Q4 2023 Mediaalpha Inc Earnings Call
Participants
Denise Garcia; IR; MediaAlpha, Inc.
Steve Yi; CO-Founder & CEO; MediaAlpha, Inc.
Pat Thompson; CFO; MediaAlpha, Inc.
Cory Carpenter; Analyst; JPMorgan Chase & Co
Michael Graham; Analyst; Canaccord Genuity Corp.
Tommy McJoynt; Analyst; KBW
Andrew Kligerman; Analyst; TD Cowen
Ben Hendrix; Analyst; RBC Capital Markets
Presentation
Operator
Ladies and gentlemen, thank you for standing by. I would like to welcome everyone to the MediaAlpha fourth quarter and full year 2023 earnings conference call. (Operator Instructions) I will now hand the call over to Denise Garcia, Investor Relations. You may begin your conference.
Denise Garcia
Thank you, [Babash]. After the market closed today, MediaAlpha issued a press release and shareholder letter announcing results for the fourth quarter ended December 31, 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 first quarter of 2024, 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, February 20, 2024, 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 and contribution, 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 investor 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 question.
Steve Yi
Thanks, Denise. Hi, everyone. Welcome to our fourth quarter 2023 earnings call. I'd like to make a few observations before turning the call over to our CFO, Pat Thompson, for his comments. After a difficult up and down year, we ended 2023 on a solidly positive note. Our fourth quarter results exceeded the high end of our guidance ranges across the board, driven by stronger than expected growth in our P&C insurance vertical.
For the past several years, lingering pandemic-related inflationary pressures created the most difficult auto insurance market in decades. Going into 2024, we're now confident that a sustainable industry recovery is finally underway. During December, we saw major carrier make meaningful increases in their marketing investments, and this positive trend has accelerated into the new year.
Accordingly, we expect first quarter P&C transaction value to nearly double quarter over quarter, far surpassing typical seasonality, and we expect continued growth over the course of 2024 as more of our auto insurance carrier partners achieve target profitability and retrain their focus on customer acquisition.
Q4 results in our health insurance vertical were in line with expectations driven by continued strength in our under 65 business, which was offset by weakness in Medicare as our partners faced headwinds in adapting to recent regulatory changes as well as medical care cost inflationary pressures.
We expect these broad trends in under 65 and Medicare to continue in the first quarter. Looking forward, we're optimistic that 2024 at the beginning of great things to come. Our unwavering focus on our partnerships and maximizing operating efficiency during (inaudible) [approved] to be an exceptionally difficult market downturn have laid the foundation for what we believe will be a period of significant top and bottom line growth.
With that, I'll turn the call over to Pat.
Pat Thompson
Thanks, Steve. I'll begin with a few comments on our fourth quarter financial results and other recent business and market developments before reviewing our first quarter financial guidance and opening the call up for questions.
As Steve mentioned earlier, our fourth quarter results exceeded the high end of our guidance ranges. Adjusted EBITDA increased 40% or $3.6 million year over year, driven primarily by higher contribution and continued expense discipline. Transaction value in our P&C insurance vertical was up 21% quarter over quarter ahead of expectations is a major carrier ramp spend on our platform. Transaction value in our health vertical was roughly flat year over year in line with expectations.
Moving to first quarter guidance, we are highly encouraged by the trends we have seen thus far. In P&C, we expect transaction value to nearly double sequentially, far in excess of typical seasonality. Despite these increases, we expect transaction value in our P&C vertical to be down modestly year over year as a major carrier as ramping customer acquisition at a more measured pace this year relative to their dramatic increase in the first quarter of 2023.
In health, Q1 is typically a seasonally weaker quarter with a smaller contribution from Medicare. We expect the trends Steve highlighted earlier to continue with transaction value growing in the mid to high single digits year over year. Overall for Q1 we expect strong year over year adjusted EBITDA growth driven by higher contribution and continued expense discipline.
As a result, we expect Q1 transaction value to be between $175 million and $190 million dollars, a year-over-year decrease of 6% at the midpoint. We expect revenue to be between $105 million and $115 million dollars, a year over year decrease of 1% at the midpoint. Lastly, we expect adjusted EBITDA to be between $9.5 million and $11.5 million a year over year increase of 45% at the midpoint.
