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

Good afternoon. I'm Frank Morgan, with the health care services and managed care coverage here at RBC. And we will continue our fireside chats this afternoon with SelectQuote. With us today, we have Tim Danker, CEO; Raff Sadun; and Bob Grant. Thank you, all, gentlemen, for being here today with us. And welcome to the RBC conference.

I guess I'd love to start out first talking about your results and really what you've been able to do very consistently really since being a new public company. And obviously a lot of capital market activity in your space, but I think you've really been able to put up very consistent growth in financial results when other -- at times other operators have struggled, so I guess, before we get into the nitty gritty, maybe just at a high level, give me some of the key attributes you think that drive your success and how you've been able to be much more consistent.

Yes. Thanks, Frank. And thanks for hosting us. We appreciate it. Frank, I think it really goes back to the quality of the build of our platform and an ROI mindset that we've been very intentional about for our 35 years-plus in business. Certainly, why us and some of our competitors distribute somewhat similar MA plans, I think the way that you approach the market in terms of marketing aspects, technology, use of data, how you utilize your agent force and the underlying operational processes can have very -- can drive very different results. And I think you can see the quality of our build and our foundation in the consistency of our results. I think, to your question, we've really focused on 3 core elements. One has certainly been our highly skilled agent force. We've always had a philosophy, dating back to 1985, that the products and services that we distribute are complex. And they're ones where a highly skilled professional agent can add a lot of value to clients and, if done right, can add a lot financially to our bottom line. So we've always had a 100% internal agent force. I know we've talked with you at length about that. We've invested a significant amount into running what we call a professional inside sales center. We're operating on a true choice platform. Our agents are aligned to the best interests of the consumer. And we really build our processes to make our agents more productive while also ensuring that they write high-quality business so that we can drive the types of LTVs that we do. I think, on the marketing front, that's another core aspect of the build. We'd like to call it a wide-funnel omnichannel approach. And that, combined with sophistication around data and technology, has allowed us really to squeeze out every available marketing ROI dollar we can on our growing acquisition spend. And I think the last component has really been technology. It's built to make our agents more productive, to make our clients stickier through better plan matching, doctor-and-drug matching. And I think it's also very adaptable and flexible, which allows us to make changes as we see them in the business. So I think, because of that very focused and intentional build, we've been able to scale without proverbial kind of cracks in the dam. And I think you can see that in our unit economics and our LTVs that lead the industry by a wide margin. You can see it in highly attractive EBITDA margins, both of which have stayed and held up very, very well in a period of rapid growth and driving faster growth than the industry at more profitable levels. And I think, at the end of the day, it just speaks to building it right from the ground up. And so now we're going to take this acquisition platform into an adjacent space via our announcement in Population Health. We think that this is really important aspect for consumers, for carriers, for service providers in a bigger market, so I think the foundation of our business is very strong. At its core, we're still in the same large addressable market for MA distribution. And the business is, quite frankly, hitting on all cylinders, but now Population Health can really expand our addressable market. And at the end of the day, we can produce more revenue streams, large EBITDA streams on the backs of kind of our existing marketing spend we have in play.

Got you. I definitely want to go there in just a little bit, but -- and maybe before we do that, back just specifically to the -- your third fiscal quarter that you just reported, the March quarter. In the call, you discussed a specific cohort, enrollment cohort, the 2019 cohort; and the need to take some adjustments for tail revenue at the end of your fiscal year, next quarter. So can you explain that cohort, the need to take that adjustment? Any other particular callouts about that specific cohort? And anything -- any differences on that one? And is it any -- is there a chance that this might likely repeat?

