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

Great. Thanks for joining, everybody. I'm Doug Anmuth, Internet analyst at JPMorgan. It's our pleasure to have with us today EverQuote CEO; Jayme Mendal; and CFO, John Wagner. So EverQuote is a leading online marketplace for auto insurance shopping in the U.S., emerging strength in home, life, health, renters and commercial. EverQuote is focused on driving scale, data and analytics with the majority of its employees, data scientists and engineers. Jayme has been CEO for the past 6 months. And before that, served as both Chief Operating Officer and Chief Revenue Officer. Prior to EverQuote, he held numerous roles at PowerAdvocate as well as at Monitor Deloitte. And John has been CFO since 2014. He previously served as CFO of NuoDB, and also, he was at Carbonite and Constant Contact. So welcome, Jayme and John.

Thanks, Doug.

Good to be here.

One thing I should just mention before we start, I will -- obviously, I've got plenty of questions, but as the audience has some questions that they'd like to ask, feel free to use the blue Ask a Question button, and I will do my best to work that into the session as well.

So let's kick it off. Maybe just to start, can you talk about your learnings from the pandemic and just your view on how the secular shift to online insurance has been accelerated?

Yes. Sure. So thanks, Doug. A couple of things happened during the pandemic, and I'll take them sort of each in turn. The first is a period of extended high profitability for insurance carriers, particularly in auto insurance, which attribute to lower miles driven leading to lower losses. The second was really the closing of some of the more traditional marketing channels, whether it's -- we're not able to run sponsorships on live events or local agents being unable to have their offices open. As a result, they were forced to push more budget into digital channels. So as we come through the pandemic and get to a period of vaccination and reopening, we're keeping a close eye on what's happening with each of these dynamics. With respect to profitability, all the data so far, so the Q1 loss data that we're seeing come through, and all the indication that we're seeing from our carriers in terms of their appetite for growth leads us to believe that the period of strength in auto profitability will persist and certainly has persisted thus far. And we see no reason to expect any abrupt change to that in the near term. Even a small but elongated drop in driving during commuting hours can result in an outsized impact on losses. And so we'll see where things calibrate as we get back to the new normal, but we do experience -- expect to experience an extended period of profitability and health with the carriers. The second component, Doug, was the closing of the non-digital channels. And the interesting thing here was that not only did they shift budget into digital channels, but they made investments in our channel to get higher return out of it. So that could be accelerating integrations with us, that could be providing more subsidy dollars and training to local agents who are new to our channel. And all of this stuff resulted in higher performance. And when you have a performance and a highly attributable channel like ours, it's unlikely that the dollars would move back. So we view the whole thing as largely pulling forward some of the shift of distribution dollars into digital channels.

Okay. And then what happens, I guess, just when you think about miles driven starting to return, claims likely picking up again just as we kind of go through the course of this year, I mean it sounds like you expect budgets to still stay pretty strong. But how does that impact spending? And then perhaps just ROI, how the carriers are thinking about ROI as well?

Yes. So as I said, the data to date suggests that sort of loss and combined ratios remain in a very healthy place. And I think all indication that we're getting from carriers is that their appetite for growth is high and -- with this as the backdrop. And even as we are already beginning to return to sort of post-COVID commuting patterns, it does appear that there are -- while miles driven have come up, they haven't come all the way back up to where they were before the pandemic. And even if they remain just a little bit below that during certain hours of the day, you'd expect to see the favorable loss conditions persist for quite some time. So again, our expectation is we will see a favorable environment for the foreseeable future, and it's unlikely that we'd see any abrupt change back to sort of pre-pandemic levels.

Got it. Okay. I can vouch for New York traffic myself, at least. All right. So partners have become deeply integrated with your platform. Hope you can just talk about the recent strength in unit economics. You saw 1Q RPQR up 22%, offsetting some of the decel in quote requests, which were 4%. How should we think about kind of the mix between those 2? Is that a function of those deeper integrations driving higher conversion rates? And how should we think about that going forward?

