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

All right. Great. We'll get started. I'm Cory Carpenter, Internet analyst at JPMorgan. Jayme Mendal, CEO of EverQuote with me today. Thanks for joining.

My pleasure. Good to be here.

All right. So we'll start off with what's going on in the P&C market, kind of the elephant in the room, I guess. A few weeks ago, the update we heard from you was fairly subdued just around carrier spin, taking another step back recently. Many of your peers confirmed a similar message shortly after you all. So my question is, what surprised you the most thus far with the cycle and kind of what's the latest that you're seeing?

Sure. So if you go back to the beginning of the cycle, we saw signs of profitability issues among the carriers in late summer. So September, October of last year. And the majority of the carriers that -- whose combined ratios, loss ratio spiked at that time, reacted almost immediately, right, because these were pretty pronounced spikes. And they did so sort of through 2 avenues: number 1 is they want to work on their rates, right? So they had to raise the insurance rates to reflect the new underwriting environment with higher losses. And then #2 is they pull back on ad spend at that time. And the exercise is to basically get profitability back in line by getting your rates up and relative to the new loss environment. So the ensuing months towards the end of last year, were more or less in line with expectations. And lot of demand came out of the system while they were working through rate increases. As we turn the corner into this year, the expectation was that we would more or less kind of drag along the bottom for the first quarter of the year, second quarter of the year, and then we'd start to see some recovery in the back half of the year. January and February more or less progressed as expected. And then something unexpected happened in the sort of March to April time frame, and that is there was a sort of holdout cohort of carriers that really hadn't pulled back on their ad spend in the late summer period. And their strategy seem to be to just try and address the issues on the rate side of the business, take some share and then -- and sort of power through it. And I think they somewhat buckled under the pressure of mounting losses into Q1. And so we have this kind of second dip in the March, April time frame. And that was the bit that surprised us most. We sort of expected things to be level over the first part of the year and then recover in the back half and instead they sort of dipped a bit further than expected before they begin to recover.

So just -- and you kind of laid this out a little bit a few weeks ago, but just curious your latest on kind of path forward from here and what needs to happen for the market to normalize? And what do you think the recovery looks like?

So the exercise that the carriers are going through again is to get the rates back in line with the loss environment, and you can -- that can happen from the rate side of the business or it can happen through relief on the loss side. All the carriers are going through this process right now of filing rate increases. And that just is taking time, right? And it can take anywhere from 2 to 12 months to push a rate filing through. And so all the carriers are going through that process right now, and that's pretty high confidence path to get there, but it takes its time. On the other side of the business, you could look at what could relieve some of the loss pressure that exists. And so losses are a function of the number of accidents, accident frequency and what is the cost when an accident occurs, it's called accident severity. On the frequency side, things have been relatively stable, but certainly as gas prices increase as they have, as interest rates increase and take some sort of demand out of the used car market, potentially deflating prices for used cars, supply chain issues resolved, you could see some relief on the loss side of the business as well. And so in terms of the timeline, you have the early movers that began reacting in September. And these early movers are -- some of them are now showing healthy levels of profitability. In a recent release, we saw one major carrier say they're comfortable with their current levels of profitability, plan to restore more of a growth mindset in the back half of the year. It's a good leading indicator for us. And so that cycle, if it plays out as expected, would look like a recovery beginning in back half of year, Q3 and extending towards the end of the year for that early moving cohort. And then you have some of these later movers, which began in the March, April time frame. And if they follow a similar path, right, they're talking at the beginning of their recovery towards the end of this year and into kind of early mid-'23.

So you were the first company to warn at earnings, you were ahead, but you -- now that we kind of look back on things, you're also one of the only companies where auto revenue actually increased year-over-year in the quarter. So just curious, is this due to customer mix or more broadly, could you talk about how your offering is differentiated versus competitors, where you held up a little better?

