Mediaalpha Inc

NYSE:MAX

Earnings Call Analysis

Record Quarter and Optimistic Future for MediaAlpha

MediaAlpha's second quarter results surpassed expectations with record transaction value of $321.8 million and adjusted EBITDA of $18.7 million. The P&C transaction value grew 88% sequentially, and Health vertical's transaction value increased by 9% YoY. The company almost doubled its cash balance to $29 million and expects strong growth for Q3 with transaction values between $415 million and $435 million. Revenue is predicted to be between $240 million and $255 million, with adjusted EBITDA of $22 million to $24 million. MediaAlpha is investing in growth while maintaining operating leverage and anticipates favorable market conditions into 2025.

Strong Performance in Q2

In the second quarter, the company delivered exceptional results, with transaction value hitting a record $321.8 million, a staggering 300% growth year-over-year. Adjusted EBITDA also surged by over 400% to reach $18.7 million. The growth in the Property & Casualty (P&C) vertical was particularly noteworthy, experiencing an 88% sequential increase driven by heightened marketing investments from insurance carrier partners.

Optimistic Q3 Guidance

For the third quarter, the company forecasts significant growth despite a highly competitive market. Guidance for P&C transaction value is set between $415 million and $435 million, representing a year-over-year increase of 290%. Revenue expectations range from $240 million to $255 million, translating to a 230% increase, while adjusted EBITDA is projected to be between $22 million and $24 million, indicating a remarkable 540% year-over-year rise.

Investments to Drive Future Growth

Despite operating in a capital-efficient environment with minimal capital expenditures, the company emphasizes ongoing investments in business capabilities and workforce expansion. It plans for a slight increase in overhead as it selectively hires additional staff to capitalize on growing market opportunities. This proactive investment approach is framed around maintaining competitive advantages and fostering further growth.

Market Trends Favoring Growth

The insurance marketplace is recovering faster than anticipated, with insurance carriers increasing their marketing budgets significantly. This shift is largely driven by improved underwriting profitability and a strong consumer sentiment toward insurance products. The management anticipates that the favorable conditions in the market will persist well into 2025, as many carriers are still returning to normalized spending levels.

Health Vertical Performance and Outlook

In the health insurance vertical, the company reported 9% growth year-over-year, consistent with expectations. The health business is expected to gradually increase its share of transaction value, contributing approximately 20% in 2024. The dynamics in this sector are also shaped by ongoing legislative changes, particularly around consent requirements, which the company views as an opportunity to enhance the quality of leads generated.

Response to Regulatory and Market Challenges

The company is closely monitoring regulatory changes affecting the healthcare market, particularly new consent requirements that may alter how leads are processed. It reports confidence in its compliance practices and anticipates that such changes will enhance operational transparency and lead quality, which could benefit overall market participation.

Confident in Business Practices

Despite facing scrutiny from external reports questioning its business practices, the company maintains its position that its operations are fully compliant with legal and regulatory standards. Management assures investors that they have conducted extensive internal reviews supporting their confidence in operational integrity, emphasizing that the focus remains on growth and market share expansion.

Earnings Call Transcript 2024-Q2

[Operator]

Thank you for standing by. My name is Pam and I will be your operator today. At this time, I would like to welcome everyone to the MediaAlpha, Inc. Second Quarter 2024 Earnings Call. [Operator Instructions] Thank you.

I would now like to turn the conference over to [ Alex Liloia ]. You may begin.

[Unknown Executive]

Thanks, Pam. Good afternoon, and thank you for joining us. With me are Co-Founder and CEO, Steve Yi; and CFO, Pat Thompson.

On today's call, we will make forward-looking statements relating to our business and outlook for future financial results, including our financial guidance for the third quarter of 2024. These forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially. Please refer to our SEC filings, including our annual report on Form 10-K and quarterly reports on Form 10-Q for a fuller explanation of those risks and uncertainties and the limits applicable to forward-looking statements.

All the forward-looking statements we make on this call reflect our assumptions and beliefs as of today, and we disclaim any obligation to update such statements, except as required by law.