Sure. Well, integrations are certainly a part of the strong monetization. Typically, when you see a period of sort of outsized monetization growth or growth in revenue per quote request, it's sort of the compounding effect of multiple things. It's not just one thing at a time. And so if you take a step back, what drives revenue per quote request, well, it's how many connections are we able to make per consumer. We refer to that as our coverage, our provider coverage. And then number 2 is what's the value of each of those connections. So sort of quality or downstream performance of those connections. And integrations would be something that would drive the value of connections because performance goes up, in some cases 40%, we're seeing improvement to downstream performance and bind rates when we integrate deeply with a partner. But you could also get higher-value connections through better targeting capabilities, which we've enabled recently through higher LTV referrals, so our bundled referrals that take an auto plus home and tender and sell them out into the marketplace. Those are all things that would give you higher value per connection. And then at the same time, we're facilitating more connections per consumer. And so adding and expanding our agents, our third-party agent base is a big part of that. We've seen our agent demand increase substantially over the last year. And then adding and expanding carriers would be another way to do it. And we called out recently, we've seen particularly strong growth in sort of the digital carrier segment of late, which is contributing to our ability to connect consumers with more providers. So it is a combination of those things, but integrations are a big part of it.

Okay. And is there any way to -- just when you think about the integrations, because I know it was kind of a big topic through a lot of last year as you got to that kind of fully integrated type of level. Any way to quantify the impact kind of that you've seen across conversion and buying rates?

Well, the impact varies by carrier where they were going from and to in terms of their depth of integration. But some of our -- the examples that stood out where we've had carriers that have gone to a deep pre-fill integration and seen a 40-plus percent improvement in their bind rate as a result.

Okay. And just when you think about those carrier relationships, are there any kind of next obvious steps in terms of deepening relationships or other kind of current product initiatives that you're thinking about there?

Yes. We sort of bifurcate the -- when we think about integrations and what we can do to improve funnel performance, we have sort of 2 funnels. The first is the online one, right? So some consumers want to go get their quotes online and sort of click out to a carrier site and get their quotes that way. The other is the offline path. And still, a lot of consumers want to get on the phone with someone, whether it's a local agent or a call center operator, to ask questions before they get their quotes and complete their process. And so we have a sort of a range of initiatives arrayed against the online funnel and the offline funnel to improve conversion through each of them. The online funnel, we've spoken about the pre-fill integrations. We're also working on -- continue to work on enabling more precise targeting from our click buyers, so they can better align their targeting with downstream value for them and improve their performance. And where possible in certain segments of the market, pushing further downstream to land consumers actually on quotes, or in some cases, even giving them the opportunity to buy an insurance policy right from within EverQuote. That said, the larger chunk of investment right now is really in that offline path. I think there's a known sort of point of friction and performance loss in the handoff from the digital shopping journey to the phone usually. And that's especially acute for local agents who don't necessarily have all the best technology or process to take an Internet shopper and connect with them and quote them in sort of real time. And so we're making investments in taking over more of that process on behalf of agents. And we think that in doing so, we're going to be able to provide a more -- certainly a more unified experience for the consumer, so more EverQuote where it's taking them further down the funnel. But then also it will yield more sort of consistent and performant experience for the agents as well.

Okay. And then do you think at all that we should be worried about quote request volume growth just given the decel that we saw last quarter?

No, I mean, look, we -- I think we expect growth to be driven by volume and monetization over time. And from volume -- quote request volume versus revenue per quote request will ebb and flow, depending on the initiatives that we're investing in over a given period of time. And I think we're in a period now where the dominant driver of growth over the last few quarters has been monetization. But I wouldn't be surprised if we start to see some quote request volume return to higher levels of growth as we get into the back part of the year. And all that said, Doug, I think one thing that we'll maybe start to caution a little bit is that DTC as -- our direct-to-consumer agency business grows as a share of the business. The quote request metric itself becomes a little bit less relevant for capturing the growth in the business, given significantly higher monetization on commissions in the DTCA business versus the referral business. And so the metric itself may start to lose some explanatory value as the business evolves. But in the near term, I would expect to continue to see some ebbing and flowing across quote request volume growth and revenue per quote request growth.

Okay. That's helpful. Let's shift gears there into DTC. So we've certainly seen strength in that channel. Hoping you could provide some updates on Crosspointe's recent performance. It pulled forward progress in health and Medicare probably more than 12 months or so, and you talked about that at 1Q earnings. Just curious kind of how you think about the progress you've seen and then also the balance of DTC in the marketplace in the long term.

