MediaAlpha, Inc. (NYSE:MAX) Q1 2023 Earnings Call Transcript May 6, 2023

Operator: Hello, my name is Chris, and I’ll be your conference operator today. At this time, I’d like to welcome everyone to the MediaAlpha Q1 2023 Earnings 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, Investor Relations. You may begin.

Denise Garcia: Thank you, Chris. After the market closed today, MediaAlpha issued a press release and shareholder letter announcing results for the first quarter ended March 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 second quarter of 2023, 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 4, 2023, 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, 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: Hey, thanks, Denise. Hi, everyone. Welcome to our first quarter earnings call. I’d like to make a few observations before turning the call over to our CFO, Pat Thompson for his comments. As we discussed in our shareholder letter, after a strong start to the year, our largest P&C carrier partner sharply pulled back their marketing investments in light of renewed profitability concerns. As a result, we expect the inevitable market recovery in our P&C vertical to be pushed back several quarters relative to our prior expectations. We responded to this unexpected change in our near-term outlook by making a difficult but necessary decision to reduce our workforce by 16%. As a result, we’re guiding to positive adjusted EBITDA in Q2 despite an expected 40% to 50% year-over-year reduction in P&C transaction value and the typical seasonal slowness in our health insurance vertical.

While the magnitude and duration of the P&C hard market cycle have been frustrating for us, both as the management team and as significant shareholders, we remain confident in the fundamental competitive advantages of our marketplace model and our ability to capture an increasing share of the multibillion-dollar opportunity across all of our insurance verticals. We will emerge from the current P&C market downturn with a stronger and more efficient organization, which will, in turn, enable us to generate significant operating leverage as our top line results recover. With that, I’ll turn the call over to Pat.

Pat Thompson: Thanks, Steve. We delivered a solid first quarter with results above the mid-point of our guidance ranges across all metrics. This outperformance was driven by 108% quarter-over-quarter transaction value growth in our P&C vertical, which was slightly ahead of the roughly 100% sequential growth expectation we discussed on last quarter’s call. Moving to our Q2 guidance. As Steve mentioned earlier, we expect P&C transaction value to decline 40% to 50% year-over-year. In our health insurance vertical, we expect transaction value to remain roughly flat year-over-year. And in our life and other verticals, we expect transaction value to decline at a similar rate to Q1. As a result, we expect Q2 transaction value to be between $107 million and $122 million, a year-over-year decrease of 37% at the mid-point.

We expect revenue to be between $74 million and $84 million, a year-over-year decrease of 24% at the mid-point. Lastly, we expect adjusted EBITDA to be between $500,000 and $2.5 million, a year-over-year decrease of 67% at the mid-point. We expect our recently initiated workforce reduction to result in approximately $6 million of annual cash expense savings. We are therefore projecting operating expenses after adjusted EBITDA add backs to be approximately $1.5 million lower than Q1 levels and to remain at these levels in Q3. I’d now like to touch on a couple of housekeeping items related to our adjusted EBITDA add-backs. First, we expect to add back roughly $1.3 million of cash severance in Q2 related to our workforce reduction. Second, in Q1, we added back $300,000 of legal fees related to the ongoing FTC inquiry, and we expect to incur a similar to slightly higher amounts for the next few quarters.

We believe we have been and remain fully compliant with all laws and regulations, and we are cooperating with the FTC as they continue their inquiry. We are adding back both of these items as we believe they do not reflect the ongoing operating performance of the business. Turning to the balance sheet. We are focused on reducing net debt and expect to continue to be in compliance with our debt covenants. We generated positive cash flow from operations in Q1 and due to our transaction-based revenue model and low capital requirements. We expect cash flows to improve sharply and in line with adjusted EBITDA coming out of the P&C hard market cycle. With that, operator, we are ready for the first question.

Q&A Session

Operator: Thank you. [Operator Instructions] The first question is from Michael Graham with Canaccord. Your line is open.

Operator: The next question is from Daniel Grosslight with Citi. Your line is open.

Operator: The next question is from Ben Hendrix with RBC Capital Markets. Your line is open.

Operator: [Operator Instructions] The next question is from KBW. Your line is open.

Operator: We have no further questions at this time, and that will conclude today’s conference call. Thank you, everyone, for participating. You may now disconnect.