EverQuote, Inc. (EVER) Earnings Call Transcript & Summary

Hi, everybody. Good afternoon, and evening if you're in Europe. My name is Michael Zaremski. I am very pleased to introduce John Wagner, CFO of EverQuote here with us today. Some of his colleagues are here too, in case others need to chime in. EverQuote, as some of you may know, has created a tremendous amount of shareholder value since its IPO in '18. Last I checked, I haven't had time to look at my Bloomberg today, its stock's risen almost 200%, 185%. So meaningfully outperforming any benchmark you want to use. The format of today's presentation is going to be kind of fireside chat Q&A. And I believe we're going to start off with a safe harbor statement. I think we've all seen this before. John, should we jump into Q&A now?

Sure, Mike.

Sure. So I tried to survey a small group of investors come in this conference. And I estimate at least 1/3, I think, just don't have a great sense of just the basic overview of the EverQuote business model, strategy, competitive advantages, what the secret sauce is. So maybe we spend the first 5 to 10 minutes, and I can interject kind of just talking about what you do, how it works and how -- what's the strategy to continue to capitalize and create shareholder value?

Sure. Thanks, Mike. So EverQuote is an online marketplace for insurance. We operate by helping consumers shop for insurance by connecting them with providers, and we help providers who are looking to source new consumer acquisition by connecting them with consumers who are in market and shopping for insurance. So what we really do is in-between using data and technology, we make the experience for both the consumer and the provider more efficient for the consumer. We make it easier for them to get multiple quotes and to save money or find the right coverage solutions for insurance. And for providers, we make it more efficient for them to acquire new consumers, especially on a very targeted basis, where most carriers make a business out of focusing on certain profiles of consumers and have certain underwriting or pricing strengths. We make it easy for those providers to target on those consumers that meet those profiles. We are in several different verticals. We started within auto. Several years ago, we launched home and life insurance as additional verticals. This past year, we added health and small business commercial. So we are -- the majority of our revenue still comes from autos, but other insurance, we're pleased this past quarter was a record 22% of our revenue. And overall, our vision is really to become the largest online source of new insurance policies, using data and technology to make it simpler, more affordable and more personalized for consumers to find insurance solutions. So that's kind of the overview.

And John, what about sometimes, for people watching, if they hear some of your direct competitors get that aha moment to better -- for things to click, would you say -- how do we think about your competitors?

Sure. I guess, it's a vast market. So competition comes in a lot of different forms. Usually, when people ask about competitors, they're usually asking about folks that are also public or focused on the insurance distribution space. And so that's folks like LendingTree, MediaAlpha or QuinStreet a little more focused maybe on the partner side of the business on [indiscernible]. So I guess, we do compete with them for distribution dollars, but I think the overriding trend there is that we service a vast market, and the dynamics of that market are moving in favor of online acquisition. So we truly don't feel competitively constrained. They have different approaches to the market, and we do as well. We are a little more of a data and technology-focused consumer marketplace. So a lot of what we do drives at adding consumers directly to our marketplace through our own direct advertising. But overall, we're all serving an industry that is over $150 billion in distribution. Much of that -- in fact, the vast majority of that is still off-line in the form of either off-line advertising or commissions. And so what the dynamic that's been set up is that more consumers are going online to start their shopping sprint, but yet more of the dollars are spent off-line. But over time, that's changing. So digital advertising spend for the U.S. auto insurers is growing about 16% per year and is projected to do so for the next 5 years. So there's this secular tailwind that is aiding the industry and anyone that is serving digital advertising, digital acquisition within the insurance industry. So that's really, I think, the greatest force that we're seeing and recognizing, and that certainly was true in a year like this past one with the pandemic.

And so just -- is EverQuote on a number of websites and performing search engine optimization to draw on the majority of its customers?

