Lemonade, Inc. (NYSE:LMND) Q3 2023 Earnings Call Transcript
Lemonade, Inc. (NYSE:LMND) Q3 2023 Earnings Call Transcript November 2, 2023
Operator: Hello, everyone, and welcome to the Lemonade Q3 2023 Earnings Call. My name is Charlie and I'll be coordinating the call today. You will have the opportunity to ask questions at the end of the presentation. [Operator Instructions] I will now hand over to our host Yael Wissner-Levy, the VP of Communications at Lemonade to begin. Yael, please go ahead.
Yael Wissner-Levy: Good morning, and welcome to Lemonade's third quarter 2023 earnings call. My name is Yael Wissner-Levy and I am the VP Communications at Lemonade. Joining me today to discuss our results are Daniel Schreiber, Co-CEO and Co-Founder; Shai Wininger, Co-CEO and Co-Founder; and Tim Bixby, our Chief Financial Officer. A letter to shareholders covering the company's third quarter 2023 financial results is available on our Investor Relations website, investor.lemonade.com. Before we begin, I would like to remind you that management's remarks on this call may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those indicated by these forward-looking statements as a result of various important factors, including those discussed in the Risk Factors section of our Form 10-K filed with the SEC on March 3, 2023, our Form 10-Q filed with the SEC on August 4, 2023 and our other filings with the SEC.
Any forward-looking statements made on this call represent our views only as of today, and we undertake no obligation to update them. We will be referring to certain non-GAAP financial measures on today's call, such as adjusted EBITDA and adjusted gross profit, which we believe may be important to investors to assess their operating performance. Reconciliations of these non-GAAP financial measures to the most directly comparable GAAP financial measures are included in our letter to shareholders. Our letter to shareholders also includes information about our key performance indicators, including customers' in-force premium, premium per customer, annual dollar retention, gross earned premium, gross loss ratio, gross loss ratio ex-cat and net loss ratio and a definition of each metric, why each is useful to investors and how we use each to monitor and manage our business.
With that I will turn the call over to Daniel for some opening remarks. Daniel?
Daniel Schreiber: Good morning, and thank you for joining us to discuss Lemonade's Q3 results and our updated outlook for the full year. We are very pleased by this quarter's results, topline, bottom line and the intervening line. Starting at the top, we saw continued growth with in-force premium growing 18% year-on-year, boosted by strong marketing efficiencies and rising prices. At the same time, we also saw our gross loss ratio improved 11 percentage points, both quarter-on-quarter and year-on-year to 83%, continuing the trend we had seen in recent quarters and which was so rudely interrupted in Q2. Our operating expense similarly declined by 11%, since our third quarter of last year. As a result of all this, our gross profit increased 170% year-on-year and our adjusted EBITDA loss contracted by 39%.
We are, as I say, pleased with the results this quarter. In other news this month, we expect to pass the 2 million customer mark. The comparison of our business today to our business when we hit the 1 million customer mark is instructive. Today with double the number of customers, we have 3.5 times as much gross earned premium, as our premium per customer jumped by 17% in the intervening years. At the same time, net loss as a percentage of gross earned premium roughly halved. Taken together, these improvements show strong progression of the business in recent years and this sketch it will best part to profitability. This month we also marked the anniversary of our first Investor Day. In our shareholder letter, you'll find significant updates to the projections and models we shared a year ago and I do encourage you to peruse it.
One notable highlight, we expect to become cash flow positive by end of year 2025 and to reach that point with hundreds of millions of unencumbered dollars in the bank. We expect it to become adjusted EBITDA positive by year-end 2026. Towards that end, we anticipate accelerating our pace of growth considerably in 2024. We previously communicated the reasons for our slowdown this year and as inflation subsides and rates come on line, we can see our path clear to reengaging our clusters in 2024. In our Investor Day, we spoke of 25% compounded annual growth rate as our target growth rate and we anticipate our growth rates in 2024 we will be at or around this target. Continuous and strong growth are key to fully harnessing the benefits of automation and it deemed to combined impact of both automation and growth are key to our profitability.