Sure. Well, thank you for noticing. So we would attribute the spread and performance to -- it's really an affirmation of the strategy to diversify our distribution channels, our verticals. Particularly within auto, it's diversification of distribution channels that is the difference maker. So we have 3 primary distribution channels, 3 ways we can connect to a consumer with an insurance provider. One is directly through -- directly to the carrier, right? And there's a segment of carriers that want to take that consumer directly. Number 2 is through a local agent. And then #3 is through an in-house, our direct-to-consumer agency. Of those 3, the first channel, the direct carrier channel is the one that was by far most affected by the market correction in the auto insurance market. And if you kind of think about mechanically how this actually works for the auto insurance carriers, they -- it's not that they just turn off or stop acquiring customers from one day to the next. Sort of what they do is they look across the business and they say, hey, what is -- where are pockets states or segments that are not profitable? And where can I take sort of targeted ad spend out of the system where I don't want it. And where can I do so in a way that doesn't disrupt the future of my business? And so the place where that impact is concentrated is in the direct channel. Carriers tend not to want to disturb the sort of agent channel, which is a big part of their future distribution and more sensitive to big changes in their spending patterns.

Any notable changes you're seeing in the competitive environment just given the headwinds that the industry has been facing?

As far as the competitive environment is concerned, I think the most notable change would be on the acquisition cost side of the business. So as demand has come out of the system temporarily from the carriers, you're starting to see acquisition costs come down with it. And so we've been able to -- despite losing some of the monetization, the value per consumer, we've been able to still maintain a healthy VMM margin as we're able to take some ad spend out of the system in parallel.

Consumer response, just talk about that a bit normally. I think you've talked about seeing this, you expect click volume to be elevated. And what are you seeing on the consumer side, especially just the last few weeks, the focus on macro and the inflation that consumers are facing?

Yes. So there are a couple of factors that would influence consumer volume at a time like this. #1 is the rate increases; and #2 is what's going on in the economy more broadly. So typically, when rates increase, it will induce more shopping behavior. People are conditioned now to know that they can shop and save. And sure enough, in Q1, we did see elevated levels of shopping behavior and shopping volume. And so that's bearing out as expected. Now the second effect is I think yet to be experienced or felt, but if we do enter a kind of a recessionary period, a period where the average consumer has to undergo some belt tightening auto insurance tends to be one of the first places they look. Again, they've been conditioned to shop and save. It tends to be a top 5 line item, nondiscretionary line item in people's expenses. And so that could provide a tailwind in the form of more shopping activity.

Could you just talk about some of the investments you're making on the auto side, just as you position yourself for -- when this does eventually turn.

Yes. I mean our strategy remains consistent, and we continue to execute against it. So on the auto side, we've -- while the direct carrier channel has withdrawn a bit, we have continued investing in the local agent channel, again, which has provided us a sort of a counterbalance to some of the challenges we've seen on the direct carrier side and the local agent channels has continued to grow through this period in spite of the turmoil in the industry as well as in our direct-to-consumer agency where we are continuing to improve the efficiency with which the team is able to sell policies. While we grow agent headcount, expand product breadth, depth and so all of that is ongoing. And in parallel with continuing to work through the carrier environment.

Okay. Last question on the auto market. We'll move onto more positive, exciting topics. We're sitting here this time next year, I'll go ahead and assume are we in a hard or soft cycle.

I think mid-May of next year, we're coming through the hard market. I think it's -- it has softened quite a bit, and I'll call it at 80% of the way to a full recovery this time next year.

All right, 80%, I like it. Okay. So nonauto vertical, nearly $100 million revenue a year business for you, growing pretty fast. Just starting with Health, could you talk about what your health offering looks like today and what you're most excited about?

Sure. So we got into the health insurance business in 2019, and we launched it through a marketplace model, akin to our core business and auto and home and life at the time. Then in 2020, we acquired Crosspointe, which is a health and Medicare brokerage, and that enabled us to begin selling policies directly to consumers. Today, we sell our marketplace business will match consumers with local and national providers. And then our agency business sells directly to consumers. For under 65-year-old people, it's individual family plans and for over 65, it's Medicare, Medicare Advantage, MedSup and all the ancillary products that's surround these things. And it's been -- it's a really interesting vertical. And I think one of the things that is most exciting about it to me is the nature of that sort of customer interaction. It is a bit different. It feels a bit useful in calls, right? It is a bit different than selling an auto insurance policy and that the consumer has an -- it's a very stressful experience buying health insurance. And the consumer has a lot of doubt in their mind. And these calls, they can last 30 to -- 30 minutes to an hour in some cases, right? But by the end of it, the provider, the agent has really built a huge amount of like trust and credibility with that consumer, which as we think about where we're taking the business over the long term and developing deeper customer relationships is a really interesting jumping off point into a more sort of wholesome insurance relationship with the consumer.

