Q1 2023 EverQuote Inc Earnings Call
Participants
Jayme Mendal; President, CEO & Director; EverQuote, Inc.
John Brandon Wagner; CFO & Treasurer; EverQuote, Inc.
Cory Alan Carpenter; Analyst; JPMorgan Chase & Co, Research Division
Daniel Paul Day; Senior Equity Research Analyst; B. Riley Securities, Inc., Research Division
Jed Kelly; Director & Senior Analyst; Oppenheimer & Co. Inc., Research Division
Michael Patrick Graham; MD & Senior Equity Analyst; Canaccord Genuity Corp., Research Division
Ralph Edward Schackart; Partner & Technology Analyst; William Blair & Company L.L.C., Research Division
Brinlea C. Johnson; MD; The Blueshirt Group, LLC
Presentation
Operator
Good afternoon, and thank you for joining the EverQuote First Quarter 2023 Earnings Call. My name is Kate, and I will be the moderator for today's call. All lines will be muted during the presentation portion of the call with an opportunity for questions and answers at the end. I would now like to pass the call over to our host, Brindley Johnson of -- the Blueshirt Group. You may proceed.
Brinlea C. Johnson
Thank you. Good afternoon, and welcome to EverQuote's First Quarter 2023 Earnings Call. We'll be discussing the results announcing our press release issued today after the market closed. With me on the call this afternoon is Jayme Mendal, EverQuote's Chief Executive Officer; and John Wagner, Chief Financial Officer of EverQuote.
During the call, we will make statements related to our business that may be considered forward-looking statements under federal securities laws, including statements concerning our financial guidance for the second quarter of 2023, our growth strategy and our plans to execute on our growth strategy, key initiatives, including our direct-to-consumer agency, our investments in the business, the growth levers we expect to drive our business, ability to maintain existing and acquire new customers, our expectations regarding recovery of the auto insurance industry and other statements regarding our plans and prospects. Forward-looking statements may be identified with words and phrases such as we expect, we believe, we intend, we anticipate, we plan, may, upcoming and similar words and phrases. These statements reflect our views only as of today and should not be considered our views as of any subsequent date. We specifically disclaim any obligation to update or revise these forward-looking statements, except as required by law. Forward-looking statements are not promises or guarantees of future performance and are subject to a variety of risks and uncertainties that could cause the actual results to differ materially from our expectations.
For a discussion of material risks and other important factors that could cause our actual results to differ materially from our expectations, please refer to those contained under the heading Risk Factors in our most recent quarterly report on Form 10-Q, our annual report on Form 10-K that is on file with the Securities and Exchange Commission and available on the Investor Relations section of our website at investor.everquote.com and on the SEC's website at sec.gov. Finally, during the course of today's call, we'll refer to certain non-GAAP financial measures, which we believe are helpful to investors. A reconciliation of GAAP to non-GAAP measures is included in the press release we issued after the close of market today, which is available on the Investor Relations section of our website at investors.everquote.com.
And with that, I'll turn it over to Jayme.
Jayme Mendal
Thank you, Brinlea, and thank you all for joining us today. EverQuote exceeded expectations across our 3 primary financial KPIs in the first quarter. We produced revenue of $109.2 million variable marketing margin, or VMM, of $35.6 million and adjusted EBITDA of $5.4 million. We achieved a strong VMM as a percentage of revenue of 32.6% and an adjusted EBITDA margin of 4.9%, both representing levels which we last achieved before the auto insurance industry downturn. Our progress in Q1 was broad-based and as the industry normalizes, we will be well positioned to grow the business significantly and profitably. As has occurred several times in the current period of auto insurance market instability, our growing momentum in Q1 was met with strong industry headwinds. We Entering Q2, a major carrier partner significantly reduced its customer acquisition budget due to their unexpectedly challenged underwriting results. We are also seeing targeted reductions in marketing subsidies for captive agents, which could impact our local agent demand for the remainder of this year.
Based on the persistent uncertainty in the auto insurance carrier market, we have decided to withdraw our previously provided full year 2023 guidance. While we maintain conviction in an auto insurance recovery driving significant growth for EverQuote, the exact timing remains difficult to predict. Focusing on what we can control, we continue to drive efficiency throughout our operations while accelerating diversification into stable parts of the business. Highlights from Q1 include strong performance in our local agent network, where continued resilience drove record levels of local agent budget.
