MediaAlpha, Inc. (MAX) Earnings Call Transcript & Summary

Okay, great. We'll get started. I'm Cory Carpenter, Internet analyst, JPMorgan. Joining me today is Pat Thompson, Chief Financial Officer of MediaAlpha. He joined in late 2021 and previous to that, he spent a good chunk of time in Expedia. So thanks for joining us.

Excellent. Thanks for being here.

So I want to kick off since you did recently joined, I just thought it would be good to hear from you a bit about your background and what excited you most about the opportunity to join MediaAlpha.

Certainly. So I spent I spent the last 11 years prior to joining MediaAlpha in December at Expedia Group, and there were a couple of lessons that I learned there. And probably the first one would be that two-sided marketplaces are immensely powerful when you get them to scale. And so you essentially have the dynamic of -- you have supply on one side, demand on the other, the tech that links them all together and strengthening any one part of that ecosystem makes the entire ecosystem stronger. And so Expedia kind of had that flywheel going when I joined and we kind of kept the momentum up over the time that I was there. I think the second piece is the offline to online tailwind is a powerful force. And so travel was one of the earlier segments to kind of come online in a big way and MediaAlpha being in insurance, insurance is actually one of the -- has been one of the slower segments to come online. And so I think that was pretty attractive. And as I kind of looked at MediaAlpha from the outside. I said, "Hey, those couple of characteristics are characteristics that when I take a 3-, 5-, 7-year view, get me really, really excited and then, of course, meeting the people and really starting to understand the competitive situation where we're kind of 3x the size of our nearest competitor from a B2B standpoint, got me really, really excited about joining the company, taking on the challenge and trying to chart a growthful course for the years to come.

So 6 months in now, what have you learned? What surprised you?

I think a couple of things. It's always been interesting to me when I've joined a new company or even taken a role, a new role within a company, I know because you have these preconceived notions of exactly what it's going to be like. And then you get in and the first day you quickly realize half of them are right and half of them are utterly and totally wrong. And I think the things that I probably underestimated, one would be the P&C, property and casualty, hard market that's going on which is underwriters are having profitability challenges. And I was committing to join right as that was starting. And I think if you ask me to put a dollar impact of that on the business, I would have undercooked that one, kind of before I started and now here we are. And I think on the positive side, the things I would highlight are really the depth of relationships and data sharing that we have with our partners and kind of we're in the early to middle innings of that still, and I think there's a lot of runway to go on it. And the other thing I'd probably cite on that would be simply the offline to online transition and just how hard it has been historically to bring insurance online and how optimistic kind of I and we are about the future prospects for that happening.

Okay. So you touched on this a little, maybe one more high-level question, we'll kind of dig in. But just you mentioned the B2B model. So you do have a very different business model than many other companies in the space. Just could you talk a bit about what makes MediaAlpha unique?

