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

I think I can even hear myself. So it is a pleasure to be here with John Wagner, CFO of EverQuote; as well as Joseph Sanborn, SVP, Corporate Development and Strategy. So I think you're going to really enjoy hearing about this company, super interesting.

And I guess maybe to kick off, given EverQuote has yet to report its fourth quarter numbers, maybe you could talk a little bit about your third quarter results and some of the highlights? Maybe secondly, a few high-level takeaways about how to think about the upcoming fourth quarter and then 2023? And then lastly, maybe a little color about your 2022 guidance, what are some of the puts and takes? So that's a lot, but in a shorter way.

Sure. Maybe -- and just to kick things off, just for those that don't know EverQuote, we are an insurance marketplace. We're focused on becoming the largest insurance -- source for insurance policies. And we do this really by using data and technology to try to make insurance simpler, more affordable, more personable for consumers. So really as a 2-sided marketplace and we're serving carriers and agents on one side. And the value proposition for carriers and agents is around acquisition and sources of policies. And for consumers, it is about shopping, finding policies, finding the right policy at the right price. So if you kind of look back, we are a multi-vertical insurance marketplace. We're only in insurance, but we're in several different verticals. Our largest and longest-tenured vertical is auto insurance. And so I think particularly for financial services audience, different than sometimes our tech audiences. Here, I think there's a greater awareness of what's going on within auto insurance and the fact that auto insurance has had a downturn in the last, say, 5 quarters, starting back in '21 with claims losses. And so our business has very much been impacted by that. And so we are -- historically, we have had a business that has grown 20% or more. And historically, up until the auto insurance downturn, we were growing close to 30% on a CAGR basis -- on a 5-year CAGR basis. But with the insurance downturn, we have seen within our largest vertical, the auto insurance carriers pull back on new consumer acquisition, and that's impacted our '22 results as well as our guidance. And that was something that we understood was coming back in Q3 of '22. In fact, we were pretty -- we were actually early released our Q3 of '22, saying that we were seeing a period in which there would be an imbalance between claims losses and premiums and that we expected a multi-quarter effect on the appetite of carriers to add new policies until such time that they had rightsized pricing. And so that has impacted '22. I think we're pretty pleased with the fact that the business has been largely more resilient than people expected. I think partially because we're in multiple verticals, but even more so because of our -- the diversity of our distribution between both carriers and agents, agents being a little more insulated during this period. So '22 was a slightly down year for us as expected. But during that time, we've had a couple of successes in that. We've also been continuing to add consumer volume. We've just seen some of the levels of monetization decline, but we've also had success on our advertising side. So we've also seen equal reductions in our advertising costs, the result of which is continuing to add consumers and do so while maintaining our margins. And overall, as a business, we've -- we had grown the business to 5%, 6% adjusted EBITDA. Although we've stepped back from that, we've maintained the business as a positive EBITDA during this hard cycle for auto insurance, which has affected us. I think during this last guidance, we talked about Q4, we think Q4 was going to be a trough for auto insurance demand, not only because of what we were seeing generally, but also because of the impact of EAN and car losses and the fact that the carriers were even pulling back more generally in Q4 in addition to the normal seasonality. And then largely as we get into '23, we see '23 as a rebuilding year for demand as carriers start to write price policies and start to reenter into acquisition mode.

Makes a lot of sense. Maybe just kind of a little bit further step back. So could you talk a few minutes about the mix of verticals, how much of it is auto, what are the other verticals? And what's your general vision about growth in the company?

Sure. So the company started about 10 years ago, a little more now. And our founding story was really -- an MIT founding story, our founders were MIT folks. And that really speaks to the DNA of the business, really being focused not so much initially around insurance as much as being focused around data and tech. And the business started with -- our founders really recognizing that within the Internet landscape, there were consumers shopping for insurance. There was no real dominant marketplace, and they just saw the size of the market, the opportunity there and the consumer volumes. And that really was the impetus to launch the business. We launched initially in just auto insurance and auto insurance continues to be our largest single vertical. But over time, we've also launched our other verticals, which includes life and home and health. And so now we are a multi-vertical marketplace. Still auto is -- given the -- depending on the quarter and certain things are more seasonal, certain verticals are more seasonal than others, such as health insurance. But generally, about 80% of our revenue is still coming from auto insurance. We believe the other verticals grow faster over time, and we continue to add diversity to our revenue through these new other verticals.

I see. And the other one -- the other 3 are profitable at this stage?

Yes, yes. So they have -- depending on the vertical, they all operate on a positive variable marketing margin, which is our measure of revenue less advertising. And that really speaks to the kind of first level return on our advertising dollars. Consumers who find us within insurance are finding us predominantly through paid advertising. So advertising is still a big cost of the business and one that we could look to get leverage on over time. And so all of our verticals today operate on a on a positive VMM basis.

