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

Okay. Well, it's my pleasure to be hosting John Wagner, CFO of EverQuote, today and spending a little time learning about the company.

So John, I want to start by asking you about EverQuote's fourth quarter '21 earnings. Maybe you could give us an overview of your results and some highlights and maybe just a few high-level takeaways for how we should think about 2022, the guidance and some of the puts and takes?

Sure. Thanks, Andrew. Appreciate being here. So we're fresh off of our earnings release last night. We released our fourth quarter results. We grew revenue overall 5% year-over-year, but that was, of course, into a difficult period for us with the headwinds in the auto insurance industry, which translates into our auto insurance vertical for EverQuote. So we still managed to grow revenue and maintain positive adjusted EBITDA. We came in just in line or maybe slightly above our guidance that we provided last quarter. Last quarter, we did revise down our guidance because of the factors within auto insurance. But I think so far, we feel pretty confident that we know how that cycle will play out within auto insurance. I think a couple of things that we highlighted on last night's call was the pockets of growth not only outside of auto insurance -- or auto insurance is our largest vertical, but we also serve other insurance verticals like life and health and home but also even pockets of growth within auto insurance. Within auto insurance, we grew our agent network, revenue from our agent network, even in the face of that downturn. So revenue from our third-party agent network was 39% of our revenue, and that's actually a growth story for us even as the carriers have been pulling back. The other item I would highlight is we grew our health vertical in Q4 and the annual enrollment period. We were quite pleased with our results and really our second annual enrollment period since an acquisition in 2020 brought us into that market.

Wow, you grew health in the enrollment period. That's a [ coup ] right there as I saw some of your competitors. But maybe shifting over, John, at a high level. So what is EverQuote's vision for the insurance industry? How do you become the largest online source of insurance policies by using data and technology to make insurance simpler, more affordable, personalized while ultimately reducing cost and risk.

So that very much is our vision for where we are going. And how we do that is, as that statement kind of starts out, we use data and technology throughout all aspects of our consumer marketplace. That means we use data and technology on how we acquire consumers, how we predict how they will perform going through our funnels and ultimately downstream, how likely they are to quote and bind insurance with our providers. Using that data, we're able to make our acquisition engines more accurate and more efficient. And then on the back side, on the distribution side, we're able to place those consumers with the providers where they're most likely to get the right price on the right level of insurance. So we're using data and technology across what is a consumer shopping experience. And for -- so for the consumer, you're shopping insurance, not only are you having a simpler experience, which you're putting your information in once and getting multiple quotes as a result through the referrals to our carriers and agents, but in addition, for the carriers, they're also using their advertising dollars in a more targeted, more efficient way because carriers make a living out of focusing on certain consumer groups. And with EverQuote, they're able to target exactly on the type of consumers that are looking to add to their book of business at exactly the cost per sales that they're looking to add those consumers at.

Got it. And you mentioned some headwinds relating to auto insurance carriers and how they've had to cut advertising spend to cover the losses that are going up. Maybe you could give us an update on what you're seeing lately, how much of an impact it might have on your 2022 results and when you think it actually might rebound.

