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

All right. So I think in the interest of time, we're going to let everybody get settled. And thanks everyone for joining. It's my pleasure to welcome the team to the stage for MediaAlpha. We've got Steve Yi, CEO; Pat Thompson, CFO. We as a team just recently initiated on MediaAlpha. So this is the first time we're hosting MediaAlpha here at the conference this year. Guys, thanks so much for being part of the conference.

Thank you.

Good to be here.

Steve, let's start with you. What I was trying to do, especially with companies that are here for the first time, is to give you an opportunity to level set folks. Can you provide an overview of the platform you're building? What are you trying to build and unlock in terms of opportunity for the company over the long term?

Yes, absolutely. So I think the best way -- and if you're new to our business, the best way to think about where we sit is really at the intersection of insurance and customer acquisition or Internet advertising customer acquisition. So what we built with our platform and our marketplace is a network of hundreds of publisher sites where people are shopping for insurance. Our biggest category is auto insurance. And then we're allowing the major carriers within the space, Progressive, GEICO, Allstate, et cetera, to reach these consumers at the point of purchase or near the point of purchase. So an example would be a publisher that we work with called Insurify or Insurance Zebra, two different publishers where people are shopping for auto insurance. They're like the KAYAK of auto insurance. So consumers will go to those sites, shop for -- put in all their information related to the policy that they're looking to acquire, whether they're a homeowner or not, number of cars that they have, et cetera. And then in response to that search, with all that data, what we're allowing is Progressive and Allstate and GEICO and the big carriers to reach those consumers, bidding the precise amount based on the expected lifetime value of that consumer. And so the reason it's such a compelling market opportunitiy is to -- one is that, within the insurance industry, the insurance industry spends countless billions in distribution. And that distribution spend typically and historically has gone to brokers in the form of broker commission or agent commission. And the seismic shift that's happening is really that economics going from offline broker sales, right, into advertising spend as more carriers start to embrace direct-to-consumer advertising. This is most notable -- notably happening within the auto insurance space where direct-to-consumer carriers like Progressive and GEICO have really gained a ton of market share at the expense of traditional agent-based carriers. And so what you're seeing is the entire industry waking up to this opportunity and really starting to make a big shift from agent-based distribution to direct-to-consumer. And where we sit, we [ tend ] to be the -- one of the direct beneficiaries of that. I don't know, Pat, if you want to add anything.

There's nothing. We're good.

You're good. Okay. Now I think that's a great way to set us up. But I do want to come back to something you've been going through more recently. Because when you talk to technology investors, some of them don't have an insurance background. Why don't you provide a little bit of an overview of what you've been through over the more recent past? Because there's been a cyclical downturn in the property and casualty insurance market over the last several years, and you're now in the midst of a bit of a recovery cycle. How should people be thinking about what you've been through and the transition we're going through to hopefully a recovery cycle of the space?

Yes. It's been quite a few years since we went public. And so you don't know the property and casualty or the personal lines property and casualty insurance, basically auto and homeowners, it's a cyclical industry. And so it moves to a different cycle than most other industries. And it typically doesn't move to a business cycle, it moves to an underwriting cycle. And so what happened at the tail end of COVID is that there was an underwriting cycle that the entire industry fell into because of rising claims costs. And the reason that they're rising claims costs was that there was supply chain-related inflation, right, at the back half of the pandemic. There were labor shortages. And so cost to repair cars based on both those factors went up pretty dramatically, like 40% to 50% on average. And so when this happens, car insurance companies need to raise rates, otherwise, they're losing money, right? Not quite that simple because it takes oftentimes a year, 1.5 years for car insurance companies to get their rates to the point where they're actually restoring underwriting profitability because they need to get these rate increases approved by 50 insurance commissioners' offices. And so what tends to happen during these periods is that these carriers, as they're getting their rates increased and restoring underwriting profitability, they tend to pull back on advertising spend and marketing spend. And so during the second half of COVID, right, when pandemic-related factors really led to sort of historical claim cost inflation of, again, 40% to 50%, which the industry hadn't seen for 30, 40 years, it took a while for the industry to restore profitability. And during that time, they essentially stopped advertising or dramatically pulled back on advertising. And so entering into 2024, largely the industries restored profitability. They're not all there yet. Carriers like Progressive and Allstate that you've heard about have restored profitability, and they're really starting to step on the gas. And so you're seeing a big inflection point at the beginning of this year with insurance advertising spend starting to go up pretty dramatically.

