MediaAlpha, Inc. (NYSE:MAX) Q4 2022 Earnings Call Transcript

MediaAlpha, Inc. (NYSE:MAX) Q4 2022 Earnings Call Transcript February 26, 2023

Operator: Good day, everyone. And welcome to the MediaAlpha Fourth Quarter and Full Year 2022 Earnings Call. Today’s call is being recorded. All lines have been placed on mute to prevent any background noise and after the speakers’ remarks there will be a question-and-answer session. I would now like to turn the conference over to Denise Garcia, Investor Relations. Please go ahead.

Denise Garcia: Thank you, Lisa. 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, 2022. 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 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, February 23, 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. This includes 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 the 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 will 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 fourth quarter and full year 2022 earnings call. I’d like to make a few observations before turning the call over to Pat for his comments. We saw strong performance in our Health Insurance vertical in the fourth quarter. This is driven by a sharp year-over-year increase in demand from Medicare Advantage carriers and we remain bullish about the long-term growth opportunity with this segment. The market for Medicare Advantage is expected to continue to outpace growth of Medicare as a whole and seniors are increasingly shopping for Medicare Advantage policies online. With carriers prioritizing direct relationships with their members, we expect Health Insurance companies to continue to increase their direct marketing investments, which represent tremendous long-term tailwinds for this business.

Turning to our P&C insurance vertical, we believe Q4 was the low point of this auto insurance hard market cycle and we are optimistic that 2023 will be a better year than 2022. Driven by the resumption of marketing investment by one leading carrier, who was early to achieve rate adequacy, we expect spend in our P&C marketplace to roughly double from Q4 to Q1, which is well above typical seasonal patterns. As the year progresses, we expect more carriers to return to growth mode as rate increases continue to be approved and as underwriting profitability is gradually restored. Coupled with the heightened consumer shopping behavior that will result from these double-digit pricing increases, we believe that this has the potential to create market condition to support outsized growth coming out of this hard market.

Now taking a step back, it’s now clear that 2022 will be remembered as one of the most difficult years ever for the P&C insurance industry. Our ability to deliver adjusted EBITDA and free cash flow in this unprecedented market environment not only speaks to the efficiency of our marketplace model, but also to our team and culture. As a bootstrap company, doing more with flashes has always been in our DNA and I couldn’t be prouder of how the entire MediaAlpha team rose syndication this past year, enabling us to flatten our expense growth to meet these challenging conditions. Looking ahead, we continue to believe MediaAlpha can be a multibillion dollar company due to the vast size of our addressable market and our highly differentiated marketplace model.

We look forward to executing on this market opportunity and delivering strong top and bottomline growth in the upcoming years. With that, I will turn the call over to Pat before we open the call to your questions.

Pat Thompson: Thanks, Steve. We exceeded our expectations during the fourth quarter due to better topline growth in our health vertical in favorable expenses excluding non-cash items. We remain highly disciplined in our spending and continue to identify efficiency opportunities across the business. I will start with our balance sheet and cash flow. During the fourth quarter, we paid down $7.4 million of debt, bringing our cumulative debt repayments over the past three quarters to $27.1 million. We were pleased to generate $28.2 million of full year free cash flow during what we believe was the bottom of the current P&C cycle and we ended the year with $14.5 million of cash and considerable headroom relative to our debt covenants, leaving us well positioned to invest in growth coming out of the P&C hard market.

Moving to our Q1 2023 guidance, we expect P&C transaction value to nearly double compared with Q4 of 2022 driven by an improvement in market conditions in our P&C vertical in addition to normal seasonality. Although, we are encouraged by these early signs of recovery, we still expect P&C transaction value to be well below Q1 2022 levels. In our Health Insurance vertical, we expect modest year-over-year growth in transaction value as we continue deepening our relationships with key carriers. For the Life and Other verticals, we expect transaction value to decline year-over-year at a similar rate as in Q4 of 2022. As a result of this, we expect Q1 transaction value for the company to be between $180 million to $195 million, a year-over-year decrease of 22% at the midpoint.

We expect revenue to range from $106 million to $116 million, a year-over-year decrease of 22% at the midpoint. Lastly, we expect adjusted EBITDA to be between $5.5 million to $7.5 million, a year-over-year decrease of 9% at the midpoint. We expect Q1 adjusted EBITDA margin to improve modestly year-over-year at the midpoint, as we expect expenses to be roughly flat compared with Q4 of 2022. We expect quarterly expenses for the rest of this year to remain flat to up slightly as compared with Q1. Due to the uncertainty around the timing and slope of the P&C market recovery we are not providing full year 2023 guidance. But we believe the inherent operating leverage in our model and our ongoing expense discipline creates the potential for strong adjusted EBITDA growth moving forward.

With that, Operator, we are ready for the first question.

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Q&A Session

Operator: Thank you. We will take our first question from Michael Graham with Canaccord.

Michael Graham: Hey. Thank you and thanks for the information, guys, it’s a big statement that you think Q4 is the low point for P&C. I know you were one of the ones to say that this hard market might last longer than most people expected. So I think that’s a good positive statement. I just wanted to ask about the — in past cycles when you see like one carrier coming on strong here with rate adequacy as you outlined in your shareholder letter, can you just talk about like the formal involved with other carriers than sort of coming to market and do you have any thoughts on like historically what a typical time lag has been between sort of the leaders getting rate adequacy and starting to spend more versus some of the others?

Steve Yi: Hey, Michael. It’s Steve. Let’s see, it’s a great question. I appreciate your commentary. Yeah. I think the way this market cycle is unfolding is remarkably similar to past hard market cycles where there was one leading carrier who is very early to achieve rate adequacy and restore underwriting profitability, really front-running the rest of the market in a big way and leaning back into growth mode, not just leaning, I would say, jumping. Now what we know is that, this will proceed the return of demand from a broader base of carriers. But in terms of the overall timing, I think, that’s when I think the parallels between the last hard market and this hard market kind of stop, because really what you are going to see is each carrier being on their own time line based on the rate adequacy that they have been able to achieve and how long each of the carriers will wait until these rate increases earn through to improve their underwriting results before they then jump back into growth mode themselves.

And so the best that we can tell you is that we expect this to happen through this year with various carriers coming in at different stages of the year. We do expect this to last into 2024. But in terms of just the overall timing and is it six months or is it three months that a leading carrier is going to front-run the rest of the marketplace. I mean that’s really hard to predict and it’s really going to depend on the individual carriers and their ability to really get their rates to a good place and where they need to be in terms of their underwriting performance before they really jump back into growth mode.

Michael Graham: I agree. Thanks a lot, Steve.

Operator: We will take our next question from Cory Carpenter with JPMorgan.

Cory Carpenter: Thanks for the question. Steve, one for you and then one for Pat, just kind of following on that one, some of the recent carrier results have been, I think, it fair to say disappointing when used car prices have actually started to rise this year. So just curious more recently, what you are hearing in conversations with carriers around those dynamics and any risk that it could lead to further delays for, call it, some of the laggards? And then maybe for Pat, just on the guide, you mentioned seasonality and then also improved carrier spend, any way to kind of parse out that — how much each of those is contributing to your 1Q guide? Thank you.