Awesome. And a moment ago, you mentioned that you had some success with your advertising, lowering those costs. Was it that they naturally became lower, John, by way of market? Or have you found new areas to advertise?

Yes. They -- so I would say a little bit of both. Certainly, again, starting out in the marketplace, we were almost entirely searched. And we are now diversified on our traffic sources to over 200 traffic stores. It's pretty much anywhere there's a click online regarding insurance, we're there in some fashion. But really, I think beyond just diversifying sources, the success that we've had over time, driving down advertising costs per consumer even as we've driven higher consumer volumes have come from the application of the data and technology. And that is looking for opportunities for consumers who are in market for insurance and optimizing not only on their performance coming through our marketplace, but also downstream with our providers as to how they -- those consumers actually quote and bind insurance. So everything we do tries to optimize on a consumer who is actually in market, shopping for insurance, wants to buy insurance, wants to see multiple quotes on insurance. And we use the information about those consumers throughout their kind of life cycle with us, but also with our carrier and agents. And we apply that back on the acquisition side of the business to make sure that we are acquiring in-market consumers with the highest propensity to shop and buy insurance, and we're doing so as efficiently as possible. And so we can, over time, understand based on different traffic sources, how performing a particular source is. We don't necessarily have to understand why that consumer is. But we know that 2 consumers coming from what might look like potentially the same -- very similar display websites. They may have very different performance in our marketplace, but also downstream, and we can alter our advertising bids based on the performance of those consumers. So we're using that data throughout the business. And that's been part of our success in driving down advertising, becoming more efficient on advertising, even in a paid landscape.

That's awesome. And then maybe just -- you also alluded to your work with agents as well. Can you clarify how that works? What -- and how much revenue they -- as a component of what EverQuote does, how much revenue do they drive as percent?

Sure. So once again, if you look at how we've grown over time and how we've added diversity not only to the different verticals that we serve but also to our distribution. We have -- first thing we built distribution relationships with most, if not all, of the very large carriers within the verticals that we serve. And then at a certain level of scale, we were also able to build relationships with agents. Those are local agents. They could be captives or they could be independents. But they're local agents. And with agents, the value proposition is very similar to with carriers. I'd say carriers focus a little more on, our marketplace being an area where they're able to target on the type of consumer that they want, being able to acquire those consumers at a very a very controllable ROI on exactly the type of consumer. So I think for carriers, it's all about targeting of the consumer. With agents, it's a little more about general acquisition. So you may be a local agent and you may have a certain amount of local business that you generate, but you need a way to find consumers who are going online to shop first. So they are able to participate in the marketplace. Much of the way carriers are and finding in their case, local consumers who are looking to get multiple quotes on insurance and find insurance. So we launched our agent network about 5 years ago. And today, that's responsible -- that has been steadily responsible for about 40% of revenue in this past year. And different than the carriers during this difficult time for auto insurance, the agents have been much more resilient. They are maybe one step removed from some of the claim's losses from the carriers and that the carriers are holding a little more steady on the commission rates. And therefore, their business is a little more steady and their acquisition has been more steady. And so that's been helpful for us during this downturn in terms of mitigating the impacts from the auto insurance downturn.

That's really innovative that you did that. And so now, like maybe shifting back to the auto insurance carriers and how they've cut their advertising spend to cover potential losses. Maybe -- so you -- I think what you were saying is it's kind of improved gradually over the 23-year, maybe a little bit more on the time line of how you see that trend playing out? And when EverQuote gets back to kind of a more normalized kind of earnings run rate?

Sure. So again, I would probably start by going back to when we first saw the impact of the downturn in the marketplace, and that was really Q3 of 2021. At that time, we recognized -- we had a little bit of pattern recognition going back to 2016. So we recognized that we were likely to see a multi-quarter effect. And we took certain steps in the business with that in mind. As we have moved through '22, I'd say the downturn was at least as deep and as long as we expected, but we are seeing all of the carriers now moving toward rate adequacy. Obviously, there are some that have moved faster and have -- you'd argue have started to get there. And then there are others that have -- are still taking rate in this environment. And we think that largely reflects how carriers will come back into market and focus again on consumer acquisition. We think there are carriers that will be on the front end of that, that where they have taken rate more aggressively, got to rate adequacy and have begun to spend on acquisition more at normalized levels from the past. And those carriers, we believe -- we saw some of that even start to return in Q3 of '22 before the hurricane really affected things for a lot of those carriers. And we think those early carriers come back in January. And then over time, some of those carriers that are still taking rate in this last quarter, and this next quarter, they will come back over time. We think, generally, '23 is a period in which there will be a recovery that carriers will start to reach that rate adequacy, and we'll see that flow into the marketplace over the course of '23 as increased demand from the carriers.

