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SelectQuote, Inc. (NYSE:SLQT) Q1 2024 Earnings Call Transcript

SelectQuote, Inc. (NYSE:SLQT) Q1 2024 Earnings Call Transcript November 2, 2023

SelectQuote, Inc. beats earnings expectations. Reported EPS is $-0.19, expectations were $-0.27.

Operator: Hello, and welcome to SelectQuote's Fiscal First Quarter 2024 Earnings Call. My name is Terry, and I'll be coordinating your call today. [Operator Instructions] It is now my pleasure to introduce Matt Gunter, SelectQuote's Investor Relations. Mr. Gunter, you may begin your conference call.

Matt Gunter: Thank you and good morning, everyone, and welcome to SelectQuote's fiscal first quarter earnings call. Before we begin our call, I would like to mention that on our website, we have provided a slide presentation to help guide our discussion. After today's call, a replay will also be available on our website. Joining me from the company, I have our Chief Executive Officer, Tim Danker; and Chief Financial Officer, Ryan Clement. Following Tim and Ryan's comments today, we will have a question-and-answer session. As referenced on Slide 2, during this call, we will be discussing some non-GAAP financial measures. The most directly comparable GAAP financial measures and a reconciliation of the differences between the GAAP and non-GAAP financial measures are available in our earnings release and investor presentation on our website.

A modern insurance policy with a pen resting on top, symbolic of a client signing it.

And finally, a reminder that certain statements made today may be forward-looking statements. These statements are made based upon management's current expectations and beliefs concerning future events impacting the company and therefore involve a number of uncertainties and risks, including but not limited to, those described in our earnings release, annual report on Form 10-K, quarterly report on Form 10-Q for the period ended September 30, 2023, and other filings with the SEC. Therefore, the actual results of operations or financial condition of the company could differ materially from those expressed or implied in our forward-looking statements. And with that, I'd like to turn the call over to our Chief Executive Officer, Tim Danker. Tim?

Tim Danker: Good afternoon, everyone, and thanks for joining us. We're proud to share that SelectQuote produced stable and strong profitability in the first quarter of fiscal 2024. We've now achieved seven consecutive quarters of materially improved operating results in each of our business segments. At the risk of repeating ourselves, we have made significant strides across both our senior distribution and healthcare services segments, and are confident in the platform's ability to produce a consistent fundamentals, and most importantly, expand consolidated profitability. Our core senior business continues to perform well driven by our strategy to overweight tenured agents and arm them with high quality leads. As a result, the first quarter again exhibited strong agent close rates in policy approval rates, efficient marketing cost per approved policy, and stable retention metrics, all of which give us substantial confidence as we enter the 2024 AEP and OAP seasons for Medicare Advantage.

Similar to last year, we've hired and trained agents earlier and are very well prepared for the season. In fact, early results for AEP have been good and in line with our expected execution. Our healthcare services business driven by continued strength in SelectRx generated strong growth and was again profitable in the quarter despite 1Q being a higher expense period to prepare for the lead flow SelectRx expected to receive during the busy AEP and OEP selling seasons. Put another way, the scale of SelectRx is ramping, which is great to see as SelectQuote becomes an increasingly year round business. For SelectRx specifically, we have now surpassed 52,000 members and continue to see significant runway for both growth and increased profitability.

As a point of reference, healthcare services revenues exceeded our senior revenues for the first time in company history this quarter, which speaks to the increasing diversity and power of our integrated model Lastly, our Life, and Auto & Home businesses were solid and continue to provide a strong base of cash flow for the overall organization. Overall, we're proud of the successful results delivered in the first quarter, which is the slowest seasonal quarter of the year. The company delivered consolidated revenue of $233 million resulting in adjusted EBITDA of negative $11 million as the company geared up for the 2024 AEP season, which exceeded our internal expectations and represents a year-over-year improvement of more than $16 million compared to 1Q fiscal '23 driven in large part by the positive and growing contribution from healthcare services.

As a result, we're very well situated to execute our fiscal 2024 and reiterate the guided financial ranges provided last quarter. If we turn to Slide 4, let me provide color on our approach to AEP and what we've observed so far this season. As we've communicated previously, we believe our strategic redesign has repositioned the company to deliver consistent and strong returns in a range of Medicare Advantage selling seasons. Represented here are the pillars of our strategy, which should all look familiar because this is the same playbook, we have run the last seven quarters. Let me begin with the pillars that are within SelectQuote's control; our agents, marketing and technology. First, our agent lead model continues to be SelectQuote's biggest competitive advantage and again, we're prepared for the upcoming season by hiring, training and onboarding those agents earlier than in years past.