To expand on our generative AI efforts and the contribution to our automation, let me hand over to Shai. Shai?
Shai Wininger: Thank you, Daniel. Before I get to some of the exciting work we've been doing with generative AI, I wanted to say a few words about our Israel-based team members. The horrors of the attacks of October 7 are hard to overstate. In the days since have been challenging for many of our team members and especially so for our Israel-based team. I want to acknowledge the extraordinary resilience and strength of our Israeli team and send them our collective appreciation and wishes. I also wanted to assure our investors that throughout this period of unprecedented heartbreak and upheaval in Israel, Lemonade has continued to operate without interruption. It helps that the overwhelming majority of our team is based outside of Israel, in the U.S. and Europe.
Thanks to the resilience of our distributed team and the level of automation we already have in our operations, our productivity remained high and our business continued to operate. Speaking of automation, I'd like to provide some more color on the advances we've made implementing generative AI into business processes across our organization. It's been an exciting few months working on multiple initiatives with our dedicated generative AI squads and preliminary impact is already reflected in our shrinking expense ratio. For example, we've recently introduced large language models into our customer support process, where our generative AI-powered automation handles customer emails from start to finish. This initiative is just a few weeks old and is already handling more than 7% of our incoming customer service emails.
This of course is on top of request handled by AI Maya in our mobile and web apps and AI Maya now handles a third of all customer interactions on these platforms. This is just the tip of the iceberg. There are dozens more initiatives in progress and we believe the percentage of generative AI-handled processes, such as answering customer ticket, will increase substantially. We're focusing our efforts on automating manual intensive work such as underwriting property inspections by leveraging the latest generative AI image analysis technology. We're now able to substitute human involvement in many underwriting processes with systems powered by generative AI. For example, we recently introduced a self-inspection feature that guides customers through a house tour and automatically analyzes captured images to reduce both risk and cost.
Using the new generative AI vision capabilities, we're able to determine construction quality, materials, finishes and levels of this repair. We can even read labels on water heaters and other equipment to determine their age and level of risk. These are just some examples, and we're working on dozens more with new capabilities going live every few days. What allows us to move so fast in incorporating these new technologies is the fact that our system was built from start to finish by Lemonade. We have zero reliance on third party providers and in the last few years, have built a modular and expensive platform that can seamlessly and easily integrate with new technologies like generative AI. As Daniel mentioned, our shareholder letter this quarter is worth close read.
One statistic from the letter that's worth highlighting is that in just two years our gross earned premium more than doubled, while our operating expenses only grew by 19%. This speaks volumes about our growing efficiency and bodes well for the coming years. As we expand the scope and depth of our automation efforts, we expect to accelerate our top-line growth while improving our bottom line. AI and automation play a starring role in enabling this dynamic and hence in charting our path to profitability and beyond. And with that, I'll turn things over to Tim.
Tim Bixby: Great. Thanks, Shai. I'll review highlights of our Q3 results and provide our expectations for the fourth quarter and the full year and then we'll take some questions. It was a strong quarter across the board with excellent loss ratio improvement coupled with rigorous cost control, resulting in strong results exceeding our own expectations. In-Force Premium or IFP grew 18% in Q3 as compared to the prior year to $719 million. As a reminder, the third quarter is the first quarter where our year-on-year comparisons include Metromile impact in both the current and the prior year results as the acquisition closed in July of 2022. Customer count increased by 12% to just shy of $2 million as compared to the prior year, premium per customer increased 6% versus prior year to $362 driven in roughly equal parts by rate increases and mix shift to higher priced products.