Sure. Sure. I guess I'll go back in time a little bit first for those that are less familiar with it, with auto insurance, especially coming into COVID, we understood that there'd be a reduction in miles driven, and that would in turn mean a reduction in claims losses for the carriers. We saw that play through in the first part of COVID. As we got later in COVID, I think the carriers, everyone was watching to see what miles driven would do and how that would influence on claims losses. And indeed, there was a spike in claims losses. It was just coming out of a different direction, and that was really out of the severity of claims, the cost to repair, the cost to replace vehicles. But either way, we saw that, within the industry, there was a spike in claims losses. Overall profitability targets were missed starting in probably in about Q3. And we felt that effect in about Q3 because the playbook for the carriers is, if they see claims losses spike up, if they see their performance go over their combined ratio targets, they are then looking to pull back on some of their discretionary spend, and they do that through limiting their advertising. And we saw that very much at the very end of Q3. We're a very targeted source of consumer acquisition for the consumers, but we're also one that you can turn down and turn up as you need. And so we reported that in Q3. We adjusted our guide for the balance of 2021, reflecting that trend. And we gave commentary as to how we thought that cycle would play out. And that commentary was that the carriers would look to adjust rates going across states, file those new rates and then see those rates flow through their book of business and then go back into a period of acquiring new customers. We think we're kind of in the mid-innings of that cycle today. We've seen some early indications of combined ratios coming back inside of targets, but claims losses are still high, and the carriers are only midway through adjusting rates. But in Q4, we felt the full effect of that. And that's why I mentioned that we grew 5% year-over-year. And that's for a company that traditionally has a growth rate of over 20%. Near 30% is our 5-year CAGR. So it certainly has affected us. It affected our '21, and we've also projected that to continue to affect us into 2022. We've given guidance for the year that says that we believe that there will be a modest and gradual recovery as that cycle plays through for the carriers, and we see them return to our marketplace and other forms of advertising in order to add new business. And so that's been the basis of our full year guidance this year. I think it is -- we think it is still early days. We think Q4 was probably the trough. Especially as you look at Q1, it's just a stronger quarter for advertising within auto insurance generally. And we've seen signs of that, but we've also seen a lot of volatility in how carriers are changing their advertising practices, their acquisition practices. And so that's what we've reflected for this new year. I think, ultimately, we believe it's a cycle that plays through in 2022. Certainly, for us, we look at the back half of the year as the opportunity to return -- start to return to our more normal levels of growth and especially as we're getting into the second half of '22 and next in '23. We think we're back on our long-term model of adding growth and profitability.

In '23.

That's right.

That's awesome. It's nice to hear that, too, because a lot of the auto carriers have been rather opaque in how they're viewing it, but this is very clear. So in the second -- in the third quarter, you mentioned some operating cost cutting to offset some of these revenue headwinds. Could you talk a little bit about what some of these areas were and how you feel about the decision to do this now that it's been a couple of months.

Sure. So early on, when we identified what was going on within auto insurance, the fact that auto insurance is our largest vertical, in some periods, can be 80% of our revenue, we took a look at our operations and our resources that we had dedicated to growing auto insurance. And we made sure that the resources we had were in line with that forecast of going through a cycle with auto insurance. And so we made some selective moves in order to focus our operations on the initiatives that we thought would grow through this next cycle and also to focus on some of our other verticals that are not affected by the headwinds within auto insurance. We made those changes in Q4, and that basically reduced our operating run rates so that we are confident in 2022 in our guidance that says we will continue to manage the business for positive adjusted EBITDA. Again, if you look historically, we had gotten to the point where we were consistently growing our adjusted EBITDA. As we were growing top line, this obviously is a setback within auto insurance, and that has a direct impact on our profitability, our adjusted EBITDA. But we're managing for positive adjusted EBITDA during this cycle, and as the auto carriers again return to adding to their book of business, we will be in a position to then return to our long-term model and also with certain other areas, which right now are performing very well, even stronger coming out of that period.

That's excellent. And do you feel that some of the cost reductions will impact the MarTech growth trajectory at all? Or do you think that increased efficiency can offset the reductions?

No, we think that what we did was pretty selective to basically rightsize our operations and the resources for the opportunity within auto specifically. We are still making investments in other aspects of our business because those other aspects of the business are growing through this period. So some of the initiatives that we've mentioned is our direct-to-consumer agency where we're making investments and also investments even within auto insurance in certain portions where it's not directly related to the carrier spend. So we're confident that, as that spend coming from the carriers returns, that we'll be in a good position to continue growing those areas but also see auto insurance spend as an additional tailwind as we come through the cycle.

And you've also mentioned other areas of investments, non-auto verticals, health. Maybe elaborate on some of these non-auto verticals.