Yes. Maybe I'll take that, Frank. First of all, there's no new news here. It's not a surprise. We've talked about the '19 cohort having lower persistency for the last several quarters. And the prospect of a potential sort of cohort tail adjustment has been in our forecasts and effectively our guidance for the last couple quarters as well. It is isolated to the '19 cohort. I probably should have been a little bit clearer on the call. We sort of mentioned several cohorts were underperforming. That was relative to fiscal '19 because we define a cohort as a quarter, product and carrier combination. There are multiple cohort combinations for any given fiscal year. So several of the '19 MA cohorts are underperforming. Cohorts before '19 have actually been performing ahead of expectations. Cohorts after '19 have had lower persistency assumed in their LTV. And since then, we've also made some changes to our tech and sales process to do a better job matching drugs and doctors, which we know are some of the primary reasons why people switch plans. And when they do switch plans, most of the switching does tend to happen in the first couple years. Once you get to renewal 3 or 4, the annual persistency is higher. And it's more stable and the variability also just tends to go down. So we're not seeing the same dynamic with later cohorts than we are with the '19 cohort. There are a couple of things that make the '19 cohort unique. And because we're always using historical persistency assumptions for the LTV calculations -- before 2019, we'd never had an OEP season, so basically the '19 cohort had persistency assumptions from prior years that didn't include that type of switching activity. Obviously OEP has expanded people's ability to switch policies. And that's ultimately a huge net win because we can sell more policies, but it was never really in the experience for the '19 LTV. So the later cohorts now capture that type of activity with respect to OEP switching. Another dynamic is that the carriers made some pretty big changes to plan design in future years' plans that sort of made them more attractive relative to '19 cohort. And then lastly, just our CCA team, our customer care team, has also ramped up the proactive outreach to customers. And really our recapture rate has been increasing for the last couple years, so now it's currently 27%. 60% of those recaptured customers happen with a new carrier. So in that example, it's sort of a lost policy for the original carrier. And that negatively impacts 606 persistency and ultimately [indiscernible] cohort and tail adjustments, but on a customer basis there's really no impact. And it's really a new policy with that new carrier, which has a new tail to it, but actually it tends to be a net positive from a dollar perspective because we get the rates that are in place at that point in time versus -- which tend to be higher than when the original plan was sold. And I guess the last point I would make is that, even with this potential adjustment in the fourth quarter for the '19 cohort, that cohort is on track to deliver an IRR in excess of 30% and sort of margins that would be above 40%. And so we've had this slide in our investor deck that shows the cohort view of cash flow over time. And we'll update that in the fourth quarter, but basically the '19 cohort has already broken even, so it's already repaid the entire cost of writing those policies. And all additional cash that comes from here on out will be pure profit.

Got you. And I guess, absent the tail adjustment detail, can you talk more about the third quarter and what you really saw there in the trends and how that really informs your views about the next AEP and OEP that's -- will be coming up later this year?

Sure. I'll take that one, Frank. Again we'd underscore the third quarter was a really strong quarter overall: 5 consecutive quarters of 100% growth in our -- in terms of Senior revenue, 35% EBITDA margins, 17% higher agent productivity while we grew our agent force by 75% year-over-year, stable and industry-leading LTVs of over $1,325, rev-CAC north of 3x and significant growth in our cash-efficient final expense business. So those are kind of the results, as to your question, and trends that we've seen, I'd say, both in OEP and the prior AEP period. We think our core strategy and execution is playing out, so I think, as far as next year, we'll continue to expand marketing capabilities and sources. We can see the strength of what we're driving in terms of rev-to-CACs and margins. We think the wide funnel approach is the best way to address the -- to really capture this large addressable market. It needs to be combined with the workflow and technology and data. We're going to continue to invest there in a wide variety of assets, both digital as well as traditional off-line TV; and probably on the margin more strategic partnerships. We do think the acquisitions that we've made have been successfully integrated. They are certainly helping us continue to drive our growth and capabilities. A second item is really around technology. We've seen it pay dividends in both OEP and AEP. The desktop tools that we've referenced on prior calls are indeed helping both upfront in terms of better plan matching, doctor-and-drug matching and certainly agent productivity. And I think, when we do get to the discussion around Population Health, the flexible and adaptable architecture has allowed us to seize opportunities, if you will, when they come to our doorstep. And so we'll continue to make a lot of investments into our flexible tech. Hiring has been a question by a lot of folks. Since the onset of COVID, we've literally hired thousands of people. We've been working from home for 15 months, a vast, vast majority of those folks outside of our traditional geographic footprint. We have always recruited from diverse backgrounds, all walks of life, I like to say. And now we're recruiting on a national basis, with associates in 40 states. So we think that is something that's very important. It's certainly a key growth driver. We've continued to build capabilities into our direct-to-consumer recruiting. Bob and his team have done a fantastic job from a technology standpoint with SelectQuote university that allows us to absorb bigger and bigger classes while still providing the required kind of attention and skills training to be a great agent. And then finally, I would say our dialogue with our consumers, with our carrier partners and with an emerging group of MA VBC service providers and others just demonstrates to us that the opportunity in Population Health is real. It's tangible. And we think there's significant value we can provide to the broader ecosystem, to all those constituents that I named. We certainly believe there are new meaningful revenue and earnings streams. As I mentioned, we think we can leverage this in a very low-risk way by really leveraging the hundreds of millions of dollars we now have in play to help grow our MA distribution business. So we think it's very logical. We've always been about adding value to consumers and to carriers, and we think that the money will [ follow ] to SelectQuote shareholders as well.

