SelectQuote, Inc. (SLQT) Earnings Call Transcript & Summary

All right. I guess we will get started. Hello, everyone. I'm Jailendra Singh, healthcare technology analyst at Crédit Suisse. Thanks, everyone, for joining us today. Next up, we have SelectQuote management team for a fireside chat conversation. From the company, we have Tim Danker, CEO; and Raff Sadun, CFO. Thanks, everyone, for being with us. I'll begin with some of my prepared questions, but if anybody from audience want me to ask questions on their behalf, please e-mail them to me at [email protected].

Thanks, Rob. Thanks, Tim, for doing this. Really appreciate your time here. And as you know, this is a technology conference. So some of the audience might be new to the story. Do you guys want to begin with providing a quick overview of the company, key underlying growth drivers you see for the company over the next 3 to 5 years, et cetera?

Yes, I'd be happy to do that, Jailendra. Thanks again for hosting this. We're much appreciative of the opportunity. So a little bit of background on the company. Again, SelectQuote was the leading technology-enabled insurance distribution platform. We pioneered actually the first direct-to-consumer sale of term life insurance all the way back in 1985. It's really a model then that combine targeted direct marketing, technology, professional inside sales center. And it was to compare and shop the market to find the best fit for the consumer. So very progressive in 1985, and we became the market leader in that sector. You fast forward about 10 years ago, we decided to expand into the high-growth verticals of senior health care, that just now about 70% of our consolidated revenue, primarily distributing Medicare Advantage, Medicare supplement as well as personal lines, auto and home. So we're a diversified multi-line national broker that ultimately educates consumers on must-have recession-proof products. We've got deep relationships with carriers, over 50-plus blue-chip strategic partners. Those have been developed and curated over decades, if you will. And for the carriers, they benefit from access to the rapidly growing direct-to-consumer channel as the channels are shifting from legacy field operations into highly efficient, more predictable direct-to-consumer platforms like SelectQuote. Also benefit from our high-quality business. I think for us, obviously, it's important to have trusted carrier brands on a national level. And certainly, we benefit from economics as being a provider of scale. From a business perspective, we've really built the business around 2 pillars: one is highly skilled agents; the other is purpose-built technology. And it's really designed to help really drive the best possible customer experience while also maximizing our customer lifetime value. So on the agent side, we've made significant investments in building a professional inside sales center. And we think that, that has been really critical, given the complexities of the products that we're dealing with, as well as the recurring revenue that's at stake if one really does it right. So we've built a 100% internal agent force from the ground up. We're not using external call centers like some of our competitors. We recruit, we retain, we -- continuous add is all built with the goal in mind of building truly a career agent and a career opportunity. And I think our merit-based leveling system allows us really to earn really good income for inside sales professionals, and we're able to have very sticky agents with 93% retention rate for our top agents. This, combined with technology, really helps us provide continuous improvements to agent productivity, policy growth, ultimately, return on marketing investment. Second pillar being technology. It's a technology conference, probably hit on that. It really drives all aspects of our business, everything from how we recruit, to how we retain, maybe we can talk about SelectQuote university today, to our marketing tech on how we make decisions around how we acquire, score, distribute leads to our highly skilled agents, ultimately to maximize marketing return on investment. We've also developed a lot of sophisticated tools that reside on our agent desktop that allow for proper quoting across our choice platform, really important to get the critical details, doctors and drugs. And we've made a lot of incremental investment around technology there to make that even better across our choice platform so that we can make sure that we get the consumer on the right plan, all paramount to driving highly retentive business and really lifetime values that we're very proud of that lead the industry. And then finally, investments in technology and data science that drive intelligent outreach for our growing customer care or CCA organization. That's important, as seniors, their needs change, right? Their geography may change, their health condition, the drugs, the doctors that they see. And so it's important that we continue on an ongoing basis to ensure that they're on the right plan. We see that, that is working with our 25% recapture rate, which again leads the industry. Also provides an entrée into cross-selling of other services. Again, we're a diversified platform, so we can introduce things like life insurance, final expense, auto and home, or where we're at in terms of introduction to value-based care providers. All that in a nutshell has us growing revenues on a consolidated basis of 70% on an LTM basis. Our senior business growing at 105%. Consolidated EBITDA margins on an LTM basis of 28%, our senior business at an attractive 38%. If we look forward to the growth drivers, I think many on this call know, but maybe some don't, very favorable demographic tailwinds in our senior business, 10,000 people a day turning 65, 60 million Medicare beneficiaries growing for the years to come. The market moving towards a popular benefit-rich Medicare Advantage plans as the carriers continue to invest in those plans. And you can see from many of the managed care organization is the expected growth rates of MA, which have been quite attractive. The shifts in distribution from legacy traditional across the kitchen table field agents into high-growth direct-to-consumer. So as you think about growth moving forward, we have scale, but we're going to continue to drive into the long tail opportunity. That means hiring more agents. That means enriching our lead generation capabilities. That means improving our technology that enables both of those. So in a way, kind of doing more of what we've already been doing. In addition, we're going to leverage the platform to sell new products. Maybe we can talk a little bit about final expense, but that has been a very high-growth segment of the business, very attractive from a cash generation profile. And lastly, I'd say we're in a great position to educate consumers. That's part of what we do. We view ourselves as an advisory firm, an educator, and we think we're in a great center pivot position to talk about value-based care, which provides retention benefits for consumers, more proactive approach to their health care, lower MLR for our partners on the carrier side and again, stickier, more retentive business. So hopefully, that was the quick couple of minutes feel on our business model. Hopefully, it was helpful.