Sure. So in Q4, we called out, overall in our results, we grew 5% and 21% for the year in a very difficult time. Part of the reason for that was diversity both in our verticals beyond auto insurance and also in our distribution within auto and within the other verticals. Looking at the verticals, we service beyond auto insurance, health, life and home. And obviously, Q4 is a big time within the health open enrollment and annual enrollment seasons for both the under 65 health and over 65 health market. And this year, we entered what was really effectively our second open enrollment but really the first where we had the benefit of being able to plan for the open enrollment within the Medicare and over 65 market. In that area, we focused on growing our first-party agents and be able to offer consumers the opportunity to purchase bindable policies directly from EverQuote rather than simply our standard marketplace offering where we make the referral to the ultimate carrier or agent. So now with this initiative, we actually have agents that are speaking to consumers, that are counseling consumers and actually closing sales. That operation for us in Q4 grew to about 130 agents, and we saw revenue increase about 281% within that health direct-to-consumer agency. So it's a good example of where, on the product side, on the distribution side, we have a diversity that is helping us grow certain areas even in the face of the auto insurance headwinds. And the other area I would point out is, even within core marketplace, auto insurance, our third-party agents stayed steady at the same percentage of revenue in Q4 as for the full year. And so we grew revenue within our third-party agents year-over-year. And really, the dynamic there is as much as the carriers are pulling back on advertising spend, they're not changing the commission structures with the agents rapidly like they would in advertising; and therefore, the agents are still healthy and spending. And we're diverse in our distribution where we have over 8,500 of these third-party agents, and they continue to spend through Q4 on new acquisition.

Excellent. And we've heard of some fluctuations in advertising costs over the past few months. Could you talk about what you're seeing in terms of these costs and how, John, that could impact variable marketing margins or VMM as you -- the acronym goes in the coming quarters?

Sure, sure. So we do see differences. I guess, again, going back, maybe even early days to COVID, where folks were expecting to see reductions in advertising costs that were happening generally in the market that we were not seeing on more insurance-specific sources of consumer acquisition to our marketplace. And the reason for that, again, was the backdrop for auto insurance in the first part of COVID was very strong; and so therefore, the advertising continued. It was a very competitive market. Obviously, now as we've moved to this cycle in which advertising is pulling back, that doesn't just affect EverQuote. That affects other sources. But we're also seeing the benefit of that on our acquisition side. So we saw about a 16% year-over-year reduction in monetization for our marketplace, but we also saw about a 15% reduction in our cost of new acquisition in the marketplace so really focusing the idea that our variable marketing margin is truly variable, and it is -- it does react. We're able to react through our traffic acquisition to the changing landscape and be able to manage for variable marketing margin in kind of all markets.

So with this variable marketing margin, could you discuss the recent trends in how investors should think about the path to your long-term 40% VMM target?

Sure. So variable marketing margin, which is revenue less advertising expenses, it's really our kind of first level metric on the return of our advertising and the performance of our marketplace. That is a metric that has been moving up over time, often 1 to 2 points per year. And that's generally about 1 point per year, is generally where we've expected VMM to increase to. And that historically has been through efficiencies on the cost side of the business. As we use data and technology to make our acquisition more efficient, we see that come through as reductions in advertising and increases in that margin. Clearly, with the pullback that we're seeing within auto insurance, that affects our VMM within the auto insurance industry. And so we do expect that, that will have an effect on 2022; but there are, again, outside of the auto insurance vertical, still areas in which we're growing VMM. And again, when the spending returns to the auto insurance industry and to our vertical, we'll see that increase again. Generally, we say that, over time, we expect we'll -- and continue to increase variable marketing margin, both on the cost side but also by increasing opportunities for monetization on our distribution side. So we have leverage against the distribution channels. And ultimately, we think that's a margin that we can grow to roughly 40% over time in our long-term margin -- in our long-term model.

And maybe shifting direct to consumer. Could you discuss the progress against the direct-to-consumer agency model for health and life insurance?