Okay, we're going to go to Population Health full bore now, so a good segue there. So I guess, how long have you been thinking about this strategy? And maybe for some of the investors, kind of maybe describe kind of your view. There's a lot of talk about Population Health that gets used a lot, but kind of your view of Population Health and specifically the platform that you have acquired to really drive this strategy. And maybe just go into some more detail behind the actual why you're actually going after this market from this perspective.

Well, Bob Grant has been the leader and the architect. I think he should lead this discussion.

Yes. So good question, Frank. I think we've talked about for a while that we were starting down the path of working with our carriers on furthering our value chain, right? So making introductions to value-based care providers, providing more prescription drug education. And then over the last 6 months to 9 months, we've really formulated this business plan, realizing that there are gaps within how far we can take that conversation. And our consumers were demanding more out of us than, at the time, we were able to give, so we ended up launching this business that obviously is in the health care services space, really has 3 pillars to it. One, I would say, is really this data collection on behalf of the carriers, right? A big portion of what they're asked to do is collecting data on consumers so that they can build their plans and their kind of care plans around the specific needs of that client. We're obviously the perfect person to do it since we have such active dialogue with our consumers. And I think a lot of folks thought we were just a consumer acquisition funnel. Really where we were differentiated is not just our consumer acquisition. There's lots of folks in that space. We've differentiated ourselves in the consumer engagement funnel, in the fact that we speak to over 85% of our clients on the back end of a policy. And they really asked us for more and more engagement, which we are able to give them through Population Health. So that data collection is kind of a key to the onboarding portion of Population Health. Then from there, we've really got the care side of the house, where we've asked the carriers -- and our definition of Population Health would be perfect for this portion. Who is bending that cost curve in health care? And who would you like your clients to work with, especially if they're kind of in that chronic -- they have a -- certain chronic diseases. So we've worked with them, got introductions and have started onboarding quality care providers in that space and making introductions to those care providers on interested parties within our book of Population Health. Again kind of realize that those businesses maybe weren't complex call center logistics businesses, but they were more -- they're great at the actual care they provide when you go into the facility, but we can help them kind of shore up the onboarding experience and further their offering out of the center. So we're working with a lot of those folks to understand how we can help them schedule appointments, how we can help facilitate data collection after those appointments; and really help them with the piece of their business that's not necessarily their core competency, so non-in-center solutions. And then the third piece was really on the pharmacy side obviously. And we went down and we purchased Express Med's because we looked for a partner that can help us solve something that we saw was a need, which is low adherence amongst kind of treatable chronic conditions with 8 or more drugs, right? What we found is our clients are having to go to multiple pharmacies to solve this. A lot of them don't have rides, don't have a -- ways to get there. And since they're treatable chronics, they don't always -- as a lot of the doctors that we work with now talk about it, they don't always feel bad, so they won't proactively go pick up their drugs on time sometimes and things like that. So we searched the marketplace for a solution that we thought would be a good fit to solve that problem and really just didn't find anything that we liked as much as Express Med's, which was a smaller business that had really high adherence rates and a really good education bend towards the risks of polypharmacy and some of the issues that arise with that. So we realized also that our technology was the perfect addition to their solution on onboarding and sign-ups and everything that we can do. So we basically are taking our $150 million-plus piece of technology; bolting it onto their business to make the sign-up and onboarding experience significantly better; and then using what they were good at, which is delivery and education of why you need to take your drugs consistently and why you need to take them as prescribed; and delivering those complex situations to your door. It's differentiated too because we can obviously target the addressable market that actually needs to be addressed versus -- a lot of the solutions that have been created rely on traditional marketing that may not recruit the necessary patients to that, right? They may just recruit folks that are just doing it for ease of use and they don't really need as robust as services they've created. So they may have 2 to 3 drugs and no chronic conditions. That's not really who we're trying to solve here, so we're really excited about what we're building and how we can scale it.

Got you, yes. This strikes me as a business or a service line that's probably worked better incrementally what you're already doing or leveraging what you already have, as opposed to somebody going out trying to build this from scratch, so maybe talk a little bit about what you think are the near-term operational and financial implications and opportunities here, both financial and also strategic long term how this may in fact help your base legacy MA business. So as a business unit -- yes, okay.