Okay. That's clear. Moving on from that topic, Steve, I want to stick with you for maybe one more, and we've got to bring Pat into the conversation. The other conversation we've been having with investors since we've initiated on the name is just a better understanding of the competitive landscape. So who do you compete with for $1 in the end market? What do you see as the competitive strengths and differentiators for MediaAlpha? Talk a little bit about that landscape for those who may be a little bit less familiar with it.

Yes, sure. So the publicly traded companies, I think were QuinStreet, EverQuote and LendingTree. So we compete with those companies who are in the broader insurance lead generation space for advertising dollars from carriers. And so if you're following these companies, you'll see that we're several times larger than them in terms of just the carrier spend that's in our marketplace. And that's exactly the reason is because we are a marketplace of hundreds of publishers who are out there actually have insurance shopping on their site or happening in the personal finance apps, like Credit Karma is one of our major publishers. And so I would say that the big differentiator between us and the other publicly traded companies is that we work with hundreds of public insurance publishers in order to actually aggregate all of the insurance shopping activity, again, on price comparison sites, on carrier sites and personal finance apps and on lead generation sites and allow insurance carriers to really access all of that inventory through 1 marketplace which is us. If you compare that us to an EverQuote or a LendingTree, you can think about them as essentially just being lead generators. They have a network of thousands of insurance agents that they're selling leads to as well as the carriers that they're selling clicks to, but they're all doing it by marketing and driving traffic to their lead generation site, which is EverQuote.com or LendingTree.com.

Yes. And I would probably just add one thing to what Steve said there, which is I think Steve talked about our direct competitive set. And then we have an indirect competitive set, which is kind of who we're fighting for marketing dollars from a carrier. And so I think, as you think about carriers, they've got a couple of budgets of distribution spend, where the first will be -- and Steve touched on this earlier, it will be agent and broker commissions. The second piece will be TV advertising and the third will be other performance marketing channels like Google. And I think on us relative to them, our big differentiator is the transparency and the targetability that we offer them. And so I think -- when you're advertising on TV, who are you getting? You're getting everybody that's watching that particular show. If you're advertising in Google, who are you getting? Whoever typed in that key word. Our channel and our platform is unbelievably data-rich where we get 30 to 40 pieces of information on a consumer that are directly relevant to the pricing decision by the carrier and the attractiveness of the customer to the carrier. And so for instance, the 3 of us up on the stage probably actually look pretty similar, just like we're all within 5 or 10 years age of each other, incomes are probably not crazy far off. But we all live in different places. We all have -- I know Steve has teenage drivers in the house. I don't. We all have different cars. We all have slightly different credit scores, et cetera. And all of these things get to make us very different customers in terms of attractiveness to carriers, and thus, worth very different amounts. So that targetability is hugely powerful because the carrier might go, I love people in Washington, but I don't like people in California or New York. This is great. They can target me and ignore those guys. And so that is a big differentiator for us and something that in a kind of -- a rapidly growing market is a real differentiator because the carriers can invest heavily to get the exact types of customers they want.

Okay. Clear. Thank you, Pat. Pat, maybe sticking with you, I want to talk a little bit about mix of the business. On the demand side, what's the current mix of advertisers? And how might that evolve over time? And similarly, on the supply side, what's your current and potential future optimal mix of publishers that you'd like to have on the platform?