Certainly. So I'll maybe actually take a couple of minutes to elaborate a bit on it and give a bit of the history of MediaAlpha because I think it probably answers a healthy chunk of this question. And so the founders of the company Steve, who is our CEO, Eugene, who's our CTO; and there's a third guy Ambrose, who left a year ago or so. They were all guys that worked in performance market in L.A. And they had an ambition to start a company and they said, "Hey, we can have a business that's kind of a performance marketing lead gen company, we'll start in insurance, and we'll see what works." They started that business from the third month on, they were profitable. So it was a fully bootstrap business, and we've never really taken outside capital. And they built that business. It was a nice business. It was making kind of high single, low double-digit millions of EBITDA. And they built out a tech platform to enable monetization of the consumers that they brought to their websites. And so they would do search engine marketing, bring consumers to a site, convert those customers into call, clicks or leads that they sell off to carriers or brokers. And they built the tech platform that allowed that process to be transparent and allow carriers to have a ton of flexibility in targeting exactly the types of customers that they wanted. And so they built that. It drove monetization for our owned and operated business. And interestingly enough, one carrier said, "Hey, we really like this platform. It's flexible, it's easy. It was easy to with integrate it. Can we buy from other publishers on it?" And they said, like, yeah, sure, we can make that happen, like this profit there. Sure. So they did it for 1 carrier, then another carrier came. And pretty early on in that process, they recognized, hey, this is actually a really, really nice business because we've built out the technology. And every incremental dollar of revenue you bring in does a pretty good job of dropping to the bottom line. And so they -- pivoted cores where we still have an owned and operated business where we acquire customers through a variety of means and then ultimately convert those into some sort of a lead product but the majority of the business relatively quickly pivoted to being a B2B business where we have today hundreds of different supply partners or publishers that really broadly fall into 4 separate categories. One would be kind of traditional lead gen type players or performance marketing players, and those can range from small shops that are a guy or a couple of folks that are making hundreds of thousands or million bucks a year to some very big players that are focused on that. They could be financial app, so you can think of a business like a credit [indiscernible] agency or something like that, price aggregators like The Zebra and carriers themselves, you can think of big insurance companies that have customers that come to their site that -- whose intent to purchase may not be all that high or that they don't serve. And so I think we've developed a pretty interesting business there, and we've got a list of great demand partners which are primarily carriers, but also in some cases, brokers. And I think we have deeper relationships with some than others. But as folks discover the power of selling policies online, the wind has been at our back.

Okay. So let's talk a bit about, I guess, the elephant in the room with what's going on in the auto market. A few weeks ago, the update we heard from you and your peers was fairly subdued on carrier spend taking a step back at the end of the quarter. Has anything changed since then? And what's the latest you're seeing?

Yes. The quick answer would be nothing major has changed. I think the -- of course, every day, you get a bit of good news and a bit of bad news. And while New York, it's going to take longer to get rates approved, Oh, we got great news in Arkansas. And you see the impact of that flow through the system. Those are just illustrative examples, by the way. But you see, hey, a carrier got a rate approved someplace, and then they go, yes, we're willing to take people that have 2 cars and a home or they go, "Yes, well, relax the home ownership requirement for instance and so you see some positive news and some negative news, but I think the overall market dynamics that we talked about before are holding. And kind of would generally say that I think the news from Progressive was relatively positive and that they feel like the rates are getting to where they need it to be. I think the news out of Allstate was quite a bit less positive where they feel like there's quite a bit more wind to chop on it. And I think progresses at the leading edge, all states probably in the middle and there are other carriers that are across that spectrum, but it's going to take a bit more time.

So how do you think about the path forward from here just from a time line perspective and how long it takes things to normalize?

Yes. And I think we and our peers and pretty much everybody who watches P&C has been wrong more often than they've been right on it. And so I'm not going to stand here and say, "Hey, I think it's going to get better in this quarter or in this month because just taking the strap hole within MediaAlpha 3 months ago, I think the -- all of us would have a different answer today than we did 3 months ago on it. But I think our view is that we've had kind of a couple of waves that were on net bad news over the last 6 or 9 months. And I think our view is that it will turn. We don't think it's going to be that long for it to turn like I don't think it's going to be a 2-year hard market or anything like that. And we're really focused on doing what we can to kind of lay the foundations and the groundwork for fast growth and share gain when the recovery hits.

So does your B2B model, does it make you more or less impacted by this pull back?