No, that was great. That was helpful. To begin, maybe on the follow-up on that one. Maybe can you discuss the competitive landscape. Who do you see as your major competitors? Maybe I know senior segment is your kind of majority of your revenue. But if you can touch on competitive landscape across all 3 business lines, and just key barriers to entry for the business model. I know you mentioned technology and agents, but if you can elaborate more on like why other players is tough for them to enter the space.

Sure. Great question. So as a backdrop, again, Medicare market, a $30 billion addressable market opportunity. I think most of the research communities validated that 60 million Medicare beneficiaries growing to 77 million by 2028. So you've got a growing market. We've talked about some of the growth in underlying MA that's going to continue to grow from, call it, a 60% penetration between MA, MS growing to 70% over the next 7 or 8 years. The shifts in distribution. So all those things are kind of tailwinds. We grew, just for perspective, at about 25x the market rate of growth last year, kind of highlighting these shifts that are happening in the market. In terms of competitors, there's really -- in terms of direct-to-consumer, there's 4 major players. There's SelectQuote, there's GoHealth, there's eHealth and TRANZACT within Willis Towers Watson. So the 4 of us are about 5%, give or take, of the addressable market opportunity today. We think there's lots of room for all of us to grow. But we also believe the mousetrap that you've built matters to really capitalize on the market opportunity. We want to do that in a very disciplined and profitable way. And we kind of point potential investors to our LTVs and our margins as kind of examples of the strength of our model. And in terms of the barriers to entry, we think they're really high to do it right. If you really want to capitalize on the opportunity, it's a pretty sophisticated ecosystem that you need to develop. And first, it really starts with the carriers, and we touched on that, but we have spent literally decades building relationships with our carrier partners. Both partners continue to make investments in each other operationally, technically around our data feeds, so that we can continue to layer on profitable growth. And I think that's been really a hallmark of SelectQuote going all the way back to 1985, and here and staying, and it's about making sure that we have trusted relationships with our partners and we're helping them achieve their business objectives. So I'd say new entrants can promise volume, they cannot promise profitability. And I think that's a big difference between us and maybe new entrants that may be getting into the market. Marketing is another big asset. We manage a diverse lead funnel, where we are leveraging our 1 billion data points that we've acquired over the years. We're continuously optimizing workflow to try to maximize marketing efficiency and managing the revenue to CAC relationship. And that's easier said than done, building, training, managing, retaining a professional inside sales center. I'm surprised I still have this much hair. It's a big feat to do this, and we put a lot of effort into it because it's a big differentiator. We think it's a big part of our economic advantage. Optimizing the time and the efficiency of those agents through technology, all the things that go around workflow to drive higher agent productivity, and we've experienced a lot of improvements in agent productivity over the past quarters. We're seeing that again in AEP. And that ultimately results in efficient cost per acquirers, and you got to be able to prove that you can do that as you scale the business. Fun things like compliance, CMS, TCPA, building a brand. There's quite a bit there, and we'd say, hey, to really make it integrated and work holistically, it takes a lot of years to optimize.