And I have lot more questions, if I should have -- I failed to mention at the beginning, if you do have questions. If you're in the room, you can raise your hand. If you're streaming, you can submit it in the JPMorgan conference portal and we'll read it Okay. So bigger picture on health care. Just could you talk about the broader opportunity? How is the TAM, the penetration, the competitive environment? How is all that different in health care than it is in auto.

The TAM -- so the entire in personal lines market is about $150 billion of spend of acquisition budget from the carriers. I think it breaks down roughly 40:30:30: 40 P&C; 30 health; 30 life. So it's almost a sort of full counterweight to the auto insurance market. Penetration is today relative to that scale, I would characterize it as negligible. So there's just a huge amount of runway given the size of that market.

Okay. What about some of your other verticals, just the latest on home and life than what you're doing there?

So home and life have a lot of potential. They are -- today, the auto insurance industry is our largest vertical, of course. Health is our fastest-growing vertical at this time. And home and life, the focus for this year has largely been to tune them to profitability to help offset some of the profitability that's come out of auto while that market is correcting. And so they're running at historically high levels of profitability this year, and are likely to receive more investment as the auto business recovers.

And then maybe just the cross-selling, bundling opportunities you see across them all?

Without a doubt. We do some today, though it's relatively little compared to what's possible. But as you think about the -- our vision for the future is that EverQuote can become the one-stop destination for insurance. It's a place where people can come and we will help them manage all their insurance needs across products and over time. And so obviously, absolutely core to that is the ability to take someone in through any given line of business and then reliably and systematically expand that relationship over time into other lines.

Last one on -- then we'll go to DTCA for a bit. But just do you have any rough targets or expectations on like how you think about the right mix between auto, health and other verticals on your platform over time?

I think in the long term, if you look at the TAM, right, so it's 40%, 30%, 30% call it 80% or so of that 40% being auto. So whatever it is. 30%, 30%, 30%, 10%, if you include home. I think it is reasonable to believe that with 70% of the market being non-auto, that we get to a place where non-auto is a proper counterweight, 50% or more of the business over time.

Okay. Okay. Awesome. DTCA. So diversifying beyond referrals to policy sales, it's been a big focus for you of late. Could you talk at first, strategically why this was the right direction for you all?

Sure. So again, just coming back to the vision to become the one-stop shop for insurance for consumers, it requires us to build a certain depth of relationship with the customer that would allow us to help manage across products and over time in a way that is challenging to do in a strictly marketplace context, where the nature of the relationship is pretty quick. So our view is that, we have this incredible asset in our marketplace. It generates a lot of consumer traffic, a lot of data and normal times, it generates cash. And that cash can be used to build out the direct-to-consumer agency, the traffic can be used to build out the direct-to-consumer agency. And what the agency allows you to do is really cultivate that customer relationship and build a relationship that endures and persists over time. It also gives you a lot of really valuable data because for every consumer that goes down the internal agency path, you know in real time, did they quote? Did they buy? What did they buy? How many household members? What was the premium over time, what is the retention of that customer. And that data is fed back into the marketplace to help us optimize our traffic acquisition efforts there. So it's not one or the other, but we think the combination of the 2 are very sort of symbiotic relationship that will ultimately result in a bigger, fast-growing and more profitable business over time.

So DTCA, I think 13% of revenue grew 400% year-over-year in the first quarter. Hopefully I got that right. What does your -- could you just go in a little more detail about what exactly your DTCA offering does look like today? And what's driving this level of growth?

Sure. So DTCA began -- the direct consumer agency was launched in 2019 with a small in-house life insurance agency. We then acquired health and Medicare brokerage in 2020, P&C brokerage in 2021. We spent the better part of the last 2 years integrating these into -- under a single operating umbrella into a multiline, digital-first agency. And that's the current state of things today. We have a meaningful number of agents. We have been adding to the agent headcount meaningfully over the last couple of years. And we see a ton of opportunity to continue to optimize those businesses, drive better unit economics and then scale them out. And as we do, wrap a richer consumer experience around it. That, again, has in mind this end goal of being able to service the customer across all their insurance needs over time.

What are the next steps to keep scaling the business in DTCA?