Today's discussion will include non-GAAP financial measures, which are not a substitute for GAAP results. Reconciliations of these non-GAAP financial measures to the corresponding GAAP measures can be found in our press release and shareholder letter issued today, which are available on the Investor Relations section of our website.

I'll now turn the call over to Steve.

[Steven Yi, executive]

Hey. Thanks, Alex. Hi, everyone. Thank you for joining us. Our performance in the second quarter was the strongest in our history across many of our key metrics with transaction value and adjusted EBITDA reaching record levels and exceeding the high end of our guidance ranges.

For those newer to the MediaAlpha story, I'll start today with a brief overview of the company. We're an advertising technology company that operates what we believe are the largest online customer acquisition marketplaces serving the P&C and health insurance industries. We do not sell insurance policies and we don't earn commissions on the sale or renewal of policies.

Our product is a transparent and scalable programmatic advertising platform that enables insurance carriers and brokers to reach high-intent insurance shoppers in real time. We primarily facilitate these connections through our network of hundreds of third-party publishers, where we earn a percentage of the value of each advertising transaction. We also operate our own websites that represent a small amount, less than 15%, of our overall transaction value.

Now turning to our Q2 results. Our P&C insurance vertical achieved record transaction value, growing over 300% year-over-year. We saw strong growth in marketing investments by an increasing number of our P&C carrier partners as auto insurance underwriting profitability continued to improve. We expect carrier spending in our marketplaces to further increase in the third quarter with P&C transaction value growing well beyond normal seasonality. Moving forward, we expect P&C market conditions to remain favorable well into 2025, given that many carriers have yet to resume normal levels of marketing investments.

In our health insurance vertical, we delivered solid second quarter growth, consistent with our expectation. Given the strong performance of our P&C business, our health vertical is expected to generate approximately 20% of transaction value for full year 2024.

As we've discussed previously, we continue to cooperate fully with the FTC civil inquiry, which has been ongoing since February 2023. We've conducted an extensive review of our marketing practices. And while we can't predict the ultimate outcome of this matter, we continue to believe our practices comply with legal and regulatory requirements. Our goal is to resolve this matter as soon as possible, and we'll provide an update when we have one to share.

Given recent market dynamics, I want to briefly acknowledge the short seller report that was published about our company last quarter. Our view is that the report fundamentally misrepresents our business model and business practices. Contrary to the report, neither my Co-Founder, Eugene, nor I sold shares in the recent secondary offerings. We continue to collectively own nearly 20% of the company, and we're more excited today about our growth opportunities for our shareholders, partners and team members as we were when we founded the company in 2011.

With that, I'll turn the call over to Pat for a more detailed review of our second quarter performance and third quarter guidance.

[Patrick Thompson, executive]

Great. Thanks, Steve. As Steve mentioned, our second quarter results exceeded the high end of our guidance ranges across all metrics, and we generated record transaction value and adjusted EBITDA of $321.8 million and $18.7 million, respectively. P&C transaction value was up 88% sequentially, above our expectations of 60% to 70%, driven by significant month-over-month step-ups in marketing investment by our carrier partners as the quarter progressed.

Transaction value in our Health vertical was up 9% year-over-year, in line with our expectations. Overhead was slightly above our expectations as we increased our investment in the business to accommodate the growth we are experiencing. The net effect of all this is that adjusted EBITDA increased $15.1 million, representing over 400% growth year-over-year. We generated $14 million of cash last quarter, nearly doubling our cash balance to $29 million at quarter end, while paying down over $5 million of debt.

There were a couple of notable items in our Q2 adjusted EBITDA reconciliation, including $700,000 of legal expenses related to the ongoing FTC inquiry and $600,000 of legal and accounting expenses related to our secondary equity offerings. In addition, one of our health partners, Assurance IQ, ceased operations during the quarter, resulting in a onetime contract termination fee payable to us of $1.7 million.

Looking forward to Q3, we expect 40% to 45% sequential growth in P&C transaction value, well in excess of normal seasonality as the pace of recovery builds, and we continue to gain market share. In Health, we expect similar transaction value growth year-over-year to what we saw in Q2.