For overhead, we expect contribution less adjusted EBITDA to be approximately $500,000 to $1 million higher than Q4 2023. Touching briefly on expenses, we remain focused on driving efficiencies and have modest hiring plans for 2024. We, therefore, expect limited overhead growth for the full year, driving significant operating leverage revenue growth picks up.
Regarding share-based compensation, 2024 levels are expected to be approximately $20 million lower than 2023 as certain founder grants issued at the IPO were fully vested by the end of the year. Finally, Q1 legal costs associated with the ongoing FTC inquiry are expected to be approximately $750,000.
Turning to the balance sheet, we continue to prioritize financial flexibility of using excess cash to decrease net debt. We ended the quarter with $17 million of cash on hand and our focus remains on reducing financial leverage through a combination of net debt reduction and adjusted EBITDA growth.
With that, operator, we are ready for the first question.
Question and Answer Session
Operator
Thank you. (Operator Instructions)
Cory Carpenter, JPMorgan.
Cory Carpenter
Thanks for the questions. Steve, wanted to ask on your view, what's different this time around, you mentioned a sustainable recovery is underway. So it's kind of what's different than what you saw this time last year that you would call out. And then secondly, you called out one major carrier ramping spend at the end 4Q (inaudible) seeing from other carriers as the years progressed? Thank you.
Steve Yi
Sure. Hi Cory. Yes, so I think what's different this time around is it's pretty evident when you look at the underlying profitability of all the carriers in the industry, what you've seen is really the second half of '23 being far better than the first half and carriers such as progressives all state really everyone who's coming out with their Q4 results showing stronger results in the second half of '23 and particularly strong results in Q4 of '23, that's really leading into -- I think justifiable optimism was justified optimism on that for where their rates are going into '24.
I think as you look back into where the industry was in '22 coming into '23, I think you're just going to see a far different picture from a profitability perspective. I think that goes to the second part of the question that you had as well, which is that in terms of other carriers, we do see sort of broad based sentiment that the market has turned we're engaged in positive growth discussions with almost all of our major carriers. Certainly this -- currently the recovery is being driven by one primary direct writer, but we are starting to see an uptick in spend from many of our major carriers, we expect that to really continue through '24 and into '25.
Cory Carpenter
Okay, great. Thank you.
Operator
Thank you.
Michael Graham, Canaccord Genuity.
Michael Graham
Yes, thank you. It's great to see the recovery taking shape I wanted to ask a question on what kind of operating leverage you think you might be able to see as we move through the year. You just guided to, I think 9.5% EBITDA margin, which is great and pretty consistent with what you were doing sort of a couple of years ago before the downturn.
I know you have cut some cost sort of from then until now. So just wondering if you could kind of frame out, how you're thinking about operating leverage if we're fortunate enough to see this recovery gain momentum throughout the year?
Pat Thompson
Yes. And Michael, this is Pat. Thank you for the questions. So would probably take that question in a couple of chunks. First piece would be to say that we're generally in the business of giving guidance kind of one quarter at a time. So there's not going to be any firm numbers kind of beyond Q1 that we'll share.
But probably a couple of things I would point you towards one would be that, this is a largely fixed cost business and transaction value goes up, revenue tends to go up as well and contribution tends to go up and overhead tends to be relatively more fixed. And I think we're in a spot where we don't have grandiose or ambitious hiring plans, of course, we're going to be adding capacity in a few places, but we're not planning on anything, no step function change in our overhead base just over the course of this year.
And regarding kind of the overhead guidance we did give for the year of modest growth, we'd kind of point you towards the comps on that, which was on May 1, of last year, we did it. So our Q1 overhead guidance has was down versus Q1 of 2023.
Q2, the comp got a little harder because we had some of the rep benefit in there. And Q3 and Q4 kind of run-rating at the lower level. And so as you think about this year, Q1 will be down year over year and then the growth rate will kind of step up as we go through the year and wouldn't be probably expecting Q3, Q4 upper end to be a bit above where we're projecting for Q1. And so hopefully that gives you some color on OpEx to be able to kind of forecast what the [take rates] could look like as the business recovers.
Michael Graham
Yeah, that's helpful. Thank you, Pat.
Operator
Thank you. (Operator Instructions)
[Tommy McJoynt, KBW].
Tommy McJoynt
Hey, good afternoon, guys. Thanks for taking my questions. Are there any lessons learned sort of thinking about this cycle relative to the last hard market and kind of exiting 2017 into 2018 and beyond. Just putting that kind of in context how we can think about the buildup and the ramp of the recovery in personal auto spend.