I'll talk about -- I'm sorry. I was just saying I'll talk about the strategic real quick and then turn it over to Raff for the financial portion of that. So strategically you're exactly right, Frank. While this is a good stand-alone economic business, it really relies on our core competency, which is the distribution side and the leads that we create through that. So we are leveraging a consumer need to launch this business in the operational side of that. Really our legacy technology that we built that's fairly new, and it's code-based and everything, was extremely flexible and applicable to the consumer engagement and patient engagement side of what we saw within health care. So we're leveraging that side and relatively quickly. We alluded to the fact that we built the solution for Population Health in general in about 90 days. And we feel that we can do the same thing within patient engagement and SelectRx, that we can leverage what we built and build it relatively quickly and a very unique solution. So operationally we think we can solve a really complicated problem through a lot of the tools that we've already built. Raff, do you want to talk about the financial implication?

Yes. I think financially, in our presentation, we gave some examples, certainly on the SelectRx side, about what that could look like at scale, which I think you shared a couple examples, one of 50,000 members and 6 prescription drugs and another 100,000. And obviously, I mean, the lifetime values associated with that are very attractive. It's a little bit different in that side just because there's an ongoing service obligation. So we'll book revenue and EBITDA on a cash basis versus lifetime, but even on -- just on P&L revenue and EBITDA, we're talking at those types of levels $200 million of revenue, up to $500 million of revenue; and then on the EBITDA side, $22 million to $90 million. So very attractive and also very cash efficient. With respect to sort of short, medium term, there's incremental costs this fourth quarter associated with these investments, right? That's in the, I mean, mid- to high single digits. There's not really that much incremental revenue in the fourth quarter. Next year, from a revenue perspective, like you will see, you will feel the impact of these activities. And from an EBITDA perspective, the incremental costs and investments that we're making will basically be offset by the revenue generated next year, so there's not going to be really a drag. We don't expect there to be a drag on earnings relative to these investments. Certainly from a lifetime revenue and EBITDA, like there'll be significant value added next year. And then looking forward to fiscal '23, you'll see in the P&L revenue, EBITDA and then obviously lifetime will be attractive as well. In terms of how fast we can get to some of those scale numbers that we showed in our presentation, that's [ now ] 5 to 6 years out. And over the next couple months and quarters, I think we'll provide some more perspective on, yes, how we're ramping, but I think the key points are, relative to the opportunity, this is a relatively low-cost investment to make. One, we're leveraging spend that we're already spending in the business to generate policies, right? So basically leveraging the 500,000-plus policies we're selling on an annual basis, plus the people who don't buy a policy from us, right? There's hundreds of thousands of people that don't buy a policy that could still benefit from the solution. And it really just leverages that existing infrastructure to drive incremental revenue, reinforces the core business. And these policies and services that we're adding are very cash efficient. So from that perspective, it just enhances that cash efficiency.

Got you, fascinating strategy. And it does appear, if you're at breakeven next year, it looks like the risk-reward there looks fairly favorable. In light of that, does this in any way really affect your cash and your capital position over the next couple of years? I mean I can see how having a more upfront cash business, a non-606 business could enhance that, but is there anything else that we should think about in terms of how it enhances your cash flow and maybe how it affects your long-term capital plan?

Yes. I mean I think a couple of things to keep in mind there, right? So the first is we have been growing revenue and EBITDA at a faster pace while using less cash normally in our model, right, that actually we'll consume more cash, but we've been able to operate more efficiently, in part also because of the agent productivity that we've got. That's the first thing. The second thing is a bigger piece of our revenue is coming from first-year cash items. In the quarter, 48% of our Senior revenue came from first-year cash items. That was up from 33% a year ago. On a consolidated basis, that's 54% of revenue, so over 50% of our revenue is from year 1 cash items. The third thing is we're significantly growing the LHA final expense business, which is very cash efficient. And as that continues to grow -- we grew 176% in the quarter, significant growth sequentially as well. And then lastly, these additional services which are very cash efficient only enhance that. So relative to where the company sits and relative to the incremental capital that we raised as part of the refinancing in February, we feel like we've got plenty of capital to grow the business based on these initiatives that we've announced here.

Got you. Hey, I would love to keep going. Unfortunately, we're at the end of our time, so thank you all for being here today. Tim and Raff and Bob, thank you so much for participating. And good luck with the rest of your day. Thank you.

We really appreciate it. Really appreciate it, Frank. Thanks for the opportunity.

Okay. Take care.

Thank you.

Bye-bye.