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

All right. Sorry for the -- little bit of a late start here. Some technical difficulties on our end, but we got it all figured out. Good afternoon, everyone, and thanks for joining us today for the SelectQuote fireside chat here at the Citi Healthcare Services Conference. My name is Daniel Grosslight, and I'm the health care technology analyst here at Citi. And I'm very pleased to welcome here the SelectQuote management team. From the company, we have CEO Tim Danker and CFO Raff Sadun. Now we'll get into this a little bit later. But from my perspective, SelectQuote is sitting at the intersection of some very interesting and strong secular tailwinds; namely the growth in Medicare Advantage and the shift to more DTC distribution within insurance. And in my mind, SelectQuote presents a very compelling way to play some of these themes. But there's certainly been a lot of controversy around this space, and I'm sure we'll get into this a little bit later. We should have a good discussion around the competitors and how SelectQuote differentiates. We want this fireside chat to be more conversational than just me on the screen talking at you. So please feel free to e-mail me at daniel.grosslight@citi.com any questions, and I'll ask on your behalf. [Operator Instructions] So Tim, before we dig into the Q&A, SelectQuote is still relatively new to the public markets, having gone public just last May. A few quarters under your belt now as a public company. And as I mentioned, there's some controversy around the space. So I think it would be helpful for those listening in who's not -- who are not too familiar with the SelectQuote story to do a little bit of table setting. Just give us a little bit of background on the SelectQuote story and how you differentiate from the other DTC insurance comparison platforms out there.

Sure. I'd be happy to do so, Daniel. Raff and I really appreciate the opportunity to be here, and thanks to Citi for hosting the event. So just briefly on the history, we're a leading, tech-enabled direct-to-consumer distribution platform. We've actually been around for 35 years, dating back to pioneering the first direct-to-consumer sale of term life, 1985. And while we're a diversified multiline platform, we have intentionally kind of doubled and tripled down in the Medicare market, given the long tail of opportunity. I think most who are on this call know there's been significant growth in the number of eligible Medicare beneficiaries, over 60 million today, growing to projected 75 million over the next 7 or so years; significant growth in the popularity of Medicare Advantage; both CMS and MCOs citing 10% or better growth for the past several years. And obviously, we've had some success growing at significant multiples of those growth rates as there's a secular shift to direct-to-consumer models like ours. I think we would attribute part of the success and your question around differentiation on 2 points. One, we're big believers in -- that this model still needs highly skilled agents and purpose-built technology. And it's those things working in tandem that we think delivers not only the best customer experience but also helps maximize our LTV. So maybe to double-click on those for a minute. On the agent front, we have made significant investments in our professional inside sales force. We think it's mission-critical given the complexities of the products that we're distributing and, quite frankly, the recurring revenue that's at stake if you can do it right. So our approach has been to build a 100% internal agent force. We've built it from the ground up. We're not using external sales centers like some of our competitors. We're recruiting. We're training. We're providing continuous education, really with the end goal in mind to build a career opportunity. That's really what we're trying to do. We've got a merit-based leveling system that allows for leading incomes. We retain over 90% of our top agents. And this combined with technology is really what's driving a lot of the policy growth and agent productivity you may have heard about in our most recent earnings call. On the technology point, briefly, it is indeed purpose-built. The vast majority of it is proprietary, custom built, and we utilize it from everything to how we recruit and train our agents across the country via SelectQuote University; to the marketing tech that really we're utilizing to acquire, to score, to distribute our agents to try to squeeze out every available dollar of our marketing ROI; to the tools that sit on the agent desktop that are critical for matching doctors and drugs to find the best plan across our robust carrier platform. And that's obviously important to driving LTVs that again lead the industry. And then finally, we use it on the back end, too, our customer care organization for ongoing dialogue and planned fit with the consumer -- and we'd point to our 25% improvement in recapture rate -- as well as providing an opportunity for cross-sell of other products or services, so we would argue a very durable model. Just to brag on our operating team for a minute, not on Raff and I, but our 2Q results for AEP, we grew 127% Senior revenues. We added $67 million of adjusted EBITDA year-over-year. This was our fourth quarter of 100% Senior revenue growth, which is pretty phenomenal. Agent productivity over 32% while having a forklift increase of 70% improvement -- increase in the agent force, that doesn't typically happen to see those types of productivity gains when you're adding that many agents. Senior margins at 43%, rev/CAC north of 3x. We're certainly proud of our LTV. So moving forward, we'd say we are seeing stability in our unit economics and LTVs in a period of rapid growth. And we also -- in addition to the core business, we are not a complacent bunch. We're going to continue to leverage this model: final expense, value-based care initiatives. And we think that this is a great way to leverage this highly effective -- but it is an evolving and flexible customer acquisition machine, if you will.