And if you could put that answer in the context of acknowledging that just the overall pie, I guess of the overall personal auto premium market size is evidently much larger right now than it was back then. So if you could just kind of put that in context as we think about building our forecast.
Steve Yi
Yes, sure, (inaudible) I think the most important takeaway that I have from the last hard market is really about how unpredictable the recovery can be and the magnitude of the potential recovery really making that transition from the last hard market in 2016 and '17 into 2018 is that was their biggest growth year in the history of our company.
And so the timing of this recovery I think it's still to be determined and I think that's really a testament to how unpredictable the cycle has been and how much deeper this hard market cycle was than the last one where really carrier advertising spend remained flat as opposed to this time around where by some estimates, overall, auto insurance carrier advertising spend went down by 35%, 40%.
And so when we think about the recovery and where the market come back to, certainly I don't think we don't have a lot -- we don't have a magic ball as it comes to exactly the timing and the magnitude of the recovery. But we do know from past experience that when the market does recover, it can recover pretty quickly and in a very fulsome way.
Tommy McJoynt
Got it. That's good color. And then my second question, it was really a tough stretch here for any of the business models that are dependent on insurer customer acquisition spend over the past couple of years. Did you have any indication whether or not the competitive landscape has gotten more attractive simply by means of some competitors maybe not making it through or are having to tampered down some of their growth expectations? Or do you view most of the competition to be pretty large and scaled players, you sort of have the capital resources to navigate. So it's a pretty unchanged competitive landscape.
Steve Yi
Yeah, I would listen (inaudible) honestly, I think it's remained relatively unchanged, we measure competitor -- our competitive landscape and our market share based on the number of supply partners we have (inaudible) were a marketplace. And so I mean, in this hard market when really advertisers weren't spending we didn't see really any notable movements in market share, namely any losses of supply partners or [games], that major supply partners in the dry market as we've seen over the last 2.5 to 3 years that's totally to be expected.
I think with that said, I think that the players in this space have largely remains, we didn't see anyone really drop out of the competitive marketplace and so the competitive landscape hasn't changed, but we do expect that coming out of the hard market cycle that we're going to gain market share as we did coming out of the last hard market cycle simply because we're the largest marketplace where marketplace dedicated to carrier spend and really that's where the recovery is going to happen. And so we do anticipate that we're going to gain market share vis-a-vis our competitors and what you've seen over the past 2.5 to 3 years.
Tommy McJoynt
That's great. Thank you.
Operator
Thank you.
Andrew Kligerman, TD Cowen.
Andrew Kligerman
Hey, good evening and congrats on your persistency in having a great quarter (multiple speakers) Sure. I mean, it's been a lot of tough quarterly calls, so great to be on this one. But thinking about the cadence of how your revenue might come back, I guess the first question and the two are intertwined, do you think and again, I know you only give quarterly guidance as Pat (technical difficulty) but looking out to 2025, do you see a potential where you could be at a run rate on transaction value that looks like it can grow on top of 2019 type numbers.
And then tied into that question private versus open transactions, is this large customer that you're talking about more geared toward the private market. And so as advertising opens up and more activity occurs, could that come from more open type business? And could that be a lot higher in margin and profitability than what we're seeing out of the gate in the first quarter.
Pat Thompson
Great. So Andrew, I can take that I'll maybe answer the second question first. Actually (multiple speakers) which was in regarding large customer and kind of carry into the private marketplace. So yes, that is true. The we have a couple of things. One is our P&C business generally has slightly lower take rates than our health business.
And within P&C tends to be more private that is health and our largest advertiser in P&C tends to be more heavily private, than the rest of P&C. And so I think kind of given those couple of trends, actually what we've seen is the margin step down in January, which was we (inaudible) less health in January than we did in Q4. And then spend kind of ramped up in January and February to take rates have come down a bit and we're forecasting March we think they're going to come down a bit more, and that's going to be largely mix driven and for us.
But in terms of take rate, which we kind of think of as being contribution of our transaction value. That number is kind of gently coming down as the market recovers and that's probably consistent with some of the trends that you've seen over the last few years as we've had periods of relative strengths -- periods of relative strengths. And flipping to your first question, which is what could 2025 be like, I would just say that we guide to what we have confidence in, which is Q1 and one of the things in my two-plus years I've seen here is that the further out we get into the wider our Spanish potential outcomes gets.
