MediaAlpha, Inc. (NYSE:MAX) Q2 2023 Earnings Call Transcript
MediaAlpha, Inc. (NYSE:MAX) Q2 2023 Earnings Call Transcript August 2, 2023
MediaAlpha, Inc. misses on earnings expectations. Reported EPS is $-0.22 EPS, expectations were $0.35.
Operator: Ladies and gentlemen, thank you for standing by and welcome to MediaAlpha's Q2 2023 Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. [Operator Instructions] Thank you. Denise Garcia, Investor Relations. You may begin your conference.
Denise Garcia: Thank you, Josh. After the market closed today, MediaAlpha issued a press release and shareholder letter announcing results for the second quarter ended June 30, 2023. These documents are available in the Investors section of our website, and we will be referring to them on this call. Our discussion today will include forward-looking statements about our business and our outlook for future financial results, including our financial guidance for the third quarter of 2023, which are based on assumptions, forecasts, expectations and information currently available to management. These forward-looking statements are subject to risks and uncertainties that could cause future results or events to differ materially from those reflected in those statements.
Please refer to the company’s SEC filings, including its Annual Report on Form 10-K and its quarterly reports on Form 10-Q for a fuller explanation of those risks and uncertainties and the limits applicable to forward-looking statements. These forward-looking statements are based on assumptions as of today, August 2, 2023, and the company undertakes no obligation to revise or update them. In addition, on today’s call, we will be referring to certain actual and projected financial metrics of MediaAlpha that are presented on a non-GAAP basis, including adjusted EBITDA, which we present in order to supplement your understanding and assessment of our financial performance. Non-GAAP measures should not be considered as a substitute for or superior to financial measures calculated in accordance with GAAP.
Reconciliations of these non-GAAP measures to the most directly comparable GAAP measures are included in our press release and shareholder letter issued today. Finally, I’d like to remind everyone that this call is being recorded and will be made available for replay via a link on the Investors section of the company’s website at investors.mediaalpha.com. Now, I’ll turn the call over to Steve and Pat for a few introductory remarks before opening the call to your questions.
Steve Yi: Thanks Denise. Hi everyone. Welcome to our second quarter earnings call. I'd like to make a few observations before turning the call over to our CFO, Pat Thompson for his comments. Our second quarter results exceeded guidance due to stronger than anticipated growth in our health insurance vertical. Our health transaction value grew 10% year-over-year, driven by a broad-based strength in both under 65 and Medicare segments, resulting in better-than-expected margins and adjusted EBITDA. These trends have continued into the third quarter and we expect Q3 health transaction value to grow year-over-year at a rate similar to what we saw in the second quarter leading up to the all important annual and open enrollment periods from Medicare and under 65 plans respectively.
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Q2 results in our P&C insurance verticals were in line with our expectations as our largest P&C carrier partner sharply reduced spend in our marketplace due to continued underwriting profitability concerns. We're projecting this major carrier spend to remain depressed through the end of the year, and as a result, we expect P&C transaction value in Q3 to be lower than what we saw in Q2. Taking a step back, I remain pleased by our resiliency through the historic P&C market downturn. Due to our capital efficient marketplace model, diversified industry vertical exposure, and most importantly, the extraordinary dedication of our team, we've been able to generate a positive adjusted EBITDA and free cash flow through the entirety of this hard market cycle.
Looking ahead, we believe these attributes will lead to strong top and bottom line growth once our P&C carrier partners resume normal levels of marketing spend coming out of the hard market. With that, I'll turn the call over to Pat. Pat Thompson Thanks, Steve. I'll begin with a few comments on our second quarter financial results and other recent business and market developments. Before reviewing our third quarter financial guidance and opening the call up for questions. Our second quarter results benefited from top line outperformance in our health vertical due to the broad-based strength Steve discussed earlier. This drove especially strong adjusted EBITDA performance in Q2 relative to our guidance range as our health vertical margins benefit from a higher open marketplace mix.
As we discussed in our shareholder letter during the second quarter, our largest shareholder White Mountains group completed a tender offer for 5.9 million Class A shares increasing their ownership position to 36% of our total outstanding shares. The White Mountains tender offer a $10 per share represented a 32% premium to the closing price of our stock the day before the announcement. White Mountains publicly stated they believe our shares are an attractive investment and they have no intention of changing the relationship between our companies. Moving to third quarter guidance. We expect P&C transaction value to decline 40% to 50% year-over-year due to a full quarter of the reduced spend by our largest P&C carrier partner. In health, we expect favorable trends across the business to drive year-over-year transaction value growth at a rate similar to the 10% we saw in the second quarter.
We expect improving year-over-year trends in our other vertical as we lap the exit of our Education business at the start of Q3 2022. As a result, we expect Q3 transaction value to be between $95 million and $110 million, a year-over-year decrease of 30% at the midpoint. We expect revenue to be between $65 million and $75 million, a year-over-year decrease of 1% of the midpoint. Lastly, we expect adjusted EBITDA to be between $1.5 million and $3.5 million a year-over-year increase of 15% at the midpoint. Q3 operating expenses after adjusted EBITDA add-backs are expected to be approximately $1.5 million lower than Q2 levels driven by both a full quarter’s impact of the May workforce reduction and continued expense discipline. Moving to other noteworthy items.
During Q2 we incurred approximately $1 million of fees related to the ongoing FTC inquiry, and we expect to incur a similar amount in Q3. We continue to believe we have been and remain fully compliant with all laws and regulations, and we are cooperating with the FTC as they continue their inquiry. In addition, we have amended our Founder’s employment agreements at their request to provide for roughly 90% of Steve and Eugene’s salaries to be paid in restricted stock rather than cash, representing an approximately $1 million annual benefit to adjusted EBITDA. This amendment reflects our Founder’s belief that our stock represents an attractive investment given the long-term growth potential of our business. Turning to the balance sheet and cash flow.
We generated $3.8 million of free cash flow during the quarter and ended the quarter with $20 million of cash on hand. In the near-term, our first priority for cash flow is to decrease net debt. We are focused on reducing financial leverage through a combination of net debt reduction and adjusted EBITDA improvement driven by strong execution in our ongoing efforts to tightly manage expenses as we await the inevitable rebound in our P&C vertical. With that operator, we are ready for the first question.
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