Yes, yes. And some great points in there that we can jump off on. I guess, first, the accounting here, it tends to be a little bit difficult because there are so many assumptions that go into revenue recognition and how that flows down to your financials. But I guess it starts with the LTV, right? And clearly, there's a difference in the LTVs that you book in Medicare in the Senior segment versus your competitors. And I guess that speaks towards that model that you have, that highly trained agent force model, lowering churn, increasing persistency, which flows through your LTV. And then, I guess, combined with that, as you mentioned, about 130% growth in approved members this past AEP while your competitors saw significantly less. So I guess the question is, was there anything you did different this year versus prior years, given COVID, given the election, given all of the operating difficulties some of your competitors have had? And do you expect to see kind of that widening divergence between your results and the rest of the market?

Yes. It's a great question, Daniel. I mean I think our ability to achieve this kind of growth really starts with the quality of our build. We've been at this business for a decade. We've been very intentional around how we built our capabilities, not just on front-end customer acquisition but also with respect to the customer experience and retention, the quality of business we're writing for our carrier partners and, ultimately, LTV. So that end-to-end thinking about the entirety of the business model has been with us from the start. I get accused of all of kinds of punny euphemisms, but I like to say we like to nail it before we scale it, and that's exactly what we've done. To be specific for this AEP and the significant [Technical Difficulty] [ noticeable fund and percent ] policy growth, it's a function of the integrated system we've built. It's not one thing, right? It's marketing. It's our workflow. It's our skilled agents. It's our technology. It's our customer care. They're all key. To put it simply, each piece of that business model impacts the whole. I think it's best captured if you look at our 32% increase in agent productivity, despite the sizable increase of our agent force. There's not any -- there's not that many businesses that can do that, but it's because of the way that we built the model that we were able to achieve it. I think as to the how we did it, again, we made investments in the underlying operation. Things like our national hiring, we're now recruiting and have got associates in over 41 states. We virtualized our training via SelectQuote University. I think we released over 80 technology enhancements last year to drive both efficiency in the model as well as ensuring that we have proper plan matching and effectiveness, if you will -- improvements to our coaching model. So all those investments into the engine allowed us to really improve upon lead conversion and policy production. And I'd also say, because of that, it allowed us to lean into the massive market potential that's out there. We did make incremental investments on the marketing front, including some marketing sources like TV that some of our competitors have said they can't make work. To your question on the election, we did -- as well as others in the industry, we felt a little pressure on TV from the election, right? There was a lot of political advertising dollars being spent on TV that did create what I'd call short-term issues on clearing TV ads from breaking news and things of that nature, that put a little bit of pricing pressure. But with that said, we're very pleased with our ability to navigate through that particular stretch of AEP. And I think that it was a function of our engine and our LTVs that allowed us to participate in these channels economically and eyes wide open, and you wouldn't -- we wouldn't have been able to do it if we didn't have the overall business model to support it. I think our decades of experience in off-line media, going back to the '90s, right, helped us navigate, make good decisions. So I think all in all, we executed the plan that we said that we were going to do. We certainly felt in the years prior we had excellent margins, north of 40%, but we left a lot of EBITDA dollars on the table. So part of our express strategy this year has been to grow absolute EBITDA dollars while maintaining solid fundamentals, and we think we hit the mark this past AEP with our 98% growth in EBITDA, and we still kept very attractive margins at 43%. So we're proud of that. I don't think a lot of companies get to say that.

Yes, yes. It was certainly an impressive result this past AEP. I guess looking forward to next year's AEP, I guess, at the end of the day, it all comes down to agents. You might have the best technology out there, the biggest integration, but if you don't have the right agents putting seniors into the right policies, it's kind of all for naught. So as you look to ramp up your agent force again for next year's AEP, how many agents do you think you need for next year, or I should say the end of this year, calendar year? And what kind of productivity increases are you expecting out of your existing agents?

Yes. So maybe I'll take the first part of that and hand it over to Tim in terms of how we recruit the agents. But generally speaking, we don't project increasing levels of agent productivity. Historically, we've actually experienced improving agent productivity. But in terms of forecasting, we always hold that relatively flat. That means that the vast majority of the increase in revenue is going to be driven by incremental agents. And if we do experience agent productivity gains, that would tend to be sort of upside from our sort of expectations. We're not providing specific guidance for fiscal '22 yet. However, we refer back to our medium-term guidance that we gave -- we've been giving for the last couple of quarters. We expect to be able to grow the Senior business at a CAGR of over 40% -- revenue CAGR of over 40% for the next several years with margins in the mid-30s, and consolidated revenue at a CAGR of over 35% with margins in the mid-20s. And so that's with 2020 as a starting point. So obviously, we've been outpacing that growth rate recently. We don't expect that we can continue to grow at 100% going forward. But as you think about the total increase in agent headcount, that we'll be roughly in line with that revenue growth. Tim, anything you want to add in terms of agent recruiting?