Yes. And I would say on the advertiser side, for us, particularly within the P&C vertical for us, it's very carrier-centric for us. And it will be the league table for auto insurance carriers is relatively top heavy, where the top 10 carriers have 70%, 80% market share. And so we've got a degree of concentration there with some big carriers, and we had last quarter, 2 10% revenue contributors in our overall mix. And so there is some concentration there, but it's not extreme by any stretch. On the publisher side, the business for us is really focused on kind of 4 different types of publishers that are all meaningful contributors to our overall mix. And the first would be financial apps, which I think Steve touched on, and you can think of Credit Karma as being an example of that. The second would be price comparison sites. So folks like Insurify and we had a recent press release on them, and they're endeavoring to be the KAYAK of insurance shopping. Third would be carriers themselves. And so you can think of somebody like the General there, which is the General is a nonstandard carrier focused on kind of the lower end of the market. And so if somebody who's a premium or preferred customer comes in, the General is -- they have a rate, but folks like us probably aren't likely to choose them. And so they'll place ads to be able to monetize and recoup some of their marketing cost. And the fourth will be traditional kind of lead generators. And so some of the public competitors Steve mentioned, we do a bit of that for our own account as well. And there are a number of smaller businesses that do that, but we've got a very diversified publisher mix.

Okay. Steve, I want to bring it back to you. We talked a little bit about the near-term cyclical trends, and you alluded a little bit to the secular tailwinds of where the insurance industry is headed in terms of how they spend their marketing dollars. Talk a little bit about sustained growth over the long term and how you feel you're positioned to capitalize on certain secular themes within the broader insurance industry.

Yes. I think I touched on one of them, which is the -- just how early innings we are in the shift of the overall insurance industry from offline broker and agent-based distribution and paying commissions as a primary distribution cost to actually again going direct-to-consumer and replacing a lot of that broker commissions that are being paid out, again, like I think by some estimate, like $100 billion plus a year, right, in terms of broker commissions that are being paid out and replacing that with advertising spend as more and more insurance carriers start to -- and more insurance sectors start to adopt a direct-to-consumer model. And so within auto insurance, it's the sector that was early to adopt direct-to-consumer. And I say that relatively speaking, because I recognize it is 2024, and there's still a lot of carriers like a State Farm. You still can't buy a policy on statefarm.com. And so I think I would say within auto insurance, which is our, again, our biggest sector right now, we're still in the fourth or fifth inning in terms of the direct-to-consumer adoption, right? The transition that you're seeing Allstate making from being a captive carrier and selling insurance policies just through Allstate agents to now spending -- having at least 1/3 of their policies now being sold through allstate.com and building a direct business that way. That's a transition that companies like American Family and State Farm and a number of other carriers still have yet to make, right? And so we believe that, that secular trend towards adding strong direct-to-consumer capabilities, which will mean a much increased investment in Internet advertising dollars has still yet to happen to a large degree with many carriers, even within the top 10 carriers within the auto insurance space. I think looking beyond that, what we anticipate is that other insurance sectors will follow suit. So I think the second insurance vertical that we're in is health insurance. And really within that, you have Medicare Advantage, which is a big sector into itself. It's a $0.5 trillion insurance sector where you have big players like UnitedHealthcare, Humana, et cetera, who I think are really in the very early innings of adopting direct-to-consumer technology. And there, what we see the long-term opportunity being is really being a technology partner with companies like that to help them develop the online enrollment and conversion capabilities just because of the capabilities that they bring to the space are somewhere maybe 10 or 15 years behind that of what we've seen from a typical auto insurance carrier. And so what we look forward to is really expanding within other insurance categories like Medicare Advantage, potentially small business commercial insurance to create similar marketplaces as these industries all make their shift to adding more direct-to-consumer distribution capabilities, and in those cases, actually leveraging the experience that we have within the auto insurance sector to help become much more of a technology partner to these companies.

The stat that I found so powerful when I joined MediaAlpha 3 years ago that I still think is a super powerful and persuasive one is that about 1/4 of all working marketing spend in the insurance industry is spent online. And you compare that to the U.S. economy, it's about 2/3 of working media spend is spent online and 2/3 of media consumption is online. And so -- what is that 25% number going to be 3 years from now, 5 years from now, 10 years from now, I can't tell you exactly, but it's going to be a lot higher than it is today. And so we clearly have the wind at our back for the foreseeable future.

Okay. Perhaps sticking with you, maybe talk a little bit about another mix question, but how does your 1P O&O site business fit into your long-term strategy? And what's the current mix between third-party marketplace and first party? What do you see as an optimal mix going forward for the business?