We continue to have a commanding leadership position in this market with data suggesting EverQuote maintains the highest market share and performance in the industry. In our direct-to-consumer agency, we had a strong open enrollment period with health and Medicare generating historically high levels of profitability and cash efficiency. And our Property and Casualty or P&C lines continue to make considerable progress expanding our product offerings and increasing the rate at which we bundle auto policies with homeowners and other ancillary products. Our direct-to-consumer agency now represents 50 carriers across our combined P&C and health and Medicare offering. As we continue to expand our carrier and product coverage, we continue to build the foundation of our one-stop insurance shop.
With the auto insurance carriers continuing to adjust rates to the changing loss environment, we began shifting more resources into non-auto verticals late in 2022. In Q1, we returned to revenue growth in our home vertical and expect to continue that trend as carrier budgets and agent demand shifts from auto into homeowners' products. In Q2, we are replicating the playbook used to reignite growth in the home vertical to our life, health and Medicare marketplaces. We are moving aggressively to restore growth in these non-auto verticals over the balance of the year after a period of contraction following reduction in DTC Medicare agent headcount as part of our broader expense management efforts. Progress in agent channels and non-auto verticals enable EverQuote to diversify further from the auto carrier direct channel. In addition, we continue to drive efficiency throughout the business.
We achieved a near-record high VMM margin in Q1 as we rolled out new bidding technology, which leverages machine learning to optimize bids at more granular levels than ever before, enabling our traffic operations to benefit from greater ad spend efficiency. We also produced a return to pre-downturn levels of adjusted EBITDA well ahead of a full auto insurance recovery, thanks to continued discipline and management of our operating expenses. We remain steadfast in our belief that we can create an industry-defining company as we continue working to redefine the $170-plus billion insurance distribution and advertising market for the digital age.
We have assembled a one-of-a-kind combination of insurance distribution assets, which provides consumers access to a comprehensive set of insurance products across major personal lines, resulting in each consumer being more likely to find the right product for them delivered in their preferred manner. We will focus increasingly on leveraging these assets to build a differentiated insurance shopping destination for consumers through which they can access the industry's widest set of insurance products across major personal lines, received personalized recommendations on the right products for them and easily access advice from knowledgeable experts as needed.
EverQuote's long-term value continues to compound as we amass more insurance distribution data, which we are using increasingly to deploy machine learning and artificial intelligence across aspects of our business, ranging from traffic bidding to experience personalization to product recommendations. With our deep roots in data and technology, we believe we will lead the insurance industry in the adoption of AI technology as it proliferates. As AI applications become more accessible, EverQuote is embracing its potential, quickly finding use cases where it can drive meaningfully greater productivity and/or enable entirely new products, services or ways of doing things. Our mission is to make it easy for customers to protect life's most important assets, their family, health, property and future.
Our vision is to become the largest online source of insurance policies by using data, technology and knowledgeable advisers to make insurance simpler, more affordable and personal ones. While we have much work left to do and require a period of industry stabilization to fully realize that vision, we continue to drive operational excellence in this difficult time. We believe that EverQuote is the only company with the assets, team and conviction to deliver the insurance shopping experience that the industry's carriers, agents and consumers ultimately need to bring the full potential of the digital age to insurance buying and selling. Our incredible team remains passionate about achieving our vision, which we believe, when realized, will deliver compelling value for our consumers, insurance provider partners and shareholders.
Now I'll turn it over to John to discuss our financial results.
John Brandon Wagner
Thank you, Jamie, and good afternoon, everyone. I'll start by discussing our financial results for the first quarter and then provide guidance for the second quarter and the context for our decision to withdraw guidance for the full year of 2023.
Our total revenue for the first quarter of $109.2 million represented a decline of 1% year-over-year but exceeded our guidance range for Q1 provided last quarter. Revenue from our auto insurance vertical increased 2% year-over-year to $89.7 million in Q1, a sequential improvement of 33% over Q4 of 2022 due to a combination of Q1 being a seasonally stronger quarter within our auto insurance vertical and the resurgence of demand within the quarter from our largest carrier customer following initial improvement in their claims losses.