Yes. And that's an interesting question. And I think the -- the things I would say, I don't know that the B2B model necessarily makes us more impacted than the B2C model. But there are a couple of reasons why I think we have been heavily impacted and a couple of ways in which we differ from peers. And so one question I got a lot when I joined MediaAlpha when the hard market was beginning from investors was, well, why are Progressive or State Farm or Allstate or Liberty Mutual or whomever, pulling back so heavily on you guys when I see ads on the Super Bowl or I watch anything on TV and see those ads. And it's like, well, they committed to a bunch of that stuff a year ago, 2 years ago, in some cases. And our platform is, it's transparent and it's essentially real time for partners to change the bids on it. And so if a carrier is having profitability challenges, they don't have a whole lot of levers they can pull, so they've got rates that are regulated by the states. And so there's a long lead time for approval. They've got big marketing budgets, a lot of which go to either agent commissions, which they can't really flex in a short term or TV advertising, brand advertising, which is contractually locked in. And so we're a convenient protocol for reductions to bully the P&L. And I think we've kind of seen that happen over time. The positive is when the market shifts, and we've seen this in the past, they start to lean in and they can recover quickly. The area where I think our business has been impacted more than some others is the demand side. And so for us, our business is heavily focused within P&C on carriers. And so it's -- we've got a ton of carriers, but the spend is -- our spend, I would say, doesn't look that different from the lead table in auto insurance. And so we're selling directly to parent companies of GEICO, Progressive, Allstate, et cetera. Some of our competitors have very strong businesses selling to individual agents. And so that could be your local state farm agent, your local Allstate agent, your local independent agent. And businesses like that have been better able to weather the storm here because the carriers are maintaining their commissions to those folks. And those folks are -- because their local businesses are relatively insulated from some of the market dynamics, and so a carrier could go, hey, California, the rates aren't good. I don't want to acquire any customers to my site in California. While the State Farm agent in L.A. is like, I'm still trying to acquire customers in L.A. I'm getting paid commissions and my business is in L.A. And so I think we've got some peers out there that have businesses there, quite a bit more focused on that. And I think they've been able to weather the storm a little bit better. The downside of that business is, there's probably a less explosive growth other side and probably, a positive slower growth over time, just given the dynamics of direct-to-consumer versus the agent model.

So when I talk about investments in margins, so maybe if you could just highlight some of the investments you are making today to position yourself for the other side. And then kind of tying that with 1Q earnings, you mentioned OpEx should decline sequentially by $1 million to $2 million, what's driving that? And how should we just expect investments in profit going forward?

Yes. So from an investment side, I think we're really focused within P&C on 2 things. And I would say, one is getting better and deeper data integrations with our carrier partners. And so to give an example of what that means, typically, when we go live, when a carrier goes live with us, we're selling them calls, clicks and leads. And that can often be where the relationship ends where it's like we sell it to them, and it's like we hope it works out for them, and we have account teams and they talk, but we have pretty limited visibility often into how things are going and often limited ability to help. And what we tend to see over time is that that's where things start and then we start to get more data from them. And so an example could be, hey, they send us a batch file once a month and go, "Hey, you sold us this many calls, clicks and leads, and we found this many policies. That's helpful. And then there are additional layers, we can start to unlock where they start passing that data in real time, and we get them to start using additional parameters in our marketplace when they target their bidding. And so we're very focused on that, particularly given that carriers are focused on kind of profitability and efficiency of spend. The second thing I would say is a big investment for us is we have a very nice business powering advertising on carrier websites. And so the way that would typically work is you could go to a major carrier. And they would typically start with having ads for customers they don't serve, which is like, hey, we don't underwrite drunk driver so they'll have an ad for a company that does or hey, we don't write in the state of Rhode Island, but hey, here are 3 great options and we'll power that. And what we've seen with some carriers is they partner with us, and we use data science, predictive analytics to say, "Hey, Cory is a guy, and he's a top decile, likely to convert as we look at his credit and his location and his driving history and he's married and he has 3 cars, et cetera." And so they go, yes, we think we can win with Cory and then they look at me and go, "Hey, we think there's a fraction of a percent chance paddle convert, great, we should put ads in the flow or maybe only show ads try to recoup some of the cost of bringing it here. And so in a time where carriers are more focused on profitability and less focused on growth, those conversations tend to be a bit more fruitful, and so we're very focused on having that. And so to answer the second part of the question on overhead. We went public in late 2020 and the business was under 100 people when we went public. And for example, the finance and accounting team was 5 people when we went public. And over the course of late 2020 and into 2021, we have layered in well in excess of $10 million in public company costs. And so it's bringing in a public company leadership team. It's beefing up accounting, it's D&O insurance, it's SOX compliance, all of that stuff. And so it's pretty standard stuff, I would say. And in particular, kind of late last year and into Q1 of this year, it was a really heavy lift for us to get over in the line on SOX because we thought we'd be a 404A filer where we had 2 years ended up being accelerated to 1 when we tripped the market cap requirement on it. And now that we're in a more steady-state environment, those pro fees that we spent to get over the line have come down pretty significantly. And the other thing that we have stated in earnings is that we're going to be much more measured when it comes to headcount growth for the balance of this year. And so we've -- there will still be some growth, and we've got a couple of areas where we're going to be growing, but it's going to be an awful lot slower than what we've seen. And so the -- our view is it should be down $1 million to $2 million in Q2, and that should hopefully be a new baseline for us.