Yes. So in Q4, we highlighted that we were very pleased with our open enrollment. Revenue from the direct-to-consumer offering within health, still quite small for us, $14.5 million on a quarter that was roughly $102 million, and that was absent a lot of contribution from the auto vertical that normally would be there. But that growth was significant for us, albeit off of small numbers from last year. So 281% growth with about a 200% increase in agents, so gaining efficiency at the same time we're growing the business. So we are very pleased with how that performed for us. Our ability to add agents to our platform, get them trained, get them ready for the annual enrollment period, make sure that our marketplace supplied the volume of consumers and shoppers and see those metrics come together in Q4 was very encouraging. And we're pretty excited about what DTCA can do within health but also within P&C as well. Our latest acquisition focused on the P&C space, and we think that will be a continued benefit going into 2022, again, especially we're looking for opportunities to continue to grow auto and other verticals in the face of the cycle from the auto carriers.

So this -- just in health, I mean, I think you mentioned 281% growth or something like that. Is this the kind of multiple that we could -- should be thinking about in terms of going forward or just continued big numbers like that?

Yes. Well, we're certainly excited about what DTCA kind of applied to our marketplace can do. It's exciting in terms of both the growth as well as what it does for our consumer experience, how we interact with consumers. 281% obviously, is coming off of small numbers, but we continue to think that we will grow DTCA. And especially in this time period where our largest vertical, we're looking for opportunities to grow outside of that. So health, I think you'll continue to see us invest in, albeit maybe not at that growth rate. And we're also making sure that we're focusing on improving economics within that vertical as well, and that will be a focus, kind of a balanced both growth and economic growth during 2022.

And so how many DTC agents do you have? And where do you see that growing to in the next couple of years?

So within that health vertical, we have about 130. We have more through the acquisition, more agents through the acquisition of Policy Fuel, but we also are moving those around during that period. So that 130 agents, that does reflect that we will move -- cross train agents, move them across verticals for something like an annual open enrollment season within health.

I see.

And so I would expect that we'll continue to grow that number in 2022, again, not as much in percentage growth as we build into what is more of an at-scale product. This year was a year in which we focused on growing health and getting to a level of scale. And then we will continue to grow from that and expect to grow it next year into next open enrollment season.

Got it. And you just mentioned this Policy Fuel acquisition. Could you describe Policy Fuel and how it performed relative to expectations in the fourth quarter?

Sure. So if you -- I guess, if we start with health even before we go to Policy Fuel, health, we entered through the acquisition of Crosspointe in 2020, in the fall of 2020. And that was our first acquisition within the direct-to-consumer agency space. It was an agency that focused on health. Policy fuel is very much that same version but focused on P&C. So they are a P&C agency. And we acquired them in the summer -- this past summer. The difference probably between health and our P&C entry with Policy Fuel is that Policy Fuel's model is really what we call policy sales as a service, where Policy Fuel acts as an extension of the carriers. And so we get appointed by a carrier. We put a team specifically on that carrier, and our agents are selling the product for the carriers. So we're changing the conversation from the carriers from one in which we are sending them referrals from consumers who are interested in shopping for insurance to one where we can deliver them sold, closed policies. But we can also do that in a way that does not introduce channel conflict with our larger marketplace because many of those same carriers that are participating in the marketplace can then become also our customers within Policy Fuel in terms of us representing them in the policy sale to the consumer.

And then the total adjustable market, John, could you provide an update on TAM for insurance? And how much has shifted online maybe for auto, health and home, respectively?

So if you look at distribution spend within the markets that we serve in auto -- in insurance, it is a massive market. It's about $154 billion in distribution spend. That is really split up into 2 large buckets. That's the advertising, the pure advertising spend, which is probably about $16 billion of that, and then the distribution spend that comes through agent commissions, which is the larger piece. I think that number then falls right short of about 140 when you do the math there. So the -- so both of those kind of pieces of the market are accessible to us either directly through the advertising spend. Roughly about 1/3 of that is actually online today, and it is generally moving online at a rate faster than the insurance companies' growth because dollars are shifting from off-line to online where the consumers are shopping today. So that creates this kind of tailwind for us as we go after insurance online. In addition, the distribution spend that we already tapped into within the commission piece through our third-party agents, we now can address that component of the TAM directly through our direct-to-consumer agency. So it has this entry into direct-to-consumer agency, has the effect of making that second component, the commission component more real, more accessible to us not just indirectly but directly.