That's fair. I know you mentioned that your business model is supported by 2 pillars, like technology and agents. I want to spend some time on technology. You talked about how you are differentiated from your competitors on lead generation, lead allocation, other broker tools you have, which improves the productivity. Going forward, which areas do you think you're likely going to focus more of your investment dollars in terms of technology spend? Where do you think the biggest ROI are? I mean, can you focus on that?

Yes, sure. Just real briefly, kind of on the historical viewpoint, I would say, the way -- your underlying philosophy on the business probably informs how you build tech. And for us, right, we're an agent-led model, and technology is meant to help make our agents more productive and make our -- the quality of our business right even better. And so that's kind of the mindset. And if we -- I think some of our competitors may say, hey, we might want to sidestep the agent and just use technology and others may be integrated with a handful of carriers, and our viewpoint is, now, we're really going to try to drive this to improve the productivity of our agents and to maximize the customer experience. And we're fortunate, the President of our Senior division, Bob Grant, he was sales agent #1. He's really helped architect and build this great business, and kudos to him, but it's been built from the inside out, from the viewpoint of both a producer and somebody that's on the front lines, and that informs the way that we've built it. So most of our investment today has been around -- maybe we've got a slide on it in the deck, Slide 8, around everything around lead acquisition, to lead management and routing, to the tools on the agent desktop. We have spent a lot of incremental investment. I think we spent $25 million. We're slated to spend 20 -- I guess it's $25 million last year, correct me if I'm wrong there, Raff, on technology. And it's been a lot around tools on the agent desktop to improve drug matching, drug costing, doctor matching, SEP eligibility. We've also made technology investment on the back end in our customer life cycle management and our CCA team to again help build that retentive business that drives not only a high recapture rate, but also the opportunity to cross-sell other services. We even use it for revenue tracking, which doesn't sound very sexy, but it's a really important part of the business, and we are able to do it with not a whole lot of people. We do it through technology. And then SelectQuote University real quickly on airtime. We recruited, as you know, 2,000 people to support this year's AEP. We did it in a fully virtual environment from a recruiting perspective, then we needed to train people. We also trained in a fully virtual environment. And we use SelectQuote University, it's almost like a college classroom type of training that allows us to train en masse, but also bring it down into small classroom style training in which we're able to get 5x more call reviews than we were in prior years. It just helped us sharpen the saw for consumers. So probably -- for our agents. So that's kind of where we've been. We're going to continue to make investments in that. I think our tech spend for fiscal '21 is in the $40 million neighborhood. And we're going to continue to make those things better, things that can make our agents more efficient as well as continue to write high-quality business. I think future areas, we'd also really work on kind of loosely calling it health care literacy. We believe there's real power in educating consumers and creating awareness around access to value-based care and full utilization of benefits, proactive wellness, right, that will help the consumer, as I mentioned, lower MLRs for the carriers and improve customer retention. I also think we will continue to enhance the tools that our CCA team has to equip them with better information about the customer, to understand where they're at, to help further improve retention as well as cross-sell opportunities.