And I think 20, given what we see right now, we're feeling pretty good about 2025 could look like but it could be better than I'm expecting, worse than I'm expecting better than you're expecting worse than you're expecting and so it's kind of hard to say and so don't want to get into the businesses so give us even harder to resolve that when we just quite frankly, are focused on executing in Q1 and in the Q2 before we talk to you again.
Cory Carpenter
(technical difficulty) assuming a good growth level, we could see more margin coming from the open transactions which would be more profit again. But that would be my view, not yours. Is that a fair kind of assumption if we see a nice trajectory in growth more could come from open given that this big account is private?
Pat Thompson
Yes. And in Andrew, I would say it's going to be very dependent on the spend dynamics within the P&C vertical, which is one major carriers more private, they've been stepping in a meaningful way and as others come back could that mix start to shift more open, sure I could.
Andrew Kligerman
Got it. And if I could sneak one last one in on the Medicare Advantage business, would you expect that yd was a very tough year in terms of new regulation (technical difficulty) play. Do you see that -- how do you see that dynamic playing in the big fourth quarter of 2024? Do you think that you'll be more nimble, you think kind of more of the case with carriers or nimble and active in that market, given that they may have adapted to this regulation. So if you could give a little color on what the regulation was and how companies might be (technical difficulty) in 2024 that would be really helpful.
Pat Thompson
Yes. Andrew, I think the trends for 2023 and what could be coming in 2024 a little bit different (inaudible) in order, which is -- I think on the 2023, what we saw was new marketing rules are put into place, and that was around kind of what you could say in creative with the carriers ultimately having to approve marketing messaging that was put in front of consumers and in a sense it and also some changes around waiting periods for kind of working leads and outbound dialing's.
The biggest change was the marketing [rules]. And essentially, we saw some set of kind of publishers struggled to adapt to those new marketing rules to say, Hey, you've always used marketing messaging and you've got to pivot to be and that's some people were able to adapt more quickly than others on that and on the approval side, different carriers in some major brokers as well had to approve creative.
And there was a degree of inconsistency between that and as to what was allowed and wasn't (inaudible) so and it took them a while because they were kind of ramping the process in real time. And so that had kind of knock-on effects on the industry and as I think about 2023 and those regulatory changes, we're feeling like (inaudible) be a lot better as an industry the second time around.
Moving to the second part of your question, which is kind of going forward. And I think that CMS is always looking to optimize things as far as regulations goes. And I think they're talking about number of things. And there's been commentary from a number of different carriers around kind of where they're at. But I would say that rule changes by CMS, it's generally made real and meaningful progress in cleaning up some of the bad practices in the industry, and they've ultimately improved user experience for senior (inaudible) those are things that we think are actually really long-term positives for the industry, and we think they're going to keep continuing to look for ways to build on that progress.
And quite frankly, where -- we've been pretty good at adapting to these changes over time because they represent an opportunity, [Cannes] were we'll continue to do that going forward and we're really excited about the future of the Medicare Advantage business.
Andrew Kligerman
Awesome. Thanks so much.
Steve Yi
Thanks, Andrew.
Operator
Ben Hendrix, RBC Capitals.
Ben Hendrix
Thank you very much. Just a quick question on the healthcare business. We saw a lot during turbulent MA and period for earning season for the carriers and saw some market share go to one carrier in particular, [CVS] versus slower growth in some of the others. Just wanted to see kind of how that translated to your transaction mix this quarter, if you saw anything in the fourth quarter that was unusual in terms of mix and then how that's translating to OEP thus far in the season. Thank you.
Pat Thompson
Yes. And Ben I would say, of course, we saw changes on an individual carrier level basis, and we do every year on that, which is seen as some people are a little bit more bullish, a little bit more bearish. But I would say that the macro trends have been pretty stable over time of their carriers continue to find our marketplace attractive and be leaning in to find pockets of customers that makes sense.
For them and as far as translating into a special enrollment period that's underway now, I would say that business is down significantly from the [AEP] and I would say the trends are not all that different from kind of what we saw during AEP or quite frankly, what we have seen even going in AEP.
Ben Hendrix
Thank you for squeezing me in.
Pat Thompson
(inaudible) Thank you, Ben.
Operator
Thank you. Ladies and gentlemen, as we have no further questions at this time, we will conclude today's conference call. We thank you for participating, and you may now disconnect.