Okay. Any -- I'm going to shift to the health vertical, but if there's any questions in the audience, feel free to raise your hand, and I think we have a microphone that can come around. Okay. So moving to Health. Maybe before we get into your offering, could you just frame the opportunity in health vertical that you're going after? How big is it? How penetrated is it relative to auto?

Yes. And so in health, we have 2 -- really 2 separate businesses or 2 separate products that we focus on. One would be under 65 Health. And so you can think of that as being kind of exchange type plans or short-term plans. And the other would be Medicare, which is overwhelmingly Medicare advantage for us. And I think both of those have some pretty nice tailwinds. I think Medicare, in particular, has some really, really interesting characteristics and some Medicare Advantage plans for those of you that don't know as much about them. They're essentially private permutation of Medicare, and they can look like an HMO or a PPO. They are often no cost to consumers with additional benefits above and beyond what they would get with the government Medicare program. And these plans are currently only 44% penetrated, meaning 44% of eligible adults -- eligible Medicare -- eligible -- folks eligible for Medicare have them. And that number is steadily going up and to the right. And I think for Medicare, in particular, Internet penetration for kind of selling those policies is extraordinarily low. There are very few that have an online buying experience that works well. And we've got demographic tailwinds there, which is every year, people are aging out of Medicare or passing on and you get younger people that are much more Internet savvy opting in. And so I think we're squarely in the crosshairs of being able to capitalize on that trend.

Could you talk about customer helper team, which you acquired recently? What is this? And how does it help you on the health side?

Yes. So the customer helper team business is -- it's a performance marketing business that is focused on selling Medicare Advantage policies or on Medicare Advantage consumers and does it through social media channels. So Facebook, YouTube, in particular, for Medicare Advantage. And the business has done as a bootstrap business, profitable almost from the get-go, started doing a couple of other areas of lead gen relatively quickly found Medicare, which grown that into a really, really nice business. And as we think about the fit of the CHT business, it was attractive really for kind of 2 reasons, and one would be Medicare calls. And so we've historically been stronger on the click side, a ton of demand for Medicare calls, as you can imagine. And we think owning them will help us build that overall marketplace and get the flywheel going between supply and demand. And secondly, it's the social media marketing capabilities. And so for our own account within performance marketing, we had -- we're very strong in search, and we were much less penetrated in other areas. And the view was customer helper team could help us there. And there's kind of an interesting option ticket to apply their capabilities that they have in Medicare to under 65 in auto insurance.

So how are you integrating it the platform? And what should we think about in terms of financial impact?

Yes. So we are actively involved in the integration of DOW where they used a third-party platform to power the vast majority business. We -- most of that -- a lot of that we've got on our platform now, the view is it will help be on our platform imminently. And so it will look an awful lot like the rest of our owned and operated businesses. From a financial performance standpoint, the guidance we gave at signing in February still holds today, which is namely we expect in excess of $25 million of transaction value and revenue for the balance of this year and in excess of $5 million of EBITDA for it. And as a reminder, we spent $50 million upfront for the business.

Okay. Any rough targets or expectations in terms of how you expect the mix of auto, health, other verticals to shake out over time?