So first and foremost, like I said, we're focused on driving unit economics to make scaling more efficient. We have been able to scale the business profitably. We can continue to do so. And so we're always going to be looking to add agent headcount as long as we are clearing certain profitability thresholds in the business. And the faster we can sort of push through optimizations, the faster we'll be able to continue scaling. And then I think the last piece is going to be really starting to wrap these consumer experiences around the operation in a way that, that begins to automate a lot of the work that agents do today over time and again, continuing to drive efficiency through that part of the business.

And you -- I think you tripled your health agent health -- health agent headcount last year. Is that -- are we talking -- do you think you need to keep it a similar pace? Or is it a slowdown? And how is the hiring in general in this environment going?

Yes. Hiring has not been an issue. Our work -- our agent base is distributed, so we have access to like a national talent pool. And so we're not gated in our ability to hire. I think that we will continue to grow the business. I don't think the pace necessarily needs to sustain at quite those levels. But we're constantly balancing growth and against improving profitability. And last year was a year of both. I think this year will be a year of both, but we're always trying to keep those things in balance.

Last on DTCA. Just could you just talk a bit about the margin and the cash flow profile and how that differs from the referral business?

Yes, sure. So in terms of margin, at the VMD level, the direct-to-consumer agency tends to run at a considerably higher VMD -- I'm sorry, variable marketing margin and on a percentage basis, but we have selling costs that live underneath that. In terms of its adjusted EBITDA contribution, our expectation is that the direct-to-consumer agency will run at a higher adjusted EBITDA margin over time as it scales relative to the marketplace business.

Okay. And provide cash flow side.

Yes. And then in terms of cash, the marketplace business in normal times generates cash. And then the direct-to-consumer agency business will consume cash for many products, not all products, the rate at which it consumes cash really depends on a number of factors, which are all in our control. It's how quickly are we growing the agent headcount, what is our product mix? What is the sort of unit economics look like, your LTV to CAC at the consumer level. And so these are all variables that we're tuning to try and drive the most cash efficiency through the system as we continue to grow it.

Question?

Yes. You guys attributed the growth in DTCA to the diversification of verticals. So I'm just curious kind of what you see as your core verticals there and where you see the opportunity in terms of penetrating new verticals? .

Good question. Thanks. So the -- today, the largest -- the products that represent the bulk of the revenue in DTCA is our auto insurance product our Medicare and our under 65 health products. So we do sell some life insurance and we sell some home insurance, but those are relatively smaller. I think the three larger product lines have ample room to continue growing. But certainly, home and life will become a larger focus area as we start to fan out. And home specifically, I guess, if you had to sequence it, it's likely to come first because it's a natural product to be bundled with auto insurance, and we're not doing that at in meaningful scale yet today, but certainly could be willing.

All right. Moving on to the exciting stuff, finance capital allocation. So you guided to negative EBITDA margins in 2Q in 2022. I think we know partly what's driving that, because you just digging a bit more on kind of drivers of this? And then also how quickly do you expect EBITDA margins to get back to more normalized levels?

Yes. So the driver of the negative Q2 adjusted EBITDA is the pullback in the auto insurance market. And we expect to be in the trough or in or around Q2. So Q2 -- middle of this year is likely to be trough levels in the auto insurance market. And as the recovery starts to progress as we move into the back part of the year, I think you'd start to see a pretty quick snap back to positive adjusted EBITDA. And then into next year, as we -- as things normalize in auto insurance, we expect to get back to our historical EBITDA trajectory.

Okay. M&A. So you've used that to accelerate your DTCA offering Crosspointe amongst others. What's your appetite for M&A going forward, especially you have $50 million of cash. Valuations are a little wacky right now in the public and private markets. So how does that all play into your M&A appetite?

Yes. So, the last 2 acquisitions we made, Crosspointe, Policy Fuel, these were squarely on our strategic roadmap in pursuit of building this multiline direct-to-consumer agency. Now that we have accomplish that. We have line of sight to just execute our plan for the next few years and deliver a great outcome without needing to pursue M&A. And right now, the focus is on execution in the business. We always -- we look at things opportunistically as they come up. But I think the expectation is we'll be heads down executing for the foreseeable future.

Okay. Curious to hear your view a bit on, I guess, what we'll call the rise and fall maybe of some of the InsurTech companies like the Roots, shouldn't name them specifically, of the world. Do you view InsurTech more broadly as a growth opportunity or growth risk for EverQuote.