Moving to our consolidated financial guidance. We expect Q3 transaction value to be between $415 million and $435 million, a year-over-year increase of 290% at the midpoint. We expect revenue to be between $240 million and $255 million, a year-over-year increase of over 230% at the midpoint. And we expect adjusted EBITDA to be between $22 million and $24 million, a year-over-year increase of over 540% at the midpoint, driven by higher contribution and moderate expense growth. We expect overhead to be flat to slightly up versus Q2 before increasing another $1 million in Q4 as we selectively add headcount to drive growth. Lastly, Q3 legal costs associated with the ongoing FTC inquiry are expected to be at a similar level to Q2.

Given the strong growth we are seeing, we are investing in the business while continuing to generate operating leverage. As we discussed last quarter, our lean team and capital-efficient model have enabled us to deliver significant year-over-year margin expansion, and we expect this to continue in the third quarter. Our near-term capital allocation priority remains to reduce net debt, though we will continue to evaluate alternative capital deployment opportunities as business and market conditions evolve.

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

[Operator]

[Operator Instructions] And your first question comes from the line of Michael Graham of Canaccord Genuity.

[Michael Graham, analyst]

Congrats on the numbers and the guidance raise is really -- is really impressive. So it seems like things are going well. And I just wanted to start with a question about the recovery. You mentioned in your letter that multiple P&C carriers were increasing spend meaningfully. So, yes, just looking to see if you could put a little bit of depth around that and talk about with such dramatic acceleration in growth expected in Q3, talk about how conservative or aggressive or how much visibility you have into that sort of forecast would be great.

[Steven Yi, executive]

Michael, thanks. I'll address that. I think what -- one of the things that we did predict correctly was how unpredictable this recovery might be and I think Pat really nailed that one. But I think what's happening is growth in our marketplace, in our P&C marketplace, most notably, is happening more quickly than what we expected. Because quite frankly, the early -- the carriers who were early to take rate and shift back into growth mode, I think have been approaching the situation and, I guess, the mixed recovery or the -- I guess, the mixed market dislocation that they're facing more aggressively than we had anticipated. What we thought was that when they started to come back into the marketplace because of the unpredictability of the last several years and how historical the underwriting conditions were and how historically unpredictable the market conditions were, that they would be, I think, cautious in stepping back into the market and that really hasn't been the case.

I think what's happening is that you have carriers who are just down the sideline, didn't advertise much for several years. Most carriers lost a lot of policies in force during this time. And as they regain profitability and they start to get confident in their rates, I think they're really stepping on the gas to take advantage of the current market conditions where you have a limited number of -- a growing but limited number of carriers who have recovered and had gotten their rates right and at their target profitability. And the consumer sentiment now and insurance shopping behavior being at historically high levels, I think they're taking advantage of that market opportunity to really start to take market share. And so we've been pleasantly surprised by how aggressively that these carriers have been stepping on the gas, and we've certainly benefited from that and you see that reflected in our results.

Now I think going forward, I would expect to see a continuation of these positive market trends because still several carriers who are notable spenders prior to the hard market still aren't spending in a notable way right now. And so as these carriers regain profitability again, we expect them to follow the course set by the earlier carriers and really start to step up their marketing investments, particularly in our marketplace. And then in addition to that, we have to remember also that there are some geographies, most notably California, New York, New Jersey, some of the big geographies that have been slow to actually allow for rate increases where really carriers aren't marketing in full right now. And so we expect the positive market conditions and the positive momentum to really continue well into 2025.

[Operator]

Your next question comes from the line of Cory Carpenter of JPMorgan.

[Cory Carpenter, analyst]

So Steve, just kind of building on that question, is the right way to think about this is that the early movers are back to normalized spend, maybe with the exception of a few states? And if so, how should we think about the growth opportunity from here just given your added transaction value level today, which is a record level? Like how do you think -- how are you comfortable with growth growing from current levels? I have a follow-up, but I'll stop there.

[Steven Yi, executive]

Okay. Well, listen, I'll start to address the questions. Pat might chime in as I start to answer that. I mean, I think we're giving you the visibility that we have right now, right, for Q3 based on the unpredictability and our underestimation in the last couple of quarters. I think as these carriers come back, it will be hard to predict what's going to happen. I do think that the growth rates overall for the P&C industry on a year-over-year basis, will continue at high levels.