Annual Dollar Retention or ADR was 85%. We measure ADR on an annual cohort basis and include the impact of changes in policy value, additional policy purchases and churn. There was some modest downward pressure on ADR this quarter from the addition of former Metromile customers in the current quarter metric calculation for the first time. Gross earned premium in Q3 increased 27%, as compared to the prior year to $173 million a bit faster than IFP growth, due to the partial quarter impact of Metromile results in Q3 of 2022. Revenue in Q3 increased 55% from the prior year to $115 million. The growth in revenue was driven by the increase in Gross Earned Premium as well as a 169% increase in investment income and a decline in the proportion of premium ceded to reinsurers.
Our gross loss ratio was 83% for Q3, as compared to 94% in both Q3, 2022 and in Q2 of 2023. The impact of CATs in aggregate in Q3 was roughly 10% points within the gross loss ratio. About equal to the average quarterly CAT impact over the last couple of years, absent the total CAT impact the underlying gross loss ratio ex-CAT, with in line with the prior quarter and nearly 15% points better than the prior year. Prior period development was roughly 3.8% favorable impact in the quarter primarily due to pet [ph] reserve adjustments. Operating expenses excluding loss and loss adjustment expense decreased a 11% to $98 million in Q3, as compared to the prior year. A bit of detail on the unique entries in the quarter both one-off expenses related to the Metromile acquisition.
We had a notable non-recurring expense in the quarter related to a successful sublet of excess office space in San Francisco, a lease acquired in conjunction with the Metromile acquisition. I'd consider the sublease of the space as a positive outcome in a very difficult West Coast real estate market. The current prevailing rents are well below the market peak of 2019 and as a result we have written down approximately $3.7 million in the quarter in relation to this transaction. We've also reserve $3 million for other potential liabilities related to Metromile operations pre-acquisition based on facts known now that were not apparent at the time of the acquisition. These expenses are included in G&A expense they impact our net operating loss, and earnings per share and have been excluded from our adjusted EBITDA calculation.
Given the unique nature in relation to activities pre-acquisition. The San Francisco office lease was our only material excess real estate obligation. We're comfortable with our other existing lease obligations relative to our space needs in all of our physical locations. Other insurance expense grew 25% in Q3 versus the prior year, a bit ahead of the growth of earned premium primarily in support of our aggressive investments in our rate filing capacity. Total sales and marketing expense declined by $11 million or 32% primarily due to lower growth acquisition spending to acquire new customers. Total growth spend in the quarter was $12.6 million, down from $23 million in the prior year quarter. Growth spend was about 15% more efficient in Q3 versus a year ago, in part due to lower absolute spend, but also due to better results in certain marketing channels.
In July, we began to draw down on our loan facility. Our synthetic agents program and financed about 50% of our Q3 growth spend. As a reminder, you'll see a 100% of our growth spend flow through the P&L as always. While the impact of the new financing mechanism, is visible on the cash flow statement in the balance sheet. Technology development expense increased just 2% close to flat versus the prior year. G&A expense decreased 9% as compared to the prior year. Personnel expense and headcount, continued to be quite stable despite continued growth in customers and premium, total head count is actually down about 5%, as compared to the prior year at 1,304. Net loss was $62 million in Q3 or a loss of $0.88 per share as compared to the $91 million loss we reported in the third quarter of 2022 or a loss of $1.37 per share.
While adjusted EBITDA loss was $40 million in Q3, as compared to $66 million of adjusted EBITDA loss in the third quarter of 2022. Our total cash, cash equivalents and investments, ended the quarter at approximately $945 million, reflecting primarily a use of cash for operations of $103 million since year end 2022, and worth noting that that total cash and equivalents and investments balance was essentially unchanged versus the prior quarter. With these goals and metrics in mind, I'll outline our specific financial expectations for the fourth quarter and the full year. For the fourth quarter we expect in-force premium at December 31, between $726 million and $729 million. Gross earned premium between $174 million and $176 million. Revenue between $107 million and $109 million and adjusted EBITDA loss between $44 million and $42 million.