Yes. So our mix is about 85% third-party, about 15% first party. And so that first-party business is us marketing and Google, Facebook for our own account. So we drive it to our own websites, ask the consumers a series of questions on a forum and ultimately monetize it the same way we would on the third-party side. And so I think that business is -- it's an interesting one because it's slightly higher margin. And two, we think it is strategic because it really gives us a -- it lets us see how it feels to be a publisher on our platform. And I know that a number of the features we've developed for publishers, we actually developed for our O&O business. And it allows us to also be a fertile test bed for things where we'll test stuff that we think could be interesting to partners on our own business and start to go like, hey, does this make sense? Yes or no? And so it is a strategic portion of the business. It's something we've invested to have perform over time. I would say the percentage of the business that's been O&O is probably going to continue to fall a bit over the course of this year, like I wouldn't doubt it goes down to -- it's 15% now. I would doubt it end of the year [indiscernible] something like 10%. And I think we're eager to play there, but we don't ever see ourselves as having that be like a majority of the business because partnerships are at the core of our business, and it is where we are focused.

So Pat, sticking with you, how do you frame the long-term opportunity with respect to the health insurance segment? How might evolving regulation impact growth over the medium term?

Yes. So the health insurance business is an interesting one because it's -- I would say it's probably actually really 3 separate businesses or 2 separate businesses for us, where there's the Medicare Advantage business and then under 65. And within under 65, there's 2 separate businesses there, there's ACA plans and non-ACA plans. And each of these areas is impacted by kind of policy decisions and quite frankly, like the party that's in the White House and controls Congress. And I think the under 65 component will be an oversimplification, but Democrats are Pro ACA Republicans are anti-ACA. And we've kind of seen with political regime change that the winds will blow in one direction versus the other, but we've successfully navigated those over time and have done well over time regardless of the administration. And Medicare Advantage is one where I think there is clearly broad bipartisan support for the program, but there are constantly changes made to reimbursement rate star ratings, et cetera, that can have some impact around the margin. But once again, we've successfully navigated those over time. As we think about the longer term here, and Steve touched on this earlier, auto insurance is in the fourth or fifth inning of moving online. Health insurance is in the first inning or warming up before the game, throwing the ball around the diamond. And so we think that there's going to be a lot of opportunity on the health side in the Medicare side to have that business move online, particularly on the Medicare side as retirees aging into that product are much more kind of Internet-enabled than some of the older folks. And so we're very excited to partner with our carrier partners and help to move that business online. And we think that over a pretty long term -- over the long term, that there's a lot of opportunity there for us.

Okay. Moving beyond P&C and health, how do you think about other areas beyond those two in terms of expanding into other categories? What are some of the characteristics you look at when you're analyzing new market verticals, things like life, travel, et cetera?

Yes. And I would say, for us, P&C and health are 1A and 1B in terms of priority. Life is probably third. And then there's everything else that's somewhere below third. And I would say that we, as a company, we're focused on insurance, and we think the biggest opportunity for us is helping our carrier partners as they transition more and more to an online experience and as consumers look to shop there. And they're big markets, they're complicated markets, they're specific markets and they're markets where we have a lot of pieces in place in terms of relationships. And so we're focused there for growth. I think we've got some other businesses that we entered at varying points historically. Travel and personal finance kind of mortgage, they're a pretty small portion of the mix. They're profitable for us today, and they're not areas where we're investing very heavily, but we see ourselves as an insurance marketing company.

Okay. So we've talked a lot about what's been built on the platform, what's evolving, where you want to go longer term. Maybe put a finer point on it for us. What are your key strategic priorities with respect to investing in the business? And against that investment cadence, how do you guys, as a company, think about balancing growth investments against continuing to deliver on margin leverage?