Sure. So Crosspointe performance, as we noted, continues to be strong. Exceeded expectations in the fourth quarter, in the first quarter. And we have since consolidated our life and health agencies into a single platform under Crosspointe's leadership. And we think that's going to -- it will enable us to benefit from their operational experience across a broader swath of the business, but also deliver other benefits like having a more flexible pool of agents to better utilize capacity, having a unified set of operational and tech platforms against which to invest. So we continue to be pleased with Crosspointe acquisition. We think we're building on the platform as we progress through the course of this year, and we're quite excited about it. And you asked about balance between DTC and marketplace. That, I think, will vary by vertical. If you zoom out and you think about the role of DTC in the context of our business, it's meant to complement the marketplace specifically where we feel we can provide a better consumer experience and fill coverage gaps where our marketplace coverage isn't strong. And so in life and health, where that marketplace distribution was more sparse and continues to be more sparse, I would expect DTC agency to actually become the dominant distribution platform over time. But in P&C, where we have really strong marketplace distribution, I think if we were to launch a DTCA platform, it would be more targeted. Coverage is sort of a big multidimensional puzzle, and it depends on like who is the consumer? What time are they shopping? Where are they? Do they want to connect with someone on the phone or continue their purchase online? And so what our job is to make sure that every consumer, no matter what they look like, where they are, what time they come through, how they want to connect, has the right option available in the marketplace. And where we can't deliver that through third-party coverage, that's where we would focus our first-party agency. So as an example, in P&C, if you have someone coming in who's uninsured, wants auto insurance, they're uninsured, it's 9:00 p.m. and they're in like Atlanta, Georgia, do we have good third-party coverage there? If not, that might be a place where we would place very targeted coverage through our agency.

Got it. Okay. So when you think about I guess, expanding DTC, do you view that as more organic or potentially through some additional M&A opportunities?

I think it will occur both ways. So -- and it will come down to whether we have the sort of foundational operating platform and expertise in place for a particular segment of the market. So we're taking a very segmented approach to this. In health as an example, we now have the platform. We have the operational expertise. We have the team to grow organically, and we may accelerate the growth of the DTC platform and health through acquisition, but it's not necessary to grow. In other verticals, like if we were to do DTCA in auto or home, I think it's a sufficiently different skill set carrier landscape instead of operational needs that we feel we would dramatically accelerate our progress by taking an inorganic approach to it. And so I think in some segments of the market, we'd focus more on M&A. And in other segments of the market, we'd focus more on organic growth.

Okay. Got it. Okay. And then just in terms of the marketplace, just curious, kind of what percentage of overall revenue the agency business comprises currently? And I guess how you're thinking about that going forward over time?

So Doug, I'll jump in on that. So today, marketplace has revenue of about 35% comes from agents. We have over 8,000 third-party agents on the platform. And so we disclosed this past quarter that it was actually our fifth quarter with 35% or more of our revenue coming from agents. So agents are playing a larger role. I think folks, when they think about insurance, they think primarily of the DTC carriers. But agents are a significant part of the distribution landscape, including within auto insurance. We've been successful growing that over the last couple of years, probably first, due to our efforts to segment our agent network between kind of our larger agents and giving them tools that allow them to target on consumers, much like our carriers do. And then second, I'd say we were pleasantly surprised by the reaction of agents within the pandemic landscape. When there was -- we were fairly confident that carriers would turn to online sources when they saw offline sources become unavailable. We were less sure about what agents would do. And I think we saw the pivot there, maybe even more complete toward online. In many cases, participation in the marketplace like ours is really the agents kind of on-ramp to Internet consumers who are shopping in their areas. So agents have played a larger role and a growing role on the platform.

And what's your view there, John, just as you think about agents kind of coming out on the other side here? It sounds like they accelerated their online activity. Does that continue from here just given kind of the familiarity and some of the success that they've seen over the last year?

I think the view with agents and where their spend dollars will go is similar to our view on the carriers. And that is as the rotation has come out of offline sources and toward online sources, including EverQuote, you're talking about moving dollars from sources that are hard to attribute and hard to understand your performance to an online source, like EverQuote where you know exactly what type of performance you're getting, and you can attribute exactly the consumers that you've added to your book of business through your spend. So I think it's always going to be a challenge to take dollars that have moved online and move them offline because you're seeing the performance and you're getting the attribution from a source like EverQuote. So we're confident that the gains that we made during the pandemic on both the agent and the carrier side are sustainable, that we pulled forward what is a secular tailwind that is both the consumers are already online, the dollars are moving online. And there's no reason to think that, that would really rotate off.

Okay. All right. So when you think about kind of shifting dollars in building out the other revenue category, how do you think about kind of bridging that gap to getting other revenue to contributing 50% of revenue in the long term? And what other key verticals, where do you see kind of the most growth opportunities?