Stock-based compensation of approximately $16 million, CapEx of approximately $3 million and a weighted average share count of approximately 70 million shares. And for the full year this would result in in-Force premium again at $726 million to $729 million, Gross Earned Premium between $665 million $667 million, revenue between $421 million $423 million. Adjusted EBITDA loss between $188 million and $186 million. Stock-based compensation of approximately $62 million, capital expenditures of approximately $10 million and again weighted average share count for the full year of approximately 70 million shares. All in all, a really strong quarter. It's worth summarizing the main headlines, cash flow positive expected by year end 2025. Adjusted EBITDA positive following by year end 2026.
Continued progress on loss ratio, rate filings and approvals earning in with more to come. Impressive efficiency and nearly flat headcount. We can look back to almost two years ago when we first spoke about our expected peak loss quarter happening in Q3, 2022. Now a year out from that date, not only was that quarter indeed our peak loss quarter, but just one year later, our adjusted EBITDA loss has shrunk by nearly 40%. Taken together, our results give us confidence that we are on the path to creating a sizable, defensible and profitable business and we hope you see them similarly. With that, I'd like to hand things back over to Shai to answer some questions for our retail investors.
A - Shai Wininger: Thanks, Tim. We'll now turn to our shareholders' questions submitted through the safe [ph] platform and by the way, I also saw some recurrent questions on Twitter, specifically from Neil and tried to address many of those questions in the letter, our comments this morning and again in the following answers. We didn't asked the most upwards question about when meaningful profitability is expected. The letter in our comments earlier in the call, answer that clearly. So I'm going to use the time to get to additional upward questions. Matthew asked about the Lemonade stock, specifically what steps are being taken to raise the value and maintain the stock? Matthew, we get this question quite often. And we understand why?
The share price is not at a place we'd like it to be. So as mentioned in previous calls, we're not focused on the short-term performance of the stock, but look towards the long-term and encourage our investors to do the same. We have high conviction in the long-term prospects for Lemonade and the value we can create for shareholders quarter-after-quarter, we are delivering underlying improvements that are meaningful and significant, to our business. And as we head closer to profitability, we are optimistic that, the true value of Lemonade will be reflected, more fully in our stock price over time. Our next couple of questions were around Lemonade car, Darren asked what is hindering the process of Lemonade car. And Paper Bag [ph] too ask for a similar update?
As with any of our products, we're only interested in growing profitably, expanding our book of business with healthy sales that, is contingent upon our loss ratio getting to where we want it to be. As we increase rates to keep up with rising inflation. As a reminder, the increase in car repair and parts costs had led to an industry wide challenge. Today, I'm happy to report that California approved a 51% rate increase, for our car product. This is especially significant as approximately 50% of our car premium come from California. These new rates earn in we expect, to become rate adequacy. We believe that this can yield a healthy loss ratio, allowing us to grow car faster in the coming years. Paper bag also asks about cost cutting measures, citing other insurance companies taking measures to cut operating expenses.
I appreciate the question here, and it's important to note that we apply great scrutiny to every single initiative we're working on into the resources at our disposal. That has allowed us to steadily iterate as needed rather than undertake sudden and drastic changes. Over the last two years Gross Earned Premium grew six times faster than operating expenses. This quarter alone, exemplifies the ability to grow while cost cutting. With IFP growing 18% year-on-year, gross loss ratio improving by 11 percentage points to 83% and operating expenses declining by 11%. And you can see that in our head count as well. We'll end 2023 with roughly the same number of full-time employees as the start even as our business will have grown considerably. And with that, let me hand the call over to the operator, so we can take some questions from our friends on the street.
Operator: [Operator Instructions] Our first question comes from Matt Smith of Halter Ferguson. Matt, your line is open. Please go ahead.
See also 15 Best ARK Stocks To Buy Now and 30 Most Barbaric Countries in the World.
To continue reading the Q&A session, please click here.