Coupled with consistent performance from our local agent network at nearly 40% of total revenue, we achieved a record level of auto insurance revenue. Revenue from our other insurance verticals, which includes home and renters, life and health insurance, decreased 15% year-over-year to $19.5 million for the first quarter and represented 18% of revenue. The decline in revenue was attributable to our planned moderation in our direct-to-consumer agency with an emphasis on optimizing unit economics and cash efficiency and offset by double-digit growth in our home insurance vertical.
Variable Marketing Margin, or VMM, defined as revenue less advertising expense was $35.6 million for the first quarter, beating our guidance range provided last quarter. Despite lower monetization, variable marketing margin as a percentage of revenue was a near record 32.6% for the quarter. Our investments in bidding technology led to a higher margin operating point as we drove down traffic cost and increased consumer traffic volumes 21% year-over-year. Though most carriers continue to limit their spending on new consumer acquisition as they work to raise policy pricing to cover rising claims losses, consumers are reacting to those price increases by shopping more aggressively.
Turning to our bottom line. GAAP net loss was $2.5 million in the first quarter. Adjusted EBITDA was positive $5.4 million in the first quarter. The result was above our guidance range for Q1 provided last quarter and reflects a return to pre auto insurance downturn levels based on stronger auto insurance performance, demonstrating that as auto insurance industry conditions improve, our marketplace has the potential to deliver expanding profitability. Operating cash flow was a use of cash of $1.2 million for the first quarter, a significant year-over-year and sequential improvement, reflecting the cash flow contribution from greater positive adjusted EBITDA. We ended the quarter with cash and cash equivalents on the balance sheet of $28.8 million and no debt outstanding on our $45 million debt facility.
Turning to our outlook, including an update on market conditions within the auto insurance industry. As anticipated, we witnessed improved demand in our auto insurance vertical in Q1, driven by a very strong return of our largest carrier customer as they experienced improved financial performance, which resulted in an increased focus on growing their new consumer acquisition. At Carrier, however, suffered an abrupt increase in claims and a decrease in profitability in March caused by a combination of onetime factors and more persistent claims-related expenses. This resulted in a significant reduction in their demand entering Q2, dropping to trough levels of Q4 2022.
Outside of this major carrier who had taken more decisive rate action earlier in the downturn, nearly all other auto insurance carriers are continuing to experience low levels of profitability and are aggressively increasing rates in order to achieve rate adequacy. Although our third-party agent network has been resilient, the prolonged nature of this downturn has resulted in some reductions of carrier support for their captive agents, and we anticipate the possibility of further reductions, which may impact our local agent business during the second half of this year.
Ultimately, we remain confident that auto insurance premium increases will improve financial performance for auto insurance carriers and consequently, will increase their demand for new consumer acquisition, but the timing of this improvement continues to be delayed therefore, impacting our guidance for Q2 and our decision to withdraw guidance for the full year.
For Q2, we expect revenue to be between $70 million and $75 million, a year-over-year decrease of 29% at the midpoint. We expect VMM in the quarter to be between $23 million and $26 million, a year-over-year decrease of 26% at the midpoint, and we expect adjusted EBITDA to be between negative 4 and negative $1 million. In summary, we delivered results better than our guidance for the first quarter and are executing well while judiciously managing expenses. Though we recognize the higher level of uncertainty in the near term, we have conviction that we will directly and significantly benefit from the eventual normalization of auto insurance carrier demand.
Jayme and I will now answer your questions. Thank you.
Question and Answer Session
Operator
We will now begin the question-and-answer session. (Operator Instructions). Our first question will be from the line of Ralph Schackart with William Blair.
Ralph Edward Schackart
Just in terms of the large carrier that I guess was in market earlier in Q1 and then out in March. Any sort of thoughts on when that carrier could return and/or conversations that particular carrier? I know it's a pretty dynamic situation. And then maybe just a follow-up with the other carriers that I know are still low profitability, how are the conversations are you sort of progressing or trending with those carriers? And then I have a follow-up.