Yes. And the -- efficiency is in our DNA as a company. And it's -- we've got 100 -- we had 137, I believe, employees at the end of Q2. And it's kind of remarkable the size of the business that we're able to drive with so few people, and it's -- it kind of -- has been embedded in the culture from the start. And so kind of being frugal, running efficiently, having people wear multiple hats is -- it is what we do as a company, and it is what we will always do as a company. And so we're delivering quite a bit of leverage right now. We're also investing in capabilities. As I think about the business, there are -- kind of broadly speaking, 3 groups of people. One will be true overhead functions. So you think about finance, HR, legal, things like that, and we're getting a lot of leverage there. The second will be stuff that's semi-variable. And so you can think of sales and account management as being an example of that, which is as the business is growing very steeply, we need to add, but not dollar for dollar on it because if an account doubles in size, you need more resource on it and not twice as many. And then the third piece is where the strategic long-term unlock comes, which is going to be on the tech product analytics side. And those are areas where investment doesn't pay off in the short term. It's like we hire a new developer and we're not getting an ROI in the first 6, 9 months. But we do get great ROI over a 3- and 5-year period. And so we've historically invested heavily there. We've been hiring there, and we're excited to continue to invest there because that's ultimately what drives the long-term success of the business.

So maybe last one for you, Pat, and sort of building on that answer. So that's the investments in the core business. Bring it back to a broader capital allocation philosophy. So you've got investments in the business. Maybe the potential to do M&A and speed up some of those go-to-market strategies and also the potential to return capital to shareholders. What's the current philosophy? How should we think about that?

Yes. And I would say the -- as a company, we are a business that should generate a lot of cash. And so for us, we've got adjusted EBITDA. We have essentially 0 CapEx. I think last year, it was $100,000. Overall, we don't capitalize any software development expense. And we don't have -- we're fully in the cloud, so there's no servers or anything like that. Historically, over time, the business has been a minimal net working capital business. It's flat to a little bit of working capital. And so we should generate a lot of cash. The capital deployment piece for us near term, it's building up the cash balance/reducing net debt. We've got a little bit drawn on the revolver, and we've got mandatory amortization every year on the term loan. So we'll be doing that. I think beyond that, we are major shareholders in the company, and we're all about driving long-term returns to shareholders. Obviously, investing in growth, whether it's organic or inorganic, comes first. And to the extent we don't see great opportunities to do that, over time, we're very open to returning capital to shareholders.

Okay. We've got a few minutes left. Steve, I want to bring you into the conversation to sort of close this out. We typically try to end these things with sort of a forward-looking bet. So maybe a two-parter for you. When you look ahead over the next 12, 18 months, what are your key priorities and the milestones you'd like to achieve for this business looking forward, both as a platform and as a company? And when you talk to investors, are there any emerging themes or dynamics around the business or the industry that you think remain relatively underappreciated or unfocused on?

Right. I'd say that -- I mean, really, what we're focused on is really working with the industry, particularly within the auto insurance industry, as it makes it through what will be the historical -- recovery from a historically down period. And so I think we're already seeing growth that we were not quite expecting last year, right? And so the first year, the recovery -- in the first half of the year, the recovery has been unexpected on the high side. And so our team is completely focused on working with these carriers as they start to ramp up their marketing spend again and really step on the gas because I think the market is going to come back in unpredictable ways. And so we need to be ready as we work with our carrier partners and major carrier partners as they come back into a growth mindset into what's called a soft market cycle. And so now I think -- really what I think remains somewhat underappreciated is really the story between us and how -- what differentiates us versus the publicly traded comparable companies, most notably EverQuote and LendingTree, who really focus on generating lease from the owned and operated site, right? We've talked about that a lot. And the fact that our marketplace and working with hundreds of publishers really enables us to scale up very quickly to meet the demand of our large carrier partners and the ability for us to really grow exponentially in some cases, right, the carrier spend. To be able to absorb that through our marketplace model, I think, is something that really still remains a bit underappreciated. But what you've seen over the last 6 months is that we've outgrown our publicly traded comparable companies by 2x to 4x because of this model that we have of working with carriers being highly levered to direct carrier spend and the ability of our marketplace of hundreds of publishers like Credit Karma, Insurance Zebra, Insurify. The 40 carriers that we work with to help them monetize their non-converting shoppers on their sites, the ability of this marketplace of publishers to really scale up in connection with the demand of what is a very cyclical P&C industry, I think, is something that we talk about over and over again with different investors. So I don't know, Pat, if you have anything to add to that.

I think you covered it.

All right. I'll leave it there.

Thank you for the opportunity to have the conversation.

Thanks, Steve. Thanks, Pat. Please join me in thanking the team for being part of the conference this year.

Thanks.