I think on a quarter-by-quarter basis, going forward into 2025, we can certainly foresee that that will be lower, again as pricing normalizes, as some of the volume around the heightened consumer shopping behavior starts to normalize as well. But in terms of just giving you an indication of really what we think the market is going to do for the remainder of the year, I mean, we're giving you our best estimate for Q3. And certainly, we do expect positive tailwinds, again, well into 2025 as the market recovers and, again, as the secular trend of insurance carriers embracing the online direct-to-consumer model continues. And we expect that secular tailwind to continue in 2025 and beyond. And so, Pat, did you want to add anything to that?

[Patrick Thompson, executive]

Yes. And I think, Steve, you touched on the price versus volume piece, which I think I can maybe elaborate on a little bit, which is if you look at the last peak of the business for us was in late 2020, early '21. And what we've seen over the last few years is that the volume trend has been generally flat to up over that time period of volumes or a decent bit higher than they were at that time. And pricing is now kind of in the ballpark, slightly higher than it was at the last peak as well. And so where are both of those things going to end up, I think Steve kind of touched on it, which is like, hey, we think the trend lines are in the right direction, but it's hard to predict the exact slope of those. But I think we're pretty bullish given where we're at in terms of the recovery and we think there are more good times to come.

[Cory Carpenter, analyst]

Okay. And just for a follow-up, I wanted to ask about the health business. We've received more questions of late. Kind of an open-ended question here, but wanted to hear your thoughts just generally your outlook for health business. Other companies have chosen to exit, you guys have chosen to stay in. Kind of why is that? And then also, any -- wanted to give you a chance to respond to maybe some of the new business practice allegations that came up in the short report as well.

[Patrick Thompson, executive]

Yes. And, Cory, I'll maybe address that first part of it of why we're staying in the business and then can hand it over to Steve for the second part of that question. And so as we think about the health business, there are a couple of things at play there. First off, it's been a growing business for us consistently over time. And so, we've grown that business from being a pretty small business a number of years ago to a meaningful one today and we're optimistic about the future of the business.

And really, as we think about it, there are 2 different pieces of it. There's Medicare Advantage, which is a product that has really strong fundamentals. It's a compelling product for many consumers in that it offers them additional benefits and no out-of-pocket. It's a business that's attractive for carriers in that they -- a number of them have made big bets in the area, and it's a solidly profitable business for them. And it's a business that enjoys bipartisan support within government as well for the benefits it provides.

And on the under 65 side, that's been a nice business for us as well and we're -- we've grown that across different political administrations and it's one that we think provides value to consumers and to the marketplace. And would also point you towards I think some of the folks that have exited the health vertical, their models were much more agent heavy models where they were focused on binding policies themselves. And as Steve said in the prepared remarks, we have no agents. We don't directly contract with any agents and we don't receive commissions for the sale of any insurance policies in our business. And so, the business models, in our view, are pretty different.

And so, Steve, do you want to tackle the second part?

[Steven Yi, executive]

Yes, absolutely. And Cory, I appreciate the question about the short report and some of the specificities there. I mean -- what I can tell you is that we've looked into it internally, did a full internal review, went through it with our Board, including our independent directors. We continue to stand by our business practices, and we continue to believe that we're in compliance with all applicable rules and regulations. And so, really beyond that, I think it's a bit of a fool's errand to really like point by point go through the business practices that they outlined there and some of the allegations they outlined there.

I mean, I think most people probably on this call understand how these firms work and how --what these smash and grab reports are really all about, right, taking things out of context, making spurious connections between one thing and another in order to actually paint a fully and completely misleading picture of a given company. And certainly, they've done that here, with the goal of really driving down our stock price to make a quick buck at the expense of our long-term shareholders. We think that's a horrible thing to do. And the last thing I want to do in a call like this, when we've had a record quarter and are looking forward to another record quarter is to give any more airtime to a short-seller like this. And so -- so I appreciate the question, but I think that's where we want to leave it with the short-seller report.

[Operator]

Your next question comes from the line of Mike Zaremski of BMO Capital Markets.