The strategy to employ a higher mix of tenured agents has been a winning formula as those agents have historically been about two times more efficient than newly hired agents. Better yet, because the SelectQuote model empowers our agents and provides a compelling career opportunity, our tenured agent retention remains very strong and strengthened over the course of the past year. We believe this is a key strategic advantage for SelectQuote. And we've entered the AEP season with what we believe is the best and most prepared salesforce, which is critical as we know each season can be different. Second, our marketing strategy will again focus on quality leads for policyholders exhibit factors that predict higher persistency and less shopping behavior.

And third, we have further developed our technology and agent desktop tools, which enable our agents to serve policyholders with the best solutions for their specific needs as efficiently as possible. As I mentioned, these three pillars are within our direct control and we believe we have designed the best model to ensure success at each point in the value creation chain. This brings us to the plans designed by our carrier partners, as expected plan features this year are largely similar to last season, especially amongst the largest carriers with continued investment in the most important plan benefits. We're also encouraged by the increased emphasis on health care services as part of the Medicare Advantage ecosystem. This is clearly aligned with SelectQuote's view of the world and where it's going.

Bottom line is we feel good about SelectQuote preparation and the early indicators point to our ability to close and win policies effectively this season. Lastly, beyond the policies themselves. SelectQuote has been recognized by carriers as a quality distribution partner and we've seen this exhibited in deeper coordination to ensure the best onboarding experience and retention behavior once policyholders have chosen their plan. I'll conclude my remarks on Slide 5 with another perspective on how unique the SelectRx platform is, both in terms of our ability to successfully onboard and rapidly scale the business. At left, we detailed two pharmacy platforms we acquired in 2021. Despite the excellent consumer value proposition, the businesses were subscale with only about 4,500 members.

The businesses also experienced high customer acquisition costs, and were hampered by disparate systems, which made customer service and logistical efficiency difficult to manage. On the right is what we had built in SelectRx, which is rapidly scaled in terms of both member growth and profitability. Aside from a lot of hard work by our team, the key success factor has been how we interact with in our customers. Similar to the senior distribution platforms, we are successful when our customers get the best care that is tailored to their specific needs. The only way to achieve that goal is with information and personal engagement. We've utilized that engagement to drive growth for select SelectRx. Member growth today has almost entirely come from the population of seniors we've assisted with Medicare Advantage plans, effectively requiring zero additional marketing spend.

At attractive unit economics, we believe SelectQuote is also well positioned to reach consumers outside of our Medicare Advantage business. Additionally, our platform and information advantages mean we have the scale and capabilities to serve all 50 states. Our single pharmacy system is more efficient and is seamlessly integrated with our automated fulfilment and shipping functions. The scale and efficiency translate directly to our unit economics evidenced by our revenue per member per month being more than 35% higher than what the prior business achieved. Lastly, we're becoming more efficient as we grow both as we scale our fixed costs, but also as we continue to use our buying power to negotiate improved drug pricing. In sum, SelectRx is the prime example of why SelectQuote is not just a Medicare Advantage distribution company, but is an information hub that enables differentiated customer acquisition and engagement.

Both we and our partners see SelectQuote as competitively unique and positioned at an advantage intersection of the rapidly shifting healthcare ecosystem. SelectQuote has always approached our value proposition holistically to each of the key stakeholders in healthcare and insurance. Medicare Advantage is simply one product facilitated by our model. Tailored prescription drug delivery, driving higher patient medication adherence and convenience is another. We noted last quarter, there are additional market opportunities for us to leverage SelectQuote's platform to deliver value to participants in the healthcare ecosystem. We plan to share more as we develop these strategies in the coming quarters and years. I'd like to emphasize that we believe our company is being viewed through the wrong investment lens.

To be clear, it is our responsibility to execute and produce financial results for our shareholders. What is less clear to us is how the value of SelectQuote seems widely dislocated, relative to the broader market opportunities we pursue and the unique approach we take to deliver financial results in that pursuit. With that, I'll end my remarks and turn the call over to Ryan. Ryan?

Ryan Clement: Thanks Tim. I'll begin on Slide 6 with our consolidated results for the first quarter. As Tim mentioned, the quarter was successful not just relative to our initial expectations but also as the company continues to diversify and smooth the seasonal swings from quarter-to-quarter. As many of you know, our fiscal first quarter has historically been a period with lower revenue and elevated investment as we ramped for the Medicare Advantage selling season. We are pleased by the increasing offset our healthcare services business contributes to the expense incurred in the quarter. As you can see in the chart here, revenue grew by 43% compared to a year ago, primarily driven by SelectRx. More importantly, our adjusted EBITDA improved by over $16 million year-over-year, as health care services continues to scale and is increasingly accretive to EBITDA.