Yes. And it's an interesting question. And we -- I'm not going to give you a number to say, hey, I think it's going to be x percent or y percent. But the -- a couple of things I think have been happening. I think P&C is cyclical, and it's in the middle of the down cycle and we have total confidence that will emerge, and there will be a pretty nice growth rate on that when it does. I think the Medicare & Health business has less cyclicality to it. And so I think investors will all have their own model, but I think you could see a period of time where P&C outgrows health, but I think the dynamics on Medicare, in particular, over the long term are roughly attractive. On the other bucket for us, which is we had a kind of smaller travel business, higher education and financial services business. I would say those are -- we do not have a lot of resources put against those businesses. They're nice businesses. They're profitable businesses. But from a focus perspective, insurance is our key focus.

Okay. Any questions in the audience? All right. So M&A, capital allocation, could you just talk more about your general philosophy around M&A? You certainly have a lot of experience there with your background? And what's your appetite to do more acquisitions going forward?

Certainly. So from a capital allocation standpoint, you really have kind of 3 things in mind for were the first for us and probably almost every company is organic growth and making sure we're funding that in the business. As I've said before, it was bootstrap self-funded, and we think we're in a growthful segment, and I think we have quite a bit more runway to drive that in the years to come. Second piece, I would say, is M&A, and it's being -- and for us, that means finding businesses that are a good strategic fit, that are attractive financially, that are a good cultural fit. I think we've done 3 M&A transactions in our history, and so we have a very high bar. It's not let's go buy stuff for the sake of buying it, it's really finding things that we believe can make our marketplace stronger and better position us for growth over time. And the third lever or the third leg of capital deployment is buybacks which we've announced a small one there, but our goal is to drive growth in the business primarily.

Okay. So I want to get back. You mentioned early on 3x larger than next closest competitor? And what type of -- how important is that -- what type of advantage does this scale give you?

Certainly. So I think it gives a couple of advantages. And one is probably pretty basic, but still pretty important, which is it's a 2-sided marketplace. And so to the extent we get more supply partners or publishers that allows us to get more demand partners, we're typically carriers. And as you get more carrier spend, you get more supply partners, and we get more money to invest to make our tech platform better. And so that's the flywheel you see in all of these businesses and that wheel is turning. I think the other thing it gives you is data. And so I think I've talked a bit earlier about the power of that, which is I think carriers and I can actually talk about my time at Expedia, like Expedia, we had thousands of places we spend marketing dollars and you'd have direct relationships with the big ones, and you'd have some sort of intermediary you would use for the smaller ones. And you didn't -- we didn't want to spend the time to have 1 million data integrations to pass it back and forth. You wanted to have scale relationships on it. And as you think about -- as I think about MediaAlpha, we're in a unique position where we offer carriers access to a tremendous number of traffic sources. And as they feed us more data, they get more effective and actually the publishers get more effective as well. And so that is, in my mind, the biggest and most interesting long-term opportunity is how do we continue to get more data and use that to make our place more and more effective for all participants.

Just sticking on data. So your B2B model, I mean, does that give you a natural data advantage in terms of maybe carriers are to be more willing to do integrations with you than some other companies?

Yes. I would say yes. I think that the carriers are very willing to do it with us because we have a very wide and disparate set of partners that they can acquire traffic from. And so I think virtually every carrier that we're a partner with has -- they have sources of traffic that they're really excited about where they go, hey, we love doing business with financial apps or, hey, we love search engine traffic because it converts really highly or hey, we love buying traffic from other carriers that don't serve our customer type of drunk drivers or a lot of accidents or whatever it may be. And I think that, that is very powerful for us, and it's a real differentiator.

Okay. So talk a bit about the competitive environment, given what we're seeing in the hard cycle, not a unique headwind to you all. So what are you seeing from a competition perspective?

Yes. The thing I would say is that from a competition standpoint, I would say, we have a number of competitors, and there -- we continue to compete with them. And the thing I would say is we're 3x our largest competitor on the B2B side. The volume trends in our business have been solid P&C, we've had double-digit growth in volumes, each of the last -- we've said that each of the last 2 quarters. We've had it many more quarters over the years as well. And I think the competitive landscape is, it's stable to favorable for us. We feel like we are winning. As we look at the publishers, we're adding new publishers, and we're not really losing any body of scale and from a demand standpoint, we continue deepening relationships and unlocking pockets of budget over time and feel like we are well positioned on that front.