Yes. So we draw consumers. We're primarily paid on the initial level. We advertise across pretty much anywhere there's a click online with regard to insurers, where they're in some form. We drive consumers to our marketplace that can have -- we can have multiple different websites, but the flagship -- the largest is EverQuote itself. We drive consumers there really on this -- on the value proposition of searching for insurance. They're able to put in their information once, and then we connect them to multiple carriers and potentially agents based on their profile. So we use data and technology throughout the process to make not only our acquisition more efficient based on what we believe is the downstream value of those consumers, their likelihood to purchase insurance, but also to use that data to align their distribution and what type of carriers we refer them to. So the curated set of quotes that they get from coming through our experience is based on their profile and where we believe, based on historic profile like theirs, they're going to find the best coverage at the best price. And so we -- the model that we derive the revenue at the time of referral when a consumer actually gets their quote when they click on to see their quote or they get a telephone call from an agent, that's the point of monetization for us. And so we drive what we call quote requests, which are consumers looking for quotes on insurance, and we have -- we monetize them as referrals to insurance companies looking to quote them insurance.

Okay. I'm going to come back to the business model and ask some questions, but maybe we can kind of talk about the company's growth profile and your kind of forecast. I think a number of the investors tuning in today understand the insurance industry in terms of the kind of the non-digital side of the insurance industry. And they know that there's a small number of carriers that are winning in a big way, the ones that are more direct-to-consumer, and those companies have very nice growth profiles as you kind of talked about this secular trend. So maybe just we can step back from the business model and talk about kind of what type of growth that you've been seeing? What's underpinning that? And what you expect in '21?

Sure. So I guess I'll start by talking about our long-term model that outlines that we believe we can continue to grow the business 20% per year or more. And historically, we've been successful in the last 5 years at a CAGR of roughly 30%. So we think we can continue to grow the business at fairly impressive rates based on the number of growth initiatives that we have and that includes what we already mentioned was the entrance into the other verticals as well as we've had strong growth that's continuing, and we believe can continue from the autos vertical. So this -- in 2021, we've recently given guidance on growth for the full year in the mid-20s at about 25% growth rate at the midpoint. And again, that really comes from a number of different levers. One is simply growing the number of consumers that come to find insurance with us. One is growing those additional verticals. And really, third is deepening the engagement we have with our carriers and agents that work with us on the platform, and that improves modernization as another form of growth.

So very healthy growth. Can you dig down deeper to understand kind of the EBITDA profile and is the cash flow enabling that growth, If you can, for people that don't understand the EverQuote story as well?

Yes, sure. So we do have a growing adjusted EBITDA profile. And again, in our long-term model, we point to what we believe is an expansion of adjusted EBITDA to the point where it's in the mid-20s in the long-term model. So effectively, we think we can continue to grow top line, while also expanding adjusted EBITDA. For that, the primary metric in which we run the business is variable marketing margin. Variable marketing margin is revenue less advertising. It basically measures our return on advertising dollars. And that's also very much our governor to growth because we want to grow, we want to be able to grow profitably in terms of the return on advertising. From there, when you look at -- and that is, by the way, completely variable as well. So advertising for us is a major expense, but one that also fluctuates with revenue and drives revenue. When you look beyond our advertising expense, most of the expense in the business then is around our investments in technology and in talent, and most of the talent in the business is actually focused on technology. And so really, when you get beyond our advertising, it's a question of investment in operational expenses to grow top line growth in future years. So we like to think of the business from a growth perspective and profitability as a blended story in which we're going to continue to grow, grow profitably, 20% or more. And at the same time, we're going to deliver additional adjusted EBITDA in the area of 1 to 2 points per year. This past year, we're successful at the high end of that range, improving adjusted EBITDA of about 2 points. Prior to that, we actually grew adjusted EBITDA in 2019 more than that. And as we look forward, this year we've given guidance for a point of increase at the midpoint. So we believe that we can grow top line and also manage profitability because it is -- profitability for us is largely a managed outcome based on the type of investments we're making for what we believe is a massive opportunity and making sure that we are capturing top line growth, but also returning profitability and showing that path to our long-term model.