Jayme Mendal
Sure. So Ralph, the large carrier that pulled back the -- we don't have like a firm commitment on what the sort of reengagement path looks like. They have pointed us to the data that's available, right? We ought to watch -- continue to watch how their combined ratio trends. They have a sort of publicly well-known and understood target that they are managing the business to. And so as they are able to manage down to their combined ratio target, we do expect them to reactivate spend.
And as they're able to take rate in specific states, we expect it to occur state by state. So the signal that they've given us is they're reviewing things month-to-month. I think the interpretation based on looking at their numbers and speaking with them is that we probably don't expect any significant movement inside the quarter, but we are hopeful that come Q3, they will have largely gotten their combined ratio in line for the first part of the year, which would bring them back to a more normalized state for the back part of the year.
With respect to other carriers, we continue to get a consistent message that the back part of the year is when we would expect to see some reengagement. We know there are carriers that are benefiting from earning in on previous rate increases. And it now seems that everyone is adjusting their 2023 rate increase plans upwards. And they are seeing good receptivity from states, even states like California, one large carrier announced they got a 19-point rate increase from California, which is a significant step in the right direction. So we are beginning to see some of these other carriers get their combined ratios more in line or at least trending in the right direction or with line of sight to get their combined ratios in line by, call it, middle of the year. And we would expect that they'll slowly start to step back in kind of state by state, segment by segment as they do.
Ralph Edward Schackart
Great. Just a quick follow-up. On the local agent, have you seen that business be impacted, I guess, in Q1 or Q2? Or is that just something that you're bracing for potentially to happen in the second half of this year?
Jayme Mendal
Yes. So the carriers have been removing subsidy dollars, they provide marketing subsidy dollars to agents. They have been removing them state by state, segment by segment, over the course of this year. And we have seen some impact, but we've been able to grow through it. So we did exit Q1 with record levels of age and budget, they likely would have been higher without the withdrawal of some of those support dollars. But we continue to make good progress. Now what we expect for the balance of the year is that carriers -- these same carriers will continue to remove additional subsidy dollars in states where they are not profitable and that those subsea dollars will return to the marketplace as the carriers are able to get rate.
So we do expect it will be hard to continue growing budget for the balance of the year, but we maintain a really good position in that market. We have a dominant market share. We provide the highest performance of any of the competitors that are sending volume into that channel. And so we feel good about continuing to build that channel over the longer term.
Operator
Our next question will be from the line of Cory Carpenter with JPMorgan.
Cory Alan Carpenter
Just on the health business, can you just talk about any impact from some of the proposed policy changes we're seeing in Medicare Advantage, whether those could impact on the negative side or potentially even in the positive side if it hurts competitors more. And then you did guide back to negative EBITDA in 2Q. So I'm just curious on the cost side. It sounded like your focus is on reallocating resources, but just how you feel about your expense base and kind of maintaining it where it is or maybe if you feel like you can make further cuts going forward?
Jayme Mendal
Sure. Thanks, Cory. So with respect to the changes in Med Advantage regulation, just to put it into context, net Advantage represents, call it, 5% of the business, plus or minus a few points. I think what you're describing is the new CMS marketing rules. And we've been preparing for those new rules to take effect since they were initially proposed in, I guess, it was in December of last year. Now since they've been finalized, we've been working with our carriers to ensure we're aligned, we're ready to execute in compliance with the new requirements. And we do not view them as having a big impact on our business. I think the rules tend to focus on unsolicited contact of Medicare beneficiaries, and we don't engage in any unsolicited contacts.
So there's been some attention paid to the 48-hour waiting period. We don't believe that, that applies to consumer-initiated calls, which is the vast majority of our Medicare business. And while that 48-hour rule may apply to schedule like personal marketing appointments, which traditional Medicare brokerage sales people do have in-person marketing activities that we don't do at EverQuote. Nobody we've spoken to interpret the new rules as prohibiting a consumer from calling us to enroll in the Medicare plan. So we'll continue to work with our carriers to interpret and comply with it. But today, we don't see these rules as having much of an impact on our business.
