EverQuote Inc. (EVER) Q1 2022 Earnings Call Transcript

EverQuote, Inc.  (NASDAQ: EVER) Q1 2022 earnings call dated May. 02, 2022

Corporate Participants:

Brinlea Johnson — Investor Relations

John Wagner — Chief Financial Officer

Jayme Mendal — Chief Executive Officer

Analysts:

Michael Graham — Canaccord Genuity Inc. — Analyst

Ralph Schackart — William Blair — Analyst

Unidentified Participant — — Analyst

Cory Carpenter — JP Morgan — Analyst

Presentation:

Operator

Good afternoon and thank you for attending today’s EverQuote First Quarter 2022 earnings call. My name is Timea, and I will be your moderator for today’s call. [Operator Instructions] I would now like to pass the conference over to our host, Brinlea Johnson with Blueshirt Group. Please go ahead.

Brinlea Johnson — Investor Relations

Thank you. Good afternoon and welcome to EverQuote’s first quarter 2022 earnings call. We’ll be discussing the results announced in 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 and full year 2022, 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 expectation regarding recovery of the auto insurance industry, our recent acquisition, our goals for integrations 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, please refer to those contained under the heading Risk Factors in our most recent Annual Report on Form 10-K, which is on file with the Securities and Exchange Commission and available on the Investor Relations section of our website at investor.everquote.and on the SEC’s website at sec.gov.

Finally, during the course of today’s call, we will refer to certain non-GAAP financial measures, which we believe are helpful to investors. A reconciliation of GAAP to non-GAAP measures was 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.

John Wagner — Chief Financial Officer

Thank you, Brinlea, and thank you all for joining us today. In the first quarter, we exceeded expectations across our 3 primary financial KPIs despite continued headwinds in the auto insurance industry, demonstrating the benefits of progress and channel and vertical diversification. We delivered revenue of $110.7 million and variable marketing margin or VMM of $34.3 million representing year-over-year growth, 7% and 9% respectively. We also generated adjusted EBITDA of $2.4 million. In Q1, our marketplace exhibited strength in customer acquisition and in our local agent distribution channel. On the consumer side of the marketplace, we grew volume by double-digit levels. On the provider side of our marketplace, we increased local agent budgets by over 20% year-over-year. We applied new data science models to drive better performance for local agents which is extending our competitive moat in this valuable channel and multiple large agent based carriers have indicated that EverQuote has become their agents largest and highest performing partner.

Our direct-to-consumer agency or DTCA, a core strategic area of investment for the company continued to perform well in Q1 and represented over 30% of revenues in the period, exceeding our internal plans. After two acquisitions and many quarters of integration work, we now sell policies across major lines of insurance including P&C, Health and Life. This represents the very early stages of the next phase of the company’s evolution to provide a rich customer experience built upon our unique position, which we believe is the only marketplace and DTCA hybrid model operating at scale across major lines of insurance. The direct carrier channel which has historically been our largest continues to face significant challenges. While early in the quarter, we saw an uptick in carrier auto demand from December lows we encountered further pullback in March, which was amplified in April as carriers continued to exit unprofitable states and segments with a little events noticed. In the past week for example one of our large carrier partners unexpectedly informed us that due to quote immense profitability pressures this year end quote, they are dramatically reducing their Q2 and Q3 customer acquisition budgets. As this carrier continues to increase rates to interrupt [Phonetic] these pressures, we anticipate they will reverse course and restore higher budgets once they are able to better align the rates to the current loss environment. As a result, we remain substantially below the levels of carrier demand in our auto vertical that we saw in August 2021, which we believe to be the level to which we will normalize upon the market’s recovery.

In Q2, we expect continued strong headwinds from auto carriers. We also expect to experience lower health demand in Q2 of 2022 reflecting seasonality entering the Medicare lock-in period that follows the Q1 open enrollment period. Let me touch on what everyone wants to know. When will auto carrier demand return and why. To derive expectations about the timing of the recovery and auto carrier demand, we solicit direct input from our carrier partners and we closely monitor their publicly reported profitability trends. The latest collected data suggests that Q2 demand will likely remain significantly depressed but at some revalued [Phonetic] is indicated to begin by the end of the year with an expectation for full recovery in the first half of 2023. Early data points that support this projection include number one, direct feedback from a large partner that they plan to reactivate by July, states which were previously paused. Number two, publicly reported loss ratios improving in recent months for large customers compared to late 2021 and three, rate increases continuing to be filed and approved. As carriers increased rate to reflect the current underwriting environment, we expect they will return to normalized levels of customer acquisition spend while driving more insurance shopping as consumers react to higher renewal rates.

In closing, despite the challenging auto insurance market, we continue to make progress towards our long-term vision to become the largest online source for insurance policies by combining data, technologies and knowledgeable advisors to make insurance simpler, more affordable and personalized. Our strategy to diversify its more stable distribution channels of local agents in our direct consumer agency helped us deliver a quarter that exceeded expectations across all of our 3 primary financial KPIs. As auto carrier demand recovers, we expect that EverQuote will be well positioned to return to our historic trend, strong revenue growth and expanding adjusted EBITDA. We remain laser focused on building an industry defining company. I continue to be incredibly proud of our team’s ability to navigate changes in the industry as we build to our objective of being the one-stop insurance up for the digital age.