Yes. Maybe moving back to kind of the industry dynamics and maybe we'll focus on auto insurance first. Is there a concentration of your business with a small number of insurers? And -- or is it -- maybe it's not? Or is it broadening out because it's -- and people in our shoes, it's -- you have a number of insurers talking about their digital strategies all the time, and then a lot of people are -- insurers are kind of quiet. They're figuring it out. They're open about working with the EverQuotes of the world. They're excited about it, but they're still tinkering, I think, with their business model a little bit to better be able to compete in the D2C world.

So that probably is a fairly good description of our customers as well. So I think if we start with the auto insurance vertical -- I mean, if you look at our customer base, not surprisingly, it has a pretty strong correlation to market size. And so some of the top players are also top participants in our marketplace. And then from there, some are over-indexed and under-indexed based on kind of how progressive they are around digital acquisition. And so some of the names that are larger within our carrier base are names that you would expect based on their kind of forward-thinking around digital acquisition. In addition, I would say, a major category that is over-indexed in our marketplace more recently is some of the newer carriers, the Insurtechs because I think they very much combine some of the favorable dynamics of the large carriers that are forward-thinking in their digital acquisition and that the digital -- new digital-first carriers have often workflows and products that are designed for online interaction with consumers. And so that makes them a very strong market participant for us in the marketplace. Anybody who's really driving insurance online and making it easier for consumers to shop online for insurance tends to do very well in our marketplace. And not only that some of the newer insurtechs, regardless of their model, whether they're leading with telematics or with mileage-based, they're usually very aggressive in terms of adding new consumers to the marketplace -- excuse me, to their book of business. So they've often come to the market with new and disruptive models, but like everyone else, they're also looking for ways to source consumers. So that combination of both being forward-thinking in terms of acquisition as well as being -- as having digital-first -- a digital-first strategy that focuses on online products and workflows tends to make them kind of over-indexed in our marketplace, and that's something we've been excited about. If you step back from that, it's probably worth noting also that our marketplace also includes agents as well. So it's not just carriers. Carriers are a big part of the marketplace. But we also have over 8,500 local agents that work with us on the marketplace, and that can range from independent agents that represent multiple different insurance companies to captive agents of some of the largest brands in the United States in terms of auto. And so that's really the breakdown within the auto vertical. If you look at -- if you look past auto and into some of our other verticals, where you see overlap of some of our auto insurance carriers. And then you see additional carriers that we've developed and are continuing to develop coverage based on some of the unique carriers that service things like health and life where you might not see as much overlap with the auto.

That's helpful. John, can you remind us how big the agency business is?

Yes. Agency business has become a significant part, still not majority, of our revenue. Carriers are still the majority of our revenue, but it's become a larger point. We have over -- a larger part. We have over 8,500 agents. I think earlier this year, we released the figure that put it -- that put Q2 or Q3 into the mid- to upper 30s in terms of the percentage of the business there. And that -- for us, the agents have continued to be strong through the COVID pandemic. It has probably -- maybe one of the surprises that came out of COVID, I think we were a little more confident around how the carriers would react. But we were surprised that the agents transitioned to focusing on online consumer acquisition. And we saw that not only in the number of agents on the platform, but also their individual appetite.

Okay. Interesting. Would you say appetite is -- what's the bottleneck in terms of increasing the propensity of consumers to buy homeowners online to -- they'll only bundle it with their auto, obviously, if they own a home, but it feels like there's a bit of apprehension from some of the carriers, but also -- but -- yes, consumers are getting more comfortable. Are you seeing any changes there?

Yes. I mean, I think -- again, I think some of the approaches with new carriers around digital workflow innovative products have helped. I mean we have good relationships with some of the insurtechs that focused on -- focus on home. We also see -- we've also had very good luck in terms of bundling. We, in this past year, started talking about the fact that we rolled out a bundled product for our providers to capture the intent of consumers who maybe came through a shopping for auto but also have intent to look for home. So we've had good luck with bundling this year. We've seen bundling be part of the influence on an increasing modernization for us in 2020.

John, maybe switching gears a little bit. A number of times you've mentioned kind of integrations within carriers. How are your -- how is your data integrated or your software integrated into their systems? And is that widespread? Or are there different levels of integration? So if you could talk about if that's a strategic priority as well?