It's an opportunity, no doubt. I mean, these companies have -- if nothing else, they have really pushed the envelope with respect to helping advance insurance companies into the more digital age, right? And anyone, any company that's out there that is sort of pushing that curve and getting more digital adoption from consumers, creating more seamless online experiences, applying pressure to the large carriers to move faster down that dimension. That all accrues benefit towards us as one of the recipients or beneficiaries of a more digitized insurance ecosystem. So these companies are partners of ours. They're customers of ours. And we continue to believe they'll be a part of the future.

Yes. Great. We have a question?

How do you guys in terms of like how many carriers can you go, quote to bind on your website?

On our website?

Yes.

We don't -- we don't do online binding on our website. So we would pass the consumer off to a third-party website to a carrier website. In all cases, we would be passing the data from our site to theirs and landing them somewhere along the carrier funnel deeper is better, of course. And we're just -- the idea is over time to get everybody to land on a carrier's quote and have the opportunity to bind with a click. As the direct-to-consumer agency becomes a bigger part of the business. We will have the opportunity to begin introducing online binding within EverQuote flows. But it's -- but today that's not a part of the marketplace strategy.

But and how long you think it will take you to get there? Or are you going to -- consumer can come, enter their data and actually get competitive bind of quotes from you.

It depends on the vertical. I think it varies by market. So in health insurance, that's like -- that exists. In life insurance, that exists. There may be additional checkpoints for life insurance policies. And in homeowners, I think it's possible that you get there very quickly. Auto is the one vertical market where the large carriers themselves, the direct carriers are [ averse ] to a rate comparison environment. And the reason for that is historically, in other markets where this has happened, it's been the problem of adverse selection and kind of a race to the bottom for carriers and a lot of carriers have gone out of business. So there are -- there are workarounds. There are ways that you can remove a lot of friction from the system. But if the question is like, when do we get to a KAYAK-like price comparison, one click by experience. In auto insurance, my answer would be one that is comprehensive of all the carrier options that matter not in the next 5 years.

And what about on home, for example?

What about what?

What about on home.

On home, I think it's viable that you can produce that experience within a few years.

Okay. Two more questions, and we'll be sure to leave 1 minute for our word association ending. So want to talk about just your vision overall for the platform. We've talked about the different verticals, the bundling and all that. But just as we think -- as you think about EverQuote, I guess we kind of hit on it there, but as we think about the business 3, 5 years from now, what does it look like? And what are you most excited about?

Yes. So our vision is to create the one-stop shop for insurance for the digital age, right? It's a digital adviser where people can come and we will manage all their insurance needs across products over time. It is the marketplace business that we have today continues to grow, delivering more traffic, more data, more cash to invest in an agency experience for a subset of consumers where we build out more enduring relationships with them and really begin to manage their insurance portfolio and invest in great customer experiences that enable us to do that. So we're well on our way. I think we've put -- gotten a lot of the key building blocks in place over the last couple of years. And I think over the next 3 to 5 years, that vision will come to fruition.

Last question, sometimes like to ask. Just most -- what do you think is the most misunderstood part of the business that people aren't getting?

I think it's just that, right? It's the vision. I don't think that's particularly well understood yet. We have -- the version of EverQuote that sort of met the public markets in 2018, which was our marketplace. If the marketplace sort of spawned spanned, the child that is our direct-to-consumer agency which grows together with the marketplace. And the combination of the 2, I think, will create a very differentiated company and asset in the space. And so that's the story that we're trying to get across to people to help them see the future the way we do.

Any other questions? Otherwise, we do close on word association.

In terms of international expansion, kind of just how is that going? And if you could provide any kind of breakdown of your revenue there?

Yes. So EverQuote doesn't have an international presence today, and we have no plans to move internationally in the near term. The opportunity size in front of us in the U.S. is sufficiently large for the foreseeable future. And the insurance market structures tend to be quite different in different countries. So it's not obvious that the business model that works in the U.S. would necessarily just translate over to another market.

All right. So word association. So I will give you a word or a topic. And whatever is the first thing that comes to your mind, ideally one word, but if it has to -- if it requires an explanation, that's okay. P&C market.

Upswing.

Progressive.

Leader.

DTCA.

Bullish.

Policy Fuel.

Success.

Health vertical.

Fast-growing.

MediaAlpha.

Friend, partner. Good company.

All right. That's a good one to end on. All right. Thank you very much, Jayme.

All right. Thank you.