Could you talk about the -- one of the themes recently been -- some of the businesses moved from your public to your private marketplace, maybe a 30-second refresher for those who don't know what that is, but then also what's driving that shift? And how is that impacting you financially?

Certainly. So we have 2 models as Cory alluded to. There is the open marketplace and the private marketplace. The open marketplace is a model where we're effectively acting as something of a principal on the transaction. And so you would have a supply partner that makes customers available and runs through our platform and effectively any demand source can bid on that. And the way that model works is somebody spends $100 -- demand partners spends $100 on that. We recognize $100 of transaction value and $100 in revenue. The average take rate on that is around 14% for us. And so that $100 of revenue translates into $14 of GP for us. And the business started as an all open marketplace business. And over time, had a number of publishers that gain scale. And so they were -- they've got nice businesses. And the competitor or kind of the rationale for offering this product is, first off, as partners get bigger, they start to go, "Hey, we're a big publisher and we want to have a direct relationship with Progressive, we want to have a direct relationship with GEICO or Liberty or Allstate or whomever it is. And I think historically, they would have done that and they would have had passing paper back and forth and put together some sort of tech solution to do that. And we said, "Hey, we can power that and you have a direct relationship. We don't do billing, we don't do any account management, you guys do what you want to do, but it piggybacks off of our technology." And so there's all the tracking, there's all the data passing and they can optimize on it. And that model, the economics of it look a bit more like kind of a variable software business where we have $100 of transaction value, our take rate on that average is around 4%. So it translates to $4 in revenue, which translates to $4 in GP. And so the business is a mixture of the 2 of those, you can tease it out from our financials. But in our mind, success for publishers is when they get big enough that they can actually have some private marketplaces because it's a feature of the marketplace, which is we keep the spend on the marketplace and as we continue to bring new demand sources online, and there's a ton of fragmentation there. There will be quite a bit of spend that's in the open marketplace.

Okay. So we've got 2 minutes left, so I'll try to sneak in 2 more questions. I want to talk about your other verticals travel and life, maybe in particular, on travel. What are you seeing there? And any sort of bounce back?

Yes. On the travel side, I think we have seen a bounce back. COVID hit that business really, really hard as probably everyone can imagine. And it's -- we're seeing nice growth numbers, but it's still below where it was pre-pandemic. And so we think the growth will continue to be pretty good, but it's not the business that it was pre-pandemic.

Okay. And then MediaAlpha for agents. What's the latest on that?

Yes. So we have -- I think I talked about how competitors -- some of our competitors have a nice agent businesses. We have been investing to start one, and it's not a major revenue driver. I think it has been a little bit harder than we anticipated and taken a bit longer. We're continuing down that path. It's not a massive drain from an investment standpoint, and we think it's an interesting long-term opportunity and it's not a real big part of our results, but something we think could be interesting in the years to come.

Those are fast answers, we have time for one more. So insurtech, there's been a lot of volatility in the space from some of those companies that have struggled of late, how big of a category is that for you? How is their spend holding up? And do you think of that in general is more of a growth opportunity for you or like a growth risk to be also?

Yes. So it's a relatively small portion of the mix. I think we've got relationships within P&C, in particular, with most, if not all, of the players that are focused there. And I think we've had -- we've seen some of them grow and then kind of fade from our platform, and we've seen others start to lean in and see good returns continue to grow over time. And I think my personal hypothesis is that there will be at least a handful of players that emerge kind of in the insurtech P&C space and get to some scale and I think that was clearly, it should be interesting sources of revenue for us. And I think there are others that will probably get consolidated out and don't really see any major near-term risk there of kind of large-scale pull out just given the one dynamics of the business and the growth expectations. And secondly, they aren't a huge portion of our overall mix.

Awesome. Well, Pat, thank you very much.

Excellent. Thanks for having me.