Yes. I would just say it is definitely -- it's one of the 2 things that, as a management team, we're always waking up worrying about, if you will. It's high-quality people, and it's leads. It's marketing. And to this specific question, we feel great about our ability to recruit the agents we need to deliver the plan. With the onset of COVID, we went to 100% remote hiring, training. We worked in a fully remote environment. As I mentioned, we're hiring across the country now. We've always hired from a diverse background. We're not just looking for licensed agents. So that gives us a lot of flexibility. And despite being fully remote this year, hats off to the team, we exceeded our hiring goals. We were able to train through this virtual platform. We actually retain more of our new hires at every stage gate, those that got licensed, those that started the first day, those that started AEP, those that ended AEP and then, obviously, the productivity gains that we saw. So we see a lot of opportunity here. We're not really concerned about any headwinds there given our approach. And again, we also concentrate on, again, building career opportunity, how we make folks successful. We're very focused on culture. We've been awarded for multiple years, both regional and now nationally, top workplaces awards. So we don't forget about the importance of people in our model.

Yes, yes. And one of your competitors has said they're moving more towards a 100% internal agent force. So I get that you've had a lot of success historically in recruitment and retention. Do you think that changes at all as the market for agents becomes more competitive, both on kind of a retention and a wage of new -- the wages of new agents you have to pay out?

No, we don't believe so. I mean we've not run into any issues whatsoever in recruiting. And if you've got a strong culture and you have a real career opportunity and you have [ probably ] a good operation and you can embrace that with employees, they love it, and they only want to come work for you. They -- we're a very sticky business, and we really -- there's just so much opportunity that's out there. And we've made intentional build. Like, we maybe weren't as far along a few years ago with respect to our recruiting and talent acquisition. And we've really doubled down on it, and we treat it more as we do professional inside sales and a sales center mentality. And we've got great people on our talent acquisition team. And we feel when you just step back and look at the opportunity at SelectQuote, it's very strong, and our retention and numbers support it.

And I might just add that we're recruiting people from all walks of life. We're not necessarily recruiting people who are already licensed agents. And so just naturally, that increases the overall pool of people that we can pull from, especially as we're pulling nationally now as well.

Yes. Makes sense. Okay. Now turning to LTVs. As I mentioned, you're consistently above your competitors in terms of LTV, which I think is a testament to your platform, to your tech, to your agents, et cetera. But you've noted going forward, you're not projecting much uplift in LTVs. I would have thought just given how commission rates out of -- for Medicare Advantage have trended recently, plus 5%, plus 6%, that you would get a natural uplift just from the increase in CMS-dictated commissions. But apparently that's not what you're projecting. Is there some -- are there some puts and takes around the MA LTV projections that are embedded in there, maybe some more churn from more recent cohorts? Can you walk us through the puts and takes around that LTV projection?

Yes. Great -- that's a great question. I mean let's take a step back and talk about the key drivers of LTV, right? So it's persistency. It's commission rates. It's the mix of switcher versus new. It's a mix of carriers, fall-off rates, intrayear lapse rates, constraint. I mean there's lots of drivers that go into it. One of the biggest ones is persistency. And the persistency rates that we use are based on a 36-month weighted average by carrier based on historical experience. So as we've been growing rapidly, there's more of a weight put on more recent experience. I think we said this last quarter. The persistency assumption has a 90% weighting towards our most recent experience, which was the lower persistency that we saw last year, so the January 2020 event. So while LTVs were flat in the quarter, it was a combination of lower persistency offset by rate and some of the other drivers around carrier mix. As we think about assumptions going forward, we don't necessarily model improving persistency. We sort of hold it flat to what we currently have. And our guidance assumes, certainly for the rest of fiscal '21, that the higher weighting of lower persistency cohorts going forward were basically replacing some of the higher persistency from several years ago. And with the rate increases that we have seen, like that is going to offset a lot of that lower persistency certainly for fiscal '21. With respect to fiscal '22 and the guidance around there, we haven't provided LTV expectations yet with respect to that. We'll do that when we do fiscal '22 guidance, but a lot of that will be driven kind of by what we're seeing right now as part of the January '21 renewal event. And while those figures will continue to bake through the end of March, we are seeing slightly higher first term persistency. And that's up a little bit even in the last couple of weeks. I think on our earnings call, we said it was kind of flat to last year. So it looks like it's up a little bit to last year. Lower second term persistency, which was expected and in line with kind of what we were seeing. And then third term persistency and out is actually flat to above last year. And so if those trends hold, that will start feeding into the calculation. It probably won't start getting into the calculation until the fourth quarter, just because we're selling policies now for the third quarter that are really based on the persistency that we had last quarter as well. But they'll start bleeding in, in the fourth quarter and beyond. And then obviously, because these are 3-year weighted average, it'll take a little bit of time to seed itself in. But from an expectation standpoint, generally speaking, we hold persistency flat to our most recent experience. One of the things that I think is important to remember is that our actual customer persistency, so customer retention, is higher than our 606 persistency, given that we're recapturing a growing number of our customers that are switching carriers. We can do that because the investments we've made in our customer care team that Tim mentioned, that kind of activity actually puts a little bit of pressure on 606 persistency because it's sort of a lost customer with the original carrier, but it's a new customer with that new carrier. So customer persistency is impacted. And on a net dollar perspective, it's actually probably a positive because we get the renewal rates that are in place at that point in time versus when it was originally sold. But it's one of the reasons why we say persistency is an important factor, but it's not the only factor as you think about LTVs, and you really can't just look at one individual metric. You have to sort of have a holistic view of the business. And by the way, as we think about long-term views on LTVs, there can always be a little bit of short-term movement, plus or minus here or there. But long term, there's more tailwinds to the drivers of LTVs than there are headwinds, in our opinion.