That's fair. Next thing I wanted to ask, Raff, about the breakdown in marketing spending. I know it generally varies quarter-to-quarter. But can you provide any color around what is your main source of -- main focus of marketing spending, direct TV, direct mail. Some companies focus on strategic partners. If you can provide any update on marketing spending? And does your retention rate really differ by various channel times -- channel types. Does it vary a lot? Raff, you might be on mute.

We use all the sources. We actually don't disclose the breakdown of the lead mix, in part because it does vary by division and it fluctuates throughout the course of the year. Ultimately, we employ a wide funnel on the channel approach to our marketing, which allows us to source and consume leads from a wide variety of different marketing channels. Those are both internally generated as well as externally purchased. And that allows maximum flexibility to sort of tap into the various ways seniors want to express interest in Medicare products. And because of this wide funnel approach, we're highly flexible and not dependent on any single lead source. Furthermore, our marketing, tech and data analytics and workflow allow us to concentrate really on the highest value leads using our sort of predictive analytics to manage the best revenue to CAC relationship. In addition, once we get a lead into our system, it doesn't go directly to an agent. It actually goes to a screener first to further qualify the lead, gather more information. That updates the quality score of the lead, and then that determines ultimately how it gets routed to one of our agents. So by the time a lead actually gets to an agent, it's actually a pretty good quality and, regardless of the source, is very consistent. Now that plays also into the persistency by sort of lead channel. Historically, we've not seen material differences in persistency by marketing channel. We manage the marketing to maximize the total EBITDA opportunity and the return on that marketing spend, measured by revenue to CAC. So because we're constantly optimizing that relationship, we don't see material differences in the rev to CAC relationship by marketing channel. There can clearly be some differences based on certain channels that are producing either more switchers or new people to Medicare or low-income subsidy, and that can drive slightly higher or lower LTVs. But generally speaking, it also corresponds with change in CAC, such that the optimization and relationship of rev to CAC is, a, consistent over time, and consistent amongst various channels. So I think that's an important piece of the overall model there.

Okay. Actually, let me -- because we have only 9 minutes left here. I want to take some e-mail questions I've got. First one is, which actually is a follow-up to what Tim was mentioning earlier on the overall industry landscape. Any thoughts on M&A consolidation in the industry? Where do you think the industry is going? That's the first. And second part is probably for Raff. When do you think you guys will hit cash flow positive? So maybe Tim, maybe start with the first part of the question, and then we'll get to the cash flow question later.

Yes. I think from our perspective, if we look at the growth drivers for us, it's people and its leads, and it's leads and its people, and it's the technology that enables us to, like that's the management team, what we're waking up every day working on. And on the people side, we're very encouraged by what we've done, this AEP, and we'll be able to share results in due time, but it was a pretty big increase for us, and it's going well. On the lead side, Raff covered the omnichannel approach, which is very, very important. And we have not run into any headroom with respect to marketing because if you build the right engine, then you're able to capitalize on a lot of different sources and manage that all important rev to CAC relationship that Raff mentioned. So we see a path and a very clear path, given the long tail opportunity, to just grow organically, and that is kind of the plan of record. Maybe when Raff talks, we can talk about inside response and give a little bit more color there. We did do a tuck-in acquisition. It's gone swimmingly well. A lot of M&A doesn't. It looks good on paper, and you've got to operationalize it. And we've done a really good job of that. It's synergistic, and it's going to pencil in at a very attractive multiple. And so to the extent we see something proprietary, compelling, additive, we will. Broader industry consolidation, it could happen. We don't see any need for us to necessarily pursue that because we have an organic path that can take us there quite clearly. In addition, we've got other growth vectors where others don't, whether that be final expense, whether that be our existing P&C and life business and other emerging models we're working on. Raff?