John Brandon Wagner
Cory, its John here. I'll take the second part of that and with regard to operating expenses. I guess going back to the very beginning of the downturn, we were pretty quick to take action to make sure that we were resourcing the business correctly for the demand that we saw going forward, especially in the auto insurance vertical. So we've done that, and we've continued to do that. You'll see the guidance that we have provided for Q2 does imply lower levels of operating expenses, and that's some steps that we've done internally already.
So I think you could expect that we will continue to tightly manage expenses. And I think even in the toughest parts of the downturn, we've always made a priority of trying to manage the business for full year adjusted EBITDA. That is something that we feel strongly about when possible that we would maintain that even regardless of demand conditions. So that would be in line with what you might see from us...
Operator
Our next question will be from the line of Michael Graham with Canaccord.
Michael Patrick Graham
Maybe just to follow on that last question on sort of expense management. And just like is this a level where -- I'm just trying to understand how you're thinking about profitability overall. I think it's totally understandable to kind of pull the full year guidance given the environment and what we've heard from some of your peers. And you have a slight EBITDA loss targeted now for Q2. And just wondering sort of how you're thinking about if the environment does not improve in the short term, how you're thinking about like how much of a loss you'd be willing to incur on a quarterly basis. And just kind of like a related question is, are there major investment areas where you are not entertaining kind of cutting back because they're a central importance to the business.
John Brandon Wagner
Sure. Thanks, Michael. I'll start us off on that one. So yes, we have guided to a slight adjusted EBITDA loss for Q2. We think there's -- as we said, there's reasons to believe that we could see a return to demand as we move through the year. But we believe we've taken the steps around operating expenses that will keep that adjusted EBITDA loss modest in Q2 and possibly into Q3. And then we do expect that in Q4, we're influenced again by the health vertical and the annual enrollment period within Medicare.
So I think we're pretty committed to full year managing as much as possible to a positive adjusted EBITDA. And not to forget that much of our model is variable in nature. And so when we do see reductions in costs, not only do we see reductions in things like advertising expenses, which you've seen up until now, but you also see semi-fixed costs, some of our technology costs that scales with revenue that actually comes down. So I think we're comfortable that you're not going to see a dramatic difference in our adjusted EBITDA profile even if we see a scenario which demand stays lower longer.
Jayme Mendal
And Mike, with respect to the potential impact on investment, I think where we're focused right now is in parts of the business where we have stability and which will further diversify us from the direct carrier channel. And so we have shifted resources into non-auto vertical marketplaces. We've seen some great progress so far in homeowners, which was the first place that we redirected those resources, and we're were sort of fast following with life, health and Medicare marketplaces and continuing to invest in our agent channels. I think if there's a place that might be affected depending on how the auto recovery proceeds over the course of the year, it probably would come from incremental adviser head count, which we have historically flexed as the growth as we're able to support it with cash flow from the marketplace. So that's probably the one area of investment that we would take a look at first. All right.
Operator
Our next question will be from the line of Jed Kelly with Oppenheimer.
Jed Kelly
Okay. Great. Just if I go back to some of your commentary, are you kind of believing just given the carrier conversation, the time it takes the pass the rates or the state boards that 2Q is likely the trough quarter for this year. Is that kind of where you think your internal projections are?
Jayme Mendal
Yes, Jed, so we've sort of been in the business of prediction a few times throughout this hard market cycle. And we haven't gotten it right. So I'm probably not going to make another prediction. What we can tell you is we -- Q4 was definitely a relative trough. The year began as we expected it would with one major carrier really leaning back in pretty aggressively. And then what's happened subsequently is that loss ratios have remained elevated despite rate increases due to higher for longer inflation in areas that affect auto losses.
And so they're continuing to see longer time and cost to repair vehicles, thanks to parts and labor, slightly higher injury severity, higher than historical catastrophe losses in Q1. And the response has been pretty consistent across most carriers, right? They're like, okay, well, we need to sort of revise upwards our plans for rate increases for the balance of the year. They're going to benefit from earning in previous rate increases, and the states seem to be receptive. And so I think we have some comfort that things will continue to improve over the balance of the year. But can we put a stake in the ground and say Q2 is very likely to be the trough? I just think there's too much uncertainty to make a claim like that.