And maybe just a long-term model update for revenues, VMM and margins, how would you judge your progress? And what is the timing to reach these long-term margins?

Sure. So we have long kind of [ espoused ] a long-term model for the business that says that we believe we can grow the top line at rates of 20% or more. And we've done that historically. We've had a 5-year CAGR that's closer to 30%. And at the same time, we can add adjusted EBITDA margin in the neighborhood of 1 to 2 points per year. So it is a model that we believe we can grow top line and add profitability on an -- in an incremental manner. Part of that leverage comes through VMM as we've spoken about, but also part of it comes from just the operations as we scale the business. We have made good progress. We had made good progress against that model through the auto insurance turndown. So we've seen -- we brought the company public with negative adjusted EBITDA. We -- last -- this past year, we were operating as much as about 6% -- 5% and 6% on a quarterly basis on adjusted EBITDA. But clearly, the slowdown within auto insurance this cycle has affected that. What we do believe is that as that cycle reverts to more normal levels of advertising spend within auto insurance, we will also revert back to our long-term model, growing top line, adding profitability. And so this is a transitory effect caused by the auto insurance pullback, but we are still reiterating and believe in the fact that we have a long-term model that says that this can be a profitable business with top line growth and ultimately, adjusted EBITDA margins in the mid-20s.

And then maybe shifting to customer acquisition strategy. Maybe, John, you could talk a little bit about how your approach to customer acquisition has changed. Maybe first starting with performance marketing to your EverQuote-branded sites. Historically, EverQuote relied on primarily direct response ad formats to drive traffic. Any updated thoughts on more brand ad to spend, especially as you have diversified into other insurance categories?

Sure. So as you look at EverQuote, it's important to kind of think back to what the founding story was, what's in our DNA. This has always been a consumer marketplace but one that is fueled by data and technology. And much of that data and technology has been focused on the consumer acquisition side of the business. And that means using that data and technology to be ever more efficient on how we acquire consumers. That generally lends itself more to programmatic type acquisition of consumers. And in general, insurance is a place where there's more paid acquisition, more programmatic type spend online. It is just not as rich of a space in terms of either content or natural search. So that has always been our model. We do have the ability to kind of move into more broader spend offline as well as online. As you think about applying kind of a brand campaign to EverQuote, I think you'd more likely see that at least initially as direct response type advertising offline that still has a call to action. That really isn't within the DNA of the company in terms of making sure that we understand what the efficiency of our advertising spend is. So that has always been kind of the way we have driven traffic to the marketplace. We have spoken in this past year more about our verified partner network, which is an additional source of traffic beyond our own owned and operated websites, where we are driving consumers directly to our site. They're requesting a quote through our website to a model that says there are other publishers, other websites that have constituents that are interested in insurance, and through the third-party network, they're able to give offers on insurance. We are able to help them monetize those consumers. That becomes another source of traffic for us. Verified Partner Network has grown in this past year, and we highlighted a little bit on our call last night that it was particularly beneficial for us within the health vertical in Q4, where we had a need to be able to produce consumers because we had a DTC agency, and that Verified Partner Network was able to -- we were able to ramp that up in such a way that we are able to keep our agents performing and meet and exceed our targets within the health marketplace. So it's playing a role across the marketplace and including DTCA for that [ huge one ] that's going on.

And also, I think there's -- you have something -- logged on user experience. Maybe how does EverQuote think about a logged on user experience and how that could impact repeat traffic?

Yes. So today, we are primarily paid on the initial arrival with the consumer, but we do a lot to bring consumers back for additional shopping experiences. Obviously, we're bringing back consumers that is additional monetization with no additional advertising cost. And so we're driving consumers back for repeat shopping experiences either because they didn't find a policy or maybe back on their next renewal or we're cross selling them -- now that we're in multiple verticals that, we're cross selling them other types of insurance as well. Logged in user experience is part of how we think about, in the future, building that relationship where they look to EverQuote as a source of all things insurance. And so we will look to build engagement with the consumers and bring them back for repeat visits. And also that does -- dovetails well into direct-to-consumer agency as well, where those consumers are actually interacting with us on a longer-term relationship. And again, we're able to bring them back either for shopping or for additional products over time. So that really fits into that strategy of bringing consumers back over time, increasing engagement.