[Michael Zaremski, analyst]

Maybe going back to lots of the good color you gave on transaction value, specifically, I'll just stick with that. If we look at your 3Q guidance and just make a reasonable guesstimate of what it implies for P&C specific transaction value and then also if I take in your comments of volume has been flat to up over the years and pricing is slightly higher than the last peak, it does imply what you said you -- I think the math implies you're taking a lot of market share because we kind of know what the average price of auto insurance has been over the last few years. So if I'm right, I think you said you took a lot of market share. What -- maybe you can elaborate on, Pat, what's --why are you taking market share. Or is it just simply just maybe you guys are the only ones that do certain things? Or what's going on underneath the covers that is causing you guys to win so much more?

[Patrick Thompson, executive]

Yes. And, Mike, I'm happy to take it and then Steve can jump in if there's anything to add. And so I think your categorization is correct in that I think the volume trends have been good. The pricing trends, in particular, over the last couple of quarters have been steeply up, which has driven the acceleration in transaction value that we've seen. And I would say that I think we got this question a lot in the hard market of kind of performance vis-a-vis peers.

And one of the biggest drivers of performance is business mix. And our business in P&C is overwhelmingly focused on the selling of clicks to carriers. And so a number of these carriers -- so in a time when carriers are not rate adequate or not profitable, that is spend that they can very easily reduce or eliminate because the last thing they want to do is to be acquiring lower funnel customers that would be -- that'll be unprofitable on day 1. And so, we think we're in a spot now as carriers are getting rate adequate and getting solidly profitable. They're eager to grow and they are returning to our marketplace probably faster than we expected. And that has been driving the outperformance versus peers over the last couple of quarters and that's a trend that we think will continue in the next year.

[Steven Yi, executive]

Yes, Pat, let me [ jump in ] which is -- I think the other thing that you're seeing at play is really the power of the marketplace model. And so we're the only pure-play marketplace model, right, that's -- among our comparable companies. And so what that means is that we have brought together hundreds of insurance publishers, right, into our ecosystem and these are insurance price comparison sites like the Zebra and Insurify, insurance carriers who are looking to generate advertising revenue off of the non-converting shoppers. These are personal finance apps like Credit Karma, who are trying to save insurance sellers to help deliver insurance savings through their user base, their lead generation sites.

And so it's really this ecosystem of hundreds of insurance-specific websites that can really flex up with carriers and their enormous growth appetite during times like this, right. And so what you're seeing is the validation of that transparent programmatic marketplace model. And what we expect to see is that model really continuing to pay dividends going forward as more and more carriers continue to spend. And we continue to expect to outgrow our competitors certainly well into 2025 because of the marketplace model and because the recovery is really going to be focused on the national direct-to-consumer carrier budgets where we focus.

And I think -- one clarification to what you said in the beginning. I think -- I don't know if you --but you said that the volume had been either flat to up slightly since the last peak. I think that that's -- I think volume is actually up, [ a pretty ] significant [indiscernible].

[Michael Zaremski, analyst]

Okay.

[Patrick Thompson, executive]

And to further clarify on that last piece, it's -- I think in any given quarter on a year-over-year basis, it was flat to up over that, but cumulatively...

[Michael Zaremski, analyst]

Yes, every year compound. Okay. Yes. Okay. Got it. I think the national carrier piece might be a part of the equation too that helps us think through this. Got it. And I guess just lastly, and maybe there's nothing to say here because you already kind of said it in the last question, but I feel like it's -- I kind of have to ask. So, have there been any business -- meaningful business practice changes in recent months?

[Steven Yi, executive]

Sorry, business practice changes? I mean, are you asking in response to the short seller report?

[Michael Zaremski, analyst]

Yes. Just -- well, I guess, well, clearly, the whole industry has been somewhat reacting to the ongoing issues, the government agencies. This has been -- there's been issues going on for well over a year now in the Medicare marketplace, for example. So just kind of -- I don't know if there's just -- if there's anything you think that maybe the whole market changed a bit, that's worth kind of reflecting on or specifically any business practice changes over the last maybe more than just a couple of months due to what's taking place in the market?