Yes, sure. So auto insurance is still about 80% of our business. But as you point out, we think that other -- that the other verticals, which is home and life, health and small business and commercial, can grow to 50% of revenue by the time we reach $1 billion run rate on revenue. What you see already within our business is that the other has reached 20% over a number of years, and it's been consistently growing faster than auto. Just simply, number one, due to the size and kind of scale of our presence within these other verticals. They are largely much greener pastures for us due to our relative scale there, so we're growing those faster. And in many cases, those verticals are as large or can be as large as auto, any one of those verticals. So they're significant. Our efforts are fairly young in that space. And as they continue to grow faster than autos, as they have consistently, they'll continue to be a larger share of our revenue. And again, internally, we think of that as being about 50% by the time we get to $1 billion. I guess when we think about our verticals, it's like choosing between our children. We think they all have a lot of opportunity. Again, any number of them can be as large as auto. And you've seen other businesses that are formed around -- any one of those verticals makes a full business around just one of those verticals. So they can be significant. I think we would certainly call out right now our efforts around direct-to-consumer. And those are within life and health, where we believe direct-to-consumer has given us an advantage, and we've seen significant growth, especially within health with our acquisition of Crosspointe and our first open enrollment with Crosspointe this past year. In the fourth quarter, we're expecting that our health vertical will grow greater than 50%. And so we think the direct-to-consumer distribution is a new leverage for those other verticals. But overall, I think there's a lot of bright spots in the verticals. We've mentioned recently that our home vertical has actually reached nearly margin parity with auto. So we're seeing these verticals perform also in ways -- also in other dynamics, not just growth, but also margin profile. And then you see something like small business commercial where we've launched small business commercial but really have not put tremendous resources behind small business commercial coming through the pandemic. And that's really a large opportunity that's in front of us. So we think that those are all levers of growth to get us to that point where we have a diversified revenue set where 50% is coming from these other verticals.

Okay. Got it. All right. Just I guess when you think about non-autos continuing to increase just other revenue in general. Just how does that change seasonality mix for you going forward? Any kind of color there would be helpful.

Yes. Sure. So I mean I think the biggest change there really is our entrance into health and our supercharging of our efforts within health through DTCA, through the acquisition of the health agency Crosspointe that we acquired last year. The change there is that within health, much of health is focused around open enrollments, whether it be in ACA policies or whether it be in Medicare Advantage and supplement policies. Those open enrollment periods tend to fall within the fourth quarter of each year. And so that becomes our largest seasonal quarter for health. And that changes the attributes, the seasonal attributes of the business and effectively makes fourth quarter our largest revenue quarter of the year. And that's different because within P&C, fourth quarter is generally a soft quarter. And so health is contributing really to bulking up what is a softer quarter in the fourth quarter.

Got it. Okay. And then just on the open enrollment. You mentioned that you basically passed the first one this past 4Q. What were the learnings there? How do you think about that for later this year in terms of maybe how you do things differently?

Yes. So we were -- we had very short time to plan. We acquired Crosspointe in September, and the open enrollment periods generally started in October. So we had a fairly short period to plan, but we were very pleased at a couple of levels. One, we actually exceeded our plan for Crosspointe. And so financially, we're very pleased with the fourth quarter. I'd say the biggest area that we're pleased in really was the integrations of the team. The teams, both the culture of the Crosspointe team, the combination with EverQuote, the integration into our traffic and our ability to leverage where we were particularly strong, which is around traffic acquisition, with where Crosspointe was particularly strong, which was around the domain expertise around selling health insurance, that made for a very strong open enrollment period that was above our expectations. We have a lot of faith in the team from Crosspointe. And actually, this past quarter, we announced that we are bringing both of our life and our health DTC efforts under the same management umbrella internally and that the backbone of that management team is actually the Crosspointe management team. So we're very pleased with how that's progressing, and we think that under that umbrella, we'll see efficiencies of being able to manage the whole agency, direct-to-consumer agency under one umbrella sharing resources.

Got it. Okay. And how does that help perhaps just from a bundling perspective for consumers? And how do you think about the potential for that over time?

Yes. Sure. I think if you go to bundling, one of the things that the other verticals have done for us in general has opened us up to bundling. Bundling, especially within natural verticals like auto and home is very common with the carriers. It not only drives larger policy values, it also drives LTV for the carriers. We are able today to be able -- because we're in multiple verticals, we're able to capture the intent of consumers that do want to bundle and be able to offer that to the providers who are anxious to be able to quote consumers who are interested in a bundled selection. I would say, in general, when you get to direct-to-consumer in our agency, there, I think you'll see that in general, not just through bundling, but also just in general, we'll be able to improve monetization around direct-to-consumer because we're really taking an additional step with consumers, not just connecting them to a provider, but also actually connecting them and selling the policy to them as the agent of record. That improves our take rate on the sale and it also opens up our ability to tap into the larger TAM of the market that we serve very directly. And that's the amount of spend today that is in the form of commissions to agents, we're now able to tap into that directly. So it's bundling even in the marketplace, but it's also expansion and monetization through tapping into those commission dollars in direct-to-consumer.