Yes, just really quickly on the Inside Response acquisition. I think it's a great example of our ability to basically target a very specific use case, set the deal up to succeed, integrate them effectively and then generate attractive returns from those investments. While we're not sharing specifics around the Inside Response financials, the acquisition has significantly exceeded our expectations. We actually expect to fully pay out the earn-out, the max earn-out on that acquisition. And I think it's a good illustration of our ROI mindset. I think the acquisition multiple will ultimately pencil out to be around 4x EBITDA, which given where some other similar companies are trading more recently, is extremely attractive. With respect to sort of cash flow and liquidity, the IPO gave us proceeds. We raised enough proceeds through the IPO to grow for the next several years. I think in our investor deck that we put out today, we -- Slide 23 specifically shows that since the IPO, we've actually grown revenue and EBITDA faster than we said we were going to. And normally, in our business, because it's sort of a 2 to 3-year breakeven on some of these policies, that would actually consume more cash. We've actually consumed less cash, even though we've grown faster. And that's a function of sort of the productivity of the agents and the efficiency of the marketing that we've seen since that time period. And it actually doesn't really take into consideration the growth in the final expense product because that's something that we've ramped up in the last year or so. It has a 1-year breakeven period, so it's highly cash efficient. But the positive impact of that to cash flow will really be experienced next year and the following year. So all else being equal, that dynamic probably stretches out the period of time that the cash we raised during the IPO will actually last. And as we think about sort of our need to raise additional capital, ultimately, it's going to be based on the growth opportunities in front of us, and the expected return on those investments. There's multiple levers that we can use to raise that capital over time, including sort of follow-on primary offerings, tapping more on the debt side. And then lastly, securitization, which while we turned off the auto and home securitization post-IPO, we could always turn it back on, on the senior side in the future, and that would bring sort of significant cash into the business if that's something that we chose to do. So from a cash perspective, we're feeling pretty good. And definitely, I think the cash that we raised as part of the IPO is going to last longer than we originally anticipated, all else being equal.

Yes, that makes sense. I'll take 1 more e-mail question here, and then I want to touch on LTV quickly. This is also very timely. Any thoughts you can share on how AEP, which is annual enrollment period for senior population has been trending with only 1 week to go? Any comments on the enrollment or the quality of enrollment?

Yes. Probably not a lot that we can say that we didn't share at our earnings release, one of the things of getting used to being public company. I would tell you, the things that we continue to see are, right, we've already shared the strength in the agent force in terms of agent productivity. Fourth quarter of fiscal '20 versus the prior year, we were up 20%. We announced in our earnings release, we were up 8% in first quarter while doubling our core agents. And I think we had also indicated that our flex agents that we just brought in, those 2,000 people we hired, over half of which were agents, are significantly more productive than the prior year. I think I'd be comfortable sharing that, and we'll wait for the dust to settle in AEP in the full quarter to share those results. But that continues to be a real strength. I would say that we continue to see great velocity on the marketing front. There's ample opportunity out there, and that we're able to manage within kind of the margins and financial targets that we've outlined as well as, I would say, that the carriers for anybody that covers managed care has talked about growth in MA, and we're certainly going to be a beneficiary of that. And I would say the carriers continue to work with us at a very strategic level to drive growth given the predictability of the model, and we would foresee that continuing. And quite frankly, right, that was part of the guide up last quarter, right? We had strength in the quarter. We also see additional promise in final expense. And we've got some tailwinds, I think -- that we think that will carry us through the year and beyond. Raff, anything you'd like to add?

No, I think you hit on everything that we can talk about at this point in time.

Raff's my guardian.

That's fair. And just one last thing I want to touch upon is your LTV. Clearly, 20%, 25%, 30% higher than some of your peers. What would you attribute that to? How do you think about LTV trends long term, especially in the senior segment? And on the same line, I mean, clearly, as guys who follow the story more closely know the group has been impacted by all this noise around churn rate and all that stuff. Maybe share your experience year-to-date about persistency rate on your new population renewal. I know a lot of stuff there, but I know it all comes together. But if you can just share your quick thoughts on those things.