We see. And then '24 could potentially get you back on track?

Yes. We seek 2024 as a more normalized period for us. I think we go back to what we speak about in terms of our long-term model, which is the ability to grow the business 20% or more with the leverage that we have within insurance and do so with improving profitability. So as we look to '24, we think that's a more normal time. And I think also we would look back to 2018, 2019 coming off of the 2016 and '17 claims losses where that became a very healthy backdrop for an acquisition partner like us because carriers were back in market spending on acquisition and then consumers are out shopping for insurance.

Got it. And you've made some reductions in your cost structure. Maybe talk a little bit, John, about how that's going to impact margins now? And then in the long term, and could it have any effect on your growth outlook?

Yes, sure. So again, going back to Q3 of '21, when we saw the downturn, it was evident that it would be a multi-quarter downturn. We took steps at that time to really bring our resource levels in line with the opportunity that we had in those quarters for that downturn. We've managed the business from an operating expense basis fairly tightly. And that has allowed us during this time, although we've stepped away from our adjusted EBITDA profile, it has allowed us to maintain positive adjusted EBITDA for '22. And we think that as the demand returns to the marketplace, we'll see a snap back to those margin levels of -- that we had -- that we were operating at before the downturn. And so we think that allows us to basically return to the model of top line growth with incremental profitability, giving back very quickly to that 5%, 6% level over the course of '23. And then from there, adding margin as we're also growing top line.

Perfect. And so maybe you could give an update on this medical vertical as a lot of people have talked about competitors like SelectQuote, Knew Health and GoHealth? It seemed to have challenged those companies a lot, although we're hearing good things in the fourth quarter with the enrollment period. How has that business been doing for you? And what are your thoughts about that over the long term given all the kind of tumult over the last year or 2 years?

Sure. Maybe I'll let Joseph take that. Joseph has led the strategy on that as well as the acquisition that we did that actually brought us not only into health that we had launched as a marketplace, but also into first-party agent offering within that health side of the business.

Thanks, John. So maybe a little context in our health business. So we got into the health business in 2019. We initially decided to do a first-party acquisition. We did a small acquisition in the summer of 2020. And the thought behind it at the time was we had consumers coming into our marketplace. We didn't have the right product market fit with them with our distribution. So underserved, undersold consumers. We wanted an opportunity to sort of meet their needs and that's what drove our acquisition at the time in the health vertical. The health vertical for us started on both under 65 in Medicare, and we've continued to use that first-party agency capability to provide consumers access to product and also give consumers a chance to sort of those who want to have a chance to connect with an agent directly versus going to the marketplace, that opportunity. As we look at the health vertical for us, we've -- I think, is different than some of the public players you're mentioning, Andrew, in that, it's really being built on the marketplace. So when we look at the DTC business for us, we did it first with the health acquisition in 2020, then we did a small acquisition in '21 on the P&C side. Both of those, in our mind, are trying to build a stronger marketplace -- stronger marketplace broadly. First, for consumers, giving them more range of choice and product offerings. Some carriers, for example, cannot participate in our marketplace. And so having the first party agency that allows them to do that. It also gives us a chance to take insights that we gain from working with consumers directly to improve the marketplace. And a couple of ways that does that. First, on the traffic side of the customer acquisition side, we can be more precise in terms of how we acquire consumers, the attributes that best perform and allow us to improve performance and monetization. The other piece is we also better understand the consumer experience and how we can improve that experience. That flows through to our consumers but also gives us insights we can bring back to our third-party part agents as well as our carriers. And so that I think is how we see the DTC business, the health vertical, specifically, it's in the context of how it benefits the overall marketplace as opposed to a stand-alone business that would be comparable to some of the other public companies.

Okay. And so if I'm understanding this right, you're bringing leads to third-party agents?

Yes, when you think about the -- when you think about our first-party business, what it allows you to do is you insights faster from consumers because you're dealing with -- they're dealing directly with our agents. We get those insights, we bring them back into the marketplace to improve the marketplace performance overall, first on how we acquire consumers, so at the front end of the marketplace, how we give a better experience for consumers. And then similarly, on the -- as you try to bring -- as you try to bring consumers through to our third-party partners, both carriers and third-party agents, we have better insights on what we'll perform based on what we've learned in our first-party business.

It sounds like a good value. I just want to make sure our audience gets a chance to ask questions. I have many more. I see Scotty has one over there.