Yes. That's good to know. And I don't want to spend too much more time on this because you can certainly get kind of wonky and end up kind of banging your head against the keyboard if you get too deep into this accounting. But I guess just going back to that point where, because of your recapture rate, you have -- your persistency for 606 is lower than what the true persistency is, wouldn't that mean that as you collect cash, you're going to just recognize sale revenue because your LTVs are understated?

Yes. I mean I think -- well, the LTVs are a reflection of 606 persistency, right? I think what ultimately will happen is at the end of that 10-year renewal period, right, there's going to be incremental revenue that comes in because we don't book revenue beyond that 10-year expectation. And anything that comes in beyond that period will basically book -- be booked as revenue as it comes in. And based on the current curves, we still expect that -- at the end of that 10-year period to have roughly 10% of the original book that's still there renewing. And by the time you get that far out in the curve, they're probably renewing in sort of the mid-80s. So none of that is really reflected in our numbers yet.

Okay. Got you. All right. Tim, I want to go back to something you said earlier on the marketing and how you've been able to pivot pretty quickly. And maybe some of that is due to your experience in the '90s, et cetera. Very good performance out of your marketing channels this past AEP. Can you go into a little more detail on which channels you saw as most productive this past AEP, and looking forward, how you think that might shift? And maybe detail a little more some of the technology investments you've made in lead acquisition.

Okay. Yes. Sure. I'd say overall, there's not one marketing channel that is necessarily most productive. It can and does move over time. Hats off and credit to our COO, Bill Grant. He's a brilliant strategist and marketeer. And I think our strategy has really been to employ this omnichannel approach because we think it's important to be able to economically fish, if you will, in multiple ponds. You don't want to be pigeonholed in. And so we like to have a vast array of approaches from the traditional off-line media that you mentioned, TV and radio, including a lot of capabilities we have in digital. And we have a significant amount of lead flow there from search to SEO to third-party leads, to content-native. We are also growing our strategic partnerships. So that wide-funnel approach has allowed us to consume all kinds of market media. We can adjust on the fly if we experience pressure, that I mentioned an example in the election, in a particular lead source, we can pivot all while managing the all-important kind of revenue to CAC relationship. As to the -- and I think on a go-forward, right, we're going to continue with that type of strategy. And ultimately, having the business that we have, complementing it with agents and tech, et cetera, really allows us to participate in the widest funnel possible. As far as the go-forward investments in marketing tech, we're actually doing quite a bit here from how we're purchasing third-party leads via SelectBid. It's essentially a ping-post platform. It's using predictive analytics to make intelligent real-time buys. Again, on expected rev/CAC, we continue to make a lot of tech investments in data science. We've got a decade-plus of history. We're always trying to improve our algorithms, how to refine our marketing mix and how to really ultimately distribute those leads. We're going to continue to make investments in our proprietary CRM and workflow engine [Technical Difficulty] [ select in it ] at SelectQuote, which makes -- takes these rich leads and scores and efficiently distributes them to the agent force. So I think that's some of the investments. And I'd say those are really only as good as the supporting agent and customer service and the underlying value that we're providing on the platform. But we kind of point to our margins and the rev/CAC multiples we're achieving and LTVs in a period of pretty rapid growth, that we believe that the marketing mousetrap is working.