Yes. Real quick on the business model side. I'll try to be brief. I mean, again, it gets back to the experience that this is a complicated decision that needs a highly skilled agent, aided by technology. From an agent perspective, I think we've covered it in the investments that we've made there more recently on the technology front. It's really improving the desktop to really focus on that best plan fit matching. It's the incremental investments we've made in prescription drug matching, physician, specialist matching, eligibility for the SEP period, costing tools around prescription drugs. I mean everyone sells a lot of 0 premium MA plans, but there's hidden costs if one doesn't understand prescription drugs, and that's the #1 reason for why people churn out. So we've made a lot of investments to that on the front end. We have also talked about the investments we've made on the back end around our CCA investment, where we've doubled that from 150 to 300 people, making 150,000 touch points a month. And that activity ensures that the consumer is on the right plan. We're leveraging data feeds from our carriers and our own intelligence to be smart about how we approach that. And that's what's driving that 25% industry-leading recapture rate. So there -- that's the quick and dirty on the operational side. It tends to coincide with some positive things we're seeing on entry year laps, and I'll let Raff take it from there.

Yes. So really quickly, I'll talk about recent persistency trends, entry year lapse and then end on the long-term trends that we see. So as we stated multiple times, LTV has been relatively flat. The last persistency event that we experienced, which was January of last year, our first and second term persistency was down a little bit, really driven by OEP and the special election periods. Having said that, that was offset by sort of higher rate and higher mix shift. Nothing has really changed there. We do use a 36-month rolling weighted average calculation for persistency. And so our expectation and embedded in our guidance this year was that persistency would sort of be flat to last year, but it would represent a larger percent of the weighting. So technically would actually be down as part of that weighting, and that, that would be offset by price, higher commission rates and mix shifts. So relatively speaking, LTV should be somewhat flat. We get one annual view of true persistency on MA products. It's really the January renewal event. But we do have visibility throughout the year in terms of lapse rates, and so that does follow a pretty predictable pattern. Lapse rates tend to be a little bit higher in January through March, and then sort of trail off from there as people have less opportunity to switch. What we've seen is that our first year lapse rates throughout the course of the year, year-to-date, are better than they were last year. Second term lapse rates are a little bit higher, and that's consistent with sort of the lower persistency that we're seeing. But third year and beyond lapse rates are either flat or better than prior year. And while you can't necessarily say, okay, we're going to end up with higher persistency because some of that could be timing, it is a pretty good leading indicator in terms of what could happen at the persistency event in January. Now having said all of that, ultimately, there can be always a little bit of short-term volatility in LTVs, just based on things that are happening in the industry, et cetera. Long term, there are way more tailwinds to the drivers that impact LTV than headwinds. And so looking out multiple years, we definitely expect LTVs to increase over time. We have not necessarily modeled that into our forecast, but we do expect that to happen.

Great. And we're out of time here. I'm sorry, I couldn't get to all the e-mail questions here. But any closing comments, Tim and Raff, you want to make before we wrap up?

I would just say, well, first again, we appreciate the opportunity. We are feeling kind of the wind behind our sales with respect to the broader market opportunity, some of the key drivers that we talked about, some of the -- I think the slide that Raff went through on Slide 23 really exhibits the efficiency of the operation as we are scaling into the opportunity. Again, we've been very disciplined about our approach to building the underlying model, which we -- I guess, gives us more confidence in the ability to capitalize on the market opportunity in a very responsible, disciplined way we can grow, but we can also drive great margins. We're encouraged by final expense and the growth and the cash-generative nature of that. Early innings of our play around value-based care, but we're in a very unique position with consumers and with carrier partners to take advantage of that, some more to come. And again, thanks so much for the opportunity.

Thanks to you guys for participating at our conference. I really appreciate it. Thanks, everyone.

Take care.

Take care. Bye.

Bye-bye.