way through kind of the the hard market in auto. And just wondering if you have any comment on that.

And then I also I thought some of the some of the discussion in your shareholder letter around some of the things that you do to differentiate your platform from some of the competitors. I think those were really good insights. And I just -- I don't know if you've had any early discussions with some of your demand partners, but just wondering if you think you can exit this current environment with with more share, maybe being able to highlight the strengths of your offering a little better. Just sort of wondering if you have any comments about that.

Steve Yi -- Co-Founder and Chief Executive Officer

Hey, Michael. Yes, I appreciate the question. I think from the beginning, I think understanding how uncertain these types of underwriting cycles can be. And I think with an appreciation of how this cycle, the root causes of it still lay within what was a an unprecedented event, right.

I think we've been hesitant to really put a number on where we are or what inning we're in for the arc to the rate taking cycle. And I think what you've seen over the last couple of months, again, some carriers, very smart carriers, are figuring out that they need to take more rate as inflationary pressures persist, I think that goes to this, and I think what we're seeing is some conflicting signs coming out, which is far more like a typical rate taking cycle or a hard market cycle where some carriers are taking rate earlier, some carriers are taking more rate than others, and in the end, they end up overshooting, undershooting. And so you have carriers really layering in and achieving rate adequacy at different times. And so I think that's what you're seeing in this marketplace. And I think to think that this market cycle is two-thirds or more of the way through, my view is that probably putting a little bit too much credence on some of that really positive news that you're hearing. In terms of -- yes.

Did you have a follow up to that part?

Michael Graham -- Canaccord Genuity -- Analyst

Well, you kind of maybe it's better to ask that follow up now and then. I'd love to get your thoughts on the sort of competitive advantage market share questions. So sorry to interrupt, but just kind of drilling into that a little bit. When you -- when we look at your Q2 guidance, should we interpret that as like what we've seen so far in April, kind of on a run rate basis? Or is that more -- because I know you mentioned that March was kind of OK, but April looked a little bit worse in the letter.

So should we think about it that way or is it more based on sort of relative to the earlier question, a lot of visibility in terms of discussions and just trying to get a feel for how conservative or not that sort of Q2 guidance might be.

Pat Thompson -- Chief Financial Officer

Yes. And, Michael, it's Pat. And what I would say is, I think we outlined in the letter and and in the [Inaudible] that some of the the market dynamics which were Q1 was relatively stable late March, business took a step down. And that trend has been pretty consistent to the present.

And we've gotten some good news from some carriers and we've gotten some not so good news from some other carriers. And so we've incorporated kind of all of our best knowledge as of last night into the guidance numbers that we put out. And I'm not going to tell you exactly what  we've got it in there for volume and price. But the thing I will tell you is that we're assuming that the balance of the quarter doesn't look all that much different from what we've seen thus far.

Michael Graham -- Canaccord Genuity -- Analyst

Thanks, Pat.

Steve Yi -- Co-Founder and Chief Executive Officer

So, Michael, to answer the second part of your question, which I really appreciate. I mean, we finished this long enough, an ending, I think a part of the insurance industry. We tend to look at things in terms of years and not necessarily quarters. And when you do that, what we've seen in past cycles is that these hard market times represent an opportunity for us. And the reason that it does so is that the carriers, when they prioritize profitability over growth, what you see is very efficient urgency around efficiency initiatives that we are pushing all the time.

But these are projects that sometimes can get sidelined when carriers are in full on growth mode and just looking for additional volume. And so it's about improving conversion tracking, improving data passing, programs to monetize, not converting shoppers. Something in particular that we're getting a fair bit of traction with this cycle. And it's really during times like this that we tend to make the most headway with these types of initiatives, which I think small -- sound, small individually, but in aggregate, it really allows us to squeeze several percentage points of efficiency from the carrier spend. And I can tell you that those things that up and at the market returns our ability through our hundreds of supply partners in our marketplace and our ability to programmatically enable carriers to achieve and maintain their efficiency targets while scaling their spend oftentimes very rapidly is really the hallmark of our marketplace and why we were able to outpace competitors coming out of these hard market cycles in the last market cycle, coming out of that and as well as during COVID, when you saw a large influx of our fund budgets to online. And I can tell you in both of those cycles that we were the primary beneficiary of that because of all the work that we do during these times that allows for this granular measurement of efficiency, that allows carriers to spend and scale their spend very rapidly without having to sacrifice their efficiency targets.

And so that's what we're focused on right now. For an earnings call, for analysts, that doesn't sound very interesting. But for us, we've been doing this for 11-plus years now. I can tell you that that's the whole ballgame.

Michael Graham -- Canaccord Genuity -- Analyst

OK. Thanks a lot, Steve. I appreciate the answer.

Steve Yi -- Co-Founder and Chief Executive Officer

Thanks, Michael.

Duration: 28 minutes

Call participants:

Denise Garcia -- Investor Relations

Steve Yi -- Co-Founder and Chief Executive Officer

Pat Thompson -- Chief Financial Officer

Andrew Kligerman -- Credit Suisse -- Analyst

Daniel Grosslight -- Citi -- Analyst

Meyer Shields -- KBW -- Analyst

Michael Graham -- Canaccord Genuity -- Analyst

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