[Steven Yi, executive]

Yes. I mean, I think I can start this as well. I think Pat will have some things to add here. I mean, I think specifically you're referring to the health insurance market and some of the -- and some of the CMS one-to-one consent requirements that are going to be in effect for this upcoming enrollment period as well as some of the one-to-one consent requirements from the FCC under the new formulation of TCPA, which affect both health insurance industry and the auto industry.

I think the impact of these things are going to be mostly within the health insurance vertical, because what these things are going to affect are mostly leads that are sold and our P&C vertical is still predominantly click focused that we don't foresee a lot of changes to the P&C ecosystem, if any at all. I think with regard to what's going to happen within the health insurance ecosystem, I mean, I think what you're going to see is the one-to-one consent really bringing about more transparency and higher quality leads and certainly that we're going to welcome. I think some of the devil is going to be in the details of exactly what's meant by an automated dial. I think companies are going to try to come into compliance with this in slightly different ways. And so I think it will be interesting to see how things shake out.

I think certainly, we're testing a lot of different implementations to maximize conversion rates, while still abiding by the new one-to-one consent requirement. But overall, for regulations like this, which really I think will limit, the number of times a lead can be sold, making more transparent exactly who's going to call you once you submit yourself as a lead to a health insurance company. Overall, the spirit of those things, we welcome. We've always welcomed those. So I don't know, Pat, if you have anything to add.

[Patrick Thompson, executive]

No, I think that was a good summary from [ my perspective ].

[Steven Yi, executive]

Okay. And Mike, is that -- did that answer your question?

[Michael Zaremski, analyst]

Yes. That's very helpful.

[Operator]

Your next question comes from the line of Tommy McJoynt of KBW.

[Thomas Mcjoynt-Griffith, analyst]

On the seasonality front, you typically see a pickup in the gross profit margin in the fourth quarter, I think given the rise of the health care mix in that quarter. Should that be more muted this year than previous years, just given the rise in the mix of P&C and its larger share of private platform mix? And is there any way to sort of quantify this?

[Patrick Thompson, executive]

Yes. And, Tommy, I would say the short answer to your question is yes, it'll be more muted. And really the way we would think about kind of modeling it is, for us typically Q4 has about 40% of our transaction value for the year in the Health vertical and a round number of plus or minus. And you can see over the last few years kind of how Q4 profit might compare to Q3 versus Q1. And acknowledging there are some changes in P&C in there, but you can start to get a feel for kind of how much extra profit the Health vertical does generate in Q4 because it is a pretty meaningful profit quarter for the Health vertical as a whole.

[Thomas Mcjoynt-Griffith, analyst]

Okay. Got it. You guys often cite your sort of need for minimal capital expenditures. Can you just talk about like where you guys are investing in the business and sort of what keeps you confident that you maybe shouldn't be spending more on CapEx to make sure that the business maintains its competitive advantages?

[Patrick Thompson, executive]

Yes. And Tommy, I would say on the CapEx side, we -- from an accounting standpoint, we historically have not capitalized any software development expense and that's because it hasn't met the threshold for capitalization. And the CapEx we have is -- generally been for leasehold improvements and little IT stuff like laptops and things like that. And so there's just virtually nothing that's in that CapEx bucket for us. It was [ $100,000 ] last year, and it'll be kind of similar ballpark of couple of hundred thousand probably for this year.

I think on the investment side, you can see that we are investing in the business given the overhead numbers. And I think we talked about the Q2 numbers and the trend line for the balance of the year. And I would say that as we think about those investments, I would say, broadly speaking, they fall into 2 categories.

One would be kind of fundamental -- kind of fundamental product expansion and excellence. And you can think of that as being us adding to our capabilities from a tech, product and data analytics standpoint if those are fundamental differentiators for the business over time. And the second area in terms of real investment is going to be some of those heads that I would say are kind of semi-variable or directly supporting revenue. And you can think of those as being sales and account management heads that become kind of more necessary and, quite frankly, more financially attractive in a time when the market is growing and the business is performing well.

[Operator]

Since there are no more questions, that concludes today's call. Thank you all for joining. You may now disconnect.