Okay. Great. Just going back to auto for a moment. There are obviously a couple of sizable carriers who have been pretty aggressive online and probably are out there well ahead of others in the space. You do have a customer at least last year north of 20% of revenue. Just how do you think about that concentration going forward? I guess, specifically within auto and then kind of on an overall basis?

Sure. So our largest carrier on platform is Progressive. And they're an excellent partner. They've been with us for many years. They're pretty consistently 18% to 26% of revenue in a given quarter. And they have scaled with the business. And I think that really is a testament to the fact that someone like that has been fairly, dare I say, progressive in adopting kind of a digital approach to customer acquisition. And they've been out front. So they've been a very healthy part of our marketplace, and they continue to be and scaling with the business. I'd say it's important to note with any of our carriers, that they all operate with us in a real-time auction. So they express what they're willing to spend with us through their own bids. And so they compete against other carriers, and they're able to also determine what their cost per sale tolerances are and express those bids exactly as they like. So we don't look at the concentration as an issue because it is them simply participating in a competitive landscape. On the other end of the spectrum, this past quarter, we highlighted that the digital carriers actually grew over 200% on our platform. So we're seeing growth from the newest entrants on the other side of the platform as well. And that again is -- I think the common denominator there is carriers that welcome a digital experience. And I don't think you get a better example than with the digital carriers who, in many ways, all have one thing in common, and that is they were built for a digital-first experience. They often have disruptive models and they're hungry for new acquisition. We provide those digital carriers, whether they're leading with telematics or whether they're leading with mileage, however they're leading into the market, we provide them with a way to acquire consumers on a very targeted basis, just the consumers they want at a very quantifiable ROI. And so it feeds really what is a model where the carriers want to grow quickly. They have a very specific type of consumer. And therefore, their spend on the platform can be very efficient. And then anybody who has come and built on a digital-first chassis is generally going to have -- be fairly sophisticated in how they deal with Internet consumers and helping that journey be smoother for a consumer who's going online to shop insurance but often also wants to buy insurance online. So anyone that's moving kind of with the market toward online experiences is generally going to help contribute to this tailwind. Just as the advertising dollars are moving online, the consumer experiences are moving online. So I think when you look at the carriers on our platform, all of them have in common -- the ones that are -- that participate well in the platform, they all have in common that they are fairly sophisticated with digital acquisition.

Got it. Okay. That's helpful. Maybe you can just talk about the kind of the long-term road map, the targets, when you think about profitability, the path to 40% VMM target and then also the 25% adjusted EBITDA margin guide over time, some of the key levers to get there?

Yes. Sure. So we have a long-term model that we've developed early on, and we've been making progress toward that long-term model. Really starts with the idea that we are going to manage the business for variable marketing margin in absolute dollars. So that is revenue less advertising. And we're going to spend on advertising to the point of incremental profitability, right? So we want to grow the business and we want to grow the business as fast as we can, but we also want to build that business with incremental profitability over our advertising spend. So that really is the biggest kind of governor to our revenue growth. If you look at what that means for revenue growth, we believe we can grow the business 20% or more. And we think we have the leverage to growth not only -- to grow, not only through adding new consumers to our existing verticals but also scaling these newer other verticals and adding new verticals as well. So we're going to grow the top line 20% or more. We're going to add to variable marketing dollars. We expect, as we manage the variable marketing dollars that, that will be reflected in increasing VMM as a percentage of revenue as well. So we expect VMM, which stands today around 30%, that, that will grow probably roughly to about 40%. So we see about 10 points of leverage over time there. And then we see leverage in all of the operating categories. Just as we scale the business, we're able to add efficiency to the operating categories. And really, the governor there is how much we're investing for new top line growth. So we think, as we scale, we'll do a combination of both adding adjusted EBITDA as well as investing for top line. And some of the initiatives we've talked about today are some of those areas where we're adding investment. Overall, we think we will add at least 1 point to 2 points to adjusted EBITDA, as we have consistently since we've been public, or more. And so we do get over time to about a mid-20s adjusted EBITDA profile. So I think what you could expect from us is strong growth, but strong growth with additional incremental profitability and us showing a path toward those long-term margins.

Okay. That's a great point to close it out there because we're just about out of time. So we'll leave it there. Thank you, Jayme. Thank you, John. Appreciate it. Thanks, everyone.

Thanks, everyone.

Thanks.