Jed Kelly
Got it. And then looking at your VMM margin guidance, it looks like its near 34% based on my math, which would be, I think, has ever been. So I mean, can you preserve margins VMM margins into the mid-30s in this low demand environment? I mean, we're seeing one of your competitors do the same thing. Would we expect your margins to kind of hold at these levels until demand comes back?
John Brandon Wagner
Yes, Jed. So what we've reflected in Q2 guidance is a VMM that implies an improved VMM as a percentage of revenue. That does reflect what we are seeing does reflect the fact that we had very good VMM margins in Q1. I think a lot of that is attributable, as we mentioned, to a combination of new technology that we've rolled out in our bidding technology as well as a favorable market for advertising. So a lot more opportunities in the landscape. And so that is very much what we are seeing, and I think we certainly feel confident in that in terms of the guidance that we've given you in maintaining those VMM levels.
Operator
Our next question will be from the line of Dan Day with B. Riley Securities. -- is now open.
Daniel Paul Day
Just first, a quick one for me. Can you remind us what percent of business percent of revenue from that agent channel that you've talked about, I think you've said in the past, just a reminder would be helpful.
Jayme Mendal
I'm sorry, Dan, was it the agent channel?
Daniel Paul Day
Yes. Yes. The agent channel as opposed to the direct carrier channel.
Jayme Mendal
Yes. It hovers around 40% of revenue. And that has been consistent through the downturn. So that has been a very resilient channel for us.
Daniel Paul Day
Got it. Okay. Any comments you can provide just in terms of like traffic to the marketplace quote request. I realize it's a challenge in terms of sort of monetizing them on the auto side, but a lot of rate hikes are getting passed through. Wondering just how robust the traffic has been to the marketplace in Q1 and into Q2.
Jayme Mendal
Yes. So traffic has definitely been a relative strength in the marketplace. In the first quarter, we grew core request volume, more than 20%. And there's a few factors contributing to that. The first, as you say, is the rate cycle. So you continue to see double-digit rate increases as the norm. And as a result, that's driving elevated levels of shopping as people get their renewal notices. But at the same time, we've been rolling out our newest bidding technology, which is driving record levels of efficiency in our ad spend, and we believe is contributing meaningfully to our ability to take share and drive some material growth during this period as well.
John Brandon Wagner
And Dan, I'd just say that the effect of consumers out shopping is largely intuitive and largely what we expected. There's now industry research that backs that up, that consumers are shopping more as they're seeing those envelopes that include double-digit increases in their policy premiums. It's a very natural reaction for consumers.
Daniel Paul Day
Got it. And quick one last. Just last call, you guys got a shelf in place. You talked about opportunities for accretive acquisitions. Just maybe remind us where you see the best opportunities there, whether this sort of re-deceleration although has either accelerated or delayed any conversations you're having on potential targets or ideas in terms of where to potentially put that capital to work.
John Brandon Wagner
I think we continue to see opportunities arise. Our sense is that kind of depressed auto market is actually accelerating the rate at which opportunities are presenting themselves. So I would say, for us, it has either accelerated or decelerated any efforts. We continue to meet with companies in the space. Our view is things that we can -- that can meaningfully accelerate our progress against our strategy in a way that makes sense for us, we will take into consideration. But that's sort of the extent of what we can say right now.
Operator
That concludes our call. We will now turn back over to the management team for closing remarks.
John Brandon Wagner
All right. Thank you. Thank you all for joining us today. And while it's unfortunate to experience another false start in the auto recovery and this extended period of uncertainty, we have high conviction that it's just a matter of time before losses stabilized and carrier acquisition spend normalizes. And Q1 provides just a glimpse of what even a partial recovery would start to look like. Now in the interim, the team is doing a hell of a job controlling the things we can control to ensure we emerge a much stronger, more diversified business. That includes improving unit economics and profitability in our marketplace and our DTCA, reaccelerating our non-auto verticals, strengthening our advantage with local agents and beginning to incorporate AI throughout the business. EverQuote's future is bright. We have made hard on progress towards building the digital insurance destination for the future, and we look forward to sharing updates in the quarters to come. Thanks all.
Operator
That concludes today's call. Thank you for your participation. You may now disconnect your lines.