And so maybe talk just a little bit about the competitive landscape. We often hear the names MediaAlpha, SelectQuote, LendingTree, Quin. How does -- what's the landscape? And how does EverQuote look versus these competitors? How do you compare?

Sure. I guess if you break those out a little bit, certainly, the other peers that are operating a consumer acquisition model for carriers is probably who we get compared to most. I think each of those players has a little bit of a different take on the market and how they approach it. We're all approaching a really large market that is moving online, so we all have that similar benefit. I think EverQuote is unique in that we have a truly multi-vertical marketplace where -- but yet focused on insurance. So we are 100% focused on insurance but through multiple verticals. And in addition, we also have a very diverse set of distribution. So within insurance, policy sales are distributed either through direct-to-consumer type carriers through independent agents or through captive agents. We have all of those channels represented in our marketplace. So I think we're unique in that we're multiverticals but focused on insurance. We have all of the distribution channels that are represented within insurance on the marketplace, and we are a consumer marketplace first and foremost that is powered by data and technology. I think everyone has a little bit of a different spin on how they approach the market. We believe it's very important to own the customer relationship, the consumer relationship over time and that basically the consumer is where the value is and that with a consumer-oriented marketplace where our value proposition for consumers is helping them shop for insurance, that, ultimately, that's a winning strategy in terms of the value of that -- of maintaining the value of that consumer.

Makes sense. Maybe lastly on my end, where are you sitting from a capital standpoint? And how do you want to allocate it, M&A? What are you thinking about there?

Yes. So we do not have -- we have a kind of an appropriately sized balance sheet, but by no means do we have a large war chest on the balance sheet. What we do have is, historically, we've had sufficient funds to be able to complete a couple of acquisitions that I outlined earlier. Both of those had kind of the same characteristics. They were small acquisitions that got us into new spaces and new spaces where we believe the combination of the domain expertise of the acquisition, plus our focus around consumer traffic, that the combination that we could add growth to an existing model and scale that model. That's very much what we proved in Q4 of this year with Crosspointe and now our health vertical and the growth we saw there, 281%. And we look to do the same thing with Policy Fuel. So that's the kind of playbook that we've executed so far, doing smaller acquisitions but ones that we think will accelerate our growth and accelerate our growth along avenues that we were even considering organically. And that can simply get us to a certain level of scale and allow us to then bring the growth of the traffic engine to bear in that acquisition. So I think generally, that continues to be our focus, is looking for companies that can introduce us to new spaces, new growth initiatives and then help bring them scale through our traffic and market expertise.

Anybody want to jump in with a question for John as we kind of come down the frame? Do I see any hands? John, how do you think about the company and its trajectory to be appreciated by the investment community? Do you think that we can see a revaluation on the stock after all the growth [ e-tech ] names that have gotten hit hard in the few...

Yes. I think absolutely. I mean I think we're in a unique position in that nothing in our business model has changed, right? We -- and nothing within the secular trends that we are taking advantage of. Insurance is a laggard going online; but clearly, it is moving online, and that creates this overall tailwind for the model. Clearly, auto insurance and the challenges within profitability right now, that is a transitory cycle that there's a well -- kind of well-understood playbook as to how the carriers move through that. Our valuation today really reflects much of that pullback. But again, that is something that is transitory. We will work through, and we will return -- we believe we'll return to the -- our long-term growth model. And I think we'll see that appreciated by the market at that point. So in terms of the overall market dynamics, they have not changed in the long term. The business model has not changed in the long term. And in the meantime, we're also growing those areas that we can. And so I think as we emerge back to a time of normal advertising spend for auto insurance, we get that tailwind in addition to some of the initiatives that we're running in these -- growing these other verticals and growing these other distribution paths.

John, great to have you here and hear about all the dynamic effective strategies that EverQuote is undertaking, so thanks so much.

Thank you, Andrew. Appreciate being here. Thank you.