In sum, the quarter was a success for SelectQuote across the Board and we feel good about our preparation for AEP and OEP and similarly feel confident in the fiscal 2024 targets we communicated last quarter. If we turn to Slide 7, let's review our senior segment results. In what's the smallest of our quarters, we're very pleased with the efficiency with which SelectQuote has prepared for the AEP and OEP selling season. Similar to Tim's comment, we are executing the same strategy as last year with earlier onboarding and higher mix of tenured agents. Aside from the sales efficiency benefit we expect this season, we are increasingly pleased with how streamlined we have become in mitigating preparation expense and investment. To that point, our senior business grew revenue by 16% compared to a year ago which resulted in adjusted EBITDA just shy of breakeven during the quarter, but it's historically been a significant investment quarter.

Turning to Slide 8, let's review the makeup of the first quarter for our senior distribution business. As you can see at left, MA approved policies grew by 17% to 98,000. And as Tim mentioned, we continue to engage with carriers early in the selling season and our fiscal first quarter is another example of those efforts. One key detail I would like to draw your attention to is the year-over-year change in booked LTV for the quarter, which averaged $761. As we noted last quarter, the sequential decline in LTV is typical given commission's booked in our fiscal 1Q are prorated for the shorter initial year duration. On the other hand, the year-over-year decline in LTV is more of a function of policy mix by carrier and to be clear is not an indicator of persistency which continues to exhibit improvement.

It is important to emphasize that we continue to see the benefit of our strategy on policyholder persistency and reiterate our view that booked LTVs for fiscal 2024 will be higher than fiscal 2023. We hope this additional detail is helpful especially in a seasonally smaller quarter were mixed impacts like the one I just detailed can swing our KPIs. For context, our first quarter historically makes up about 15% of our booked policies for the full year. On that point, let's move to Slide 9 where we can underscore our confidence in the underlying unit economics of our senior distribution business, which were again very strong. SelectQuote drove increased efficiency across each of our core KPIs compared to a year ago. Operating expense for policy declined 22% year-over-year, marketing expense for policy improved by 30% and our agent close rates increased by 25%.

As we've shared over the past two years, these improvements are a direct result of our strategic redesign and best of all, they have synergistic benefits to one another. Our expenses per policy benefit from the deployment of better and more experienced agents, our marketing costs for policy benefit from refocus lead targeting, which in turn benefits agent close rate. And lastly to the point of our confidence in LTVs, we firmly believe that our strategic redesign has improved the persistency of onboarding policyholders. To bring in full circle, we monitor each of these metrics closely and provide them for context in your analysis. That said, what is most important is our conviction that the mix of these building blocks for unit economics will generate consistent profitability in a range of Medicare selling seasons.

Put another way, which they will observe persistency and the per policy efficiency we have delivered over the past two years, we reiterate our view that the senior distribution business can produce attractive EBITDA margins in the low 20s in fiscal 2024. Let me turn to healthcare services and give additional detail about the strong results SelectRx continues to produce. Beginning with member growth. In a seasonally slower quarter, SelectRx continued to grow sequentially, and we have now eclipsed 52,000 members, which is up over 60% compared to a year ago. Again, we would note that nearly all of the growth in our membership today has come from customers we've engaged with on Medicare Advantage. With over 4 million Americans turning 65 each year, there is a long loan rate for that source of growth.

As Tim alluded to though, the population for those in need of organized and convenient prescription drug delivery is significantly larger, and SelectQuote has the opportunity to generate growth and attractive returns on investment with other lead sources. We'll share more on these initiatives as the business continues to expand. As you can see, there are a number of growth drivers for SelectRx including organic member growth through our Medicare Advantage business, new lead opportunities and lastly the continued maturation of our membership. Specifically, healthcare services revenue totaled $97 million for the quarter and our adjusted EBITDA was again positive at over $2 million, which is a strong result given a seasonally slower quarter with higher expenses in preparation for the season ahead.

Overall, we are thrilled with the progress and you can see the ramp in both our revenues and adjusted EBITDA as the business continues to scale. Lastly, I'll briefly touch on our Life and Auto & Home segments, which performed in line with our expectations and similarly benefited from the strategy we've employed in our core senior business. Combined revenues of $47 million were up nearly 7% compared to last year. Our life business continues to benefit from the broadening adoption of our SwiftTerm Select Product and our Auto & Home business remained stable despite a hard P&C insurance market. Overall, the Life and Auto & Home segments produced stable profitability with combined adjusted EBITDA totaling nearly $9 million. Finally, it's worth noting that both our auto and home and life businesses are solid contributors to company cashflow.

With that, let me conclude our prepared remarks and take your question. Operator?

Operator: [Operator Instructions] The first question on the line comes from Ben Hendrix of RBC. Please go ahead. Your line is now open.

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