Now I will turn the call over to John to provide more details on our financial results. Thank you, Jayme, 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 updated guidance for the full year of 2022. Our total revenue for the first quarter grew 7% year-over-year to $110.7 million and exceeded our guidance range provided last quarter as growth in consumer volumes and demand from non-carrier customers offset reductions and monetization due to the industry wide pullback in auto insurance advertising that has affected demand from our direct carrier customers. While the auto insurance industry challenges were evident in the nearly 20% year-over-year reduction in carrier revenue, all other distribution channels besides carrier grew year-over-year as we benefited from the diversity of our distribution. Strong DTCA in third party agent revenue growth also contributed to a 4% year-over-year increase in revenue from our auto insurance vertical. Growing that vertical to $87.7 million dollars, again despite reductions from our auto insurance carriers. With regard to carriers within the auto insurance vertical, we did see improvement in pricing in demand early in Q1, a quarter when historically carrier budgets are reset and as expected, revenue from carriers grew in Q1 as compared to Q4 as did pricing. But as Jayme mentioned, carrier demand waned as the quarter progressed with the reversal of much of that improvement late in the quarter. This retrenchment has persisted into Q2 as carriers continued to evaluate consumer acquisition targets in light of claims losses and rate changes. Revenue from our other insurance verticals which includes home and renters, life and health insurance increased 19% year-over-year to $23 million. During Q1, health DTCA revenue Increased nearly 8-fold from the prior year reflecting the operational improvements we made in DTCA last year paid off in a strong open enrollment period for Medicare Advantage coverage this year. Variable marketing margin or VMM defined as revenue less advertising expense was $34.3 million for the first quarter, an increase of 9% year-over-year and above our guidance range provided last quarter. Our VMM within the quarter reflected VMM in the upper ’20s in our marketplace blended with higher VMM contribution from DTCA. Turning to our bottom line, GAAP net loss was $5.7 million in the first quarter and adjusted EBITDA was $2.4 million dollars exceeding our guidance range provided last quarter. Our favorable VMM performance translate directly into adjusted EBITDA as we continue to forecast and manage operating expenses tightly. With regard to cash flow, you’ll recall that our marketplace produces cash that is well correlated with adjusted EBITDA while in DTCA, we recognize revenue at the time of the policy sale and collect the cash associated with that revenue over the life of the policy creating a cash requirement initially but also a future cash annuity. We believe DTCA is compelling areas of investment as it aligns with our vision for the consumer shopping experience and has demonstrated its potential for high growth and profitability. For Q1 DTCA’s higher revenue contribution and our current lower adjusted EBITDA operating point led to a use of cash of $3.8 million in the quarter. We expect to continue to use cash in operations as we grow DTCA and while our auto insurance vertical is facing reduced demand from carriers. We ended the quarter with cash and cash equivalents on the balance sheet of $46.1 million reflecting the closing of a $15 million private placement investment by Recognition Capital, an entity which is owned by David Blundin Chairman of the Board of Directors and a long time investor in the company. This investment strengthens our balance sheet and provides us with additional confidence in our liquidity and resources. Turning to our outlook and building on Jaime’s comments regarding the market conditions within the auto insurance industry, though early Q1 reflected stronger auto insurance demand from carriers, much of that demand reflected the annual reset of carrier budgets in Q1 and didn’t yet reflect the start of an industry return to acquisition spending at previous levels. Auto insurance industry trends continue to point to a hardening market for auto insurance in the near term with rate increases for consumers and lower spending on new consumer acquisition from carriers. Within our marketplace, carrier demand has been inconsistent. With carriers turning bids up early in Q1 but lowering bids later in the quarter and in some cases eliminating their bids entirely for consumers in some segments and in some states. Overall increases in carrier demand early in Q1 did not persist into Q2 and we’ve seen a second pullback in carrier demand to lower levels similar to Q4 2021. We continue to believe we are in the middle of a multi-quarter cycle for auto insurance but our view has shifted to expect a second trough in auto insurance demand in Q2 and a more gradual recovery in auto carrier demand beginning in the second half of 2022 before an expected full recovery in 2023. Through Q1, our third party and first party agents demonstrated resilience and combined with the performance of our health insurance vertical allowed us to grow revenue and remain adjusted EBITDA positive. Though we expect to continue to benefit from consistent and growing demand from our agent network, our health insurance vertical exits the open enrollment shopping season in Q2 and we expect it will operate seasonally lower rates until the start of the annual enrollment season in Q4. This health insurance vertical seasonality combined with a deeper and prolonged pullback in auto insurance carrier demand will impact our financial performance during the middle quarters of this year. For Q2, we expect revenue to be between $92 million and $97 million, a year-over-year decrease of 10% at the midpoint. We expect VMM in the quarter to be between $24 million and $27 million, a year-over-year decrease of 24% at the midpoint and we expect adjusted EBITDA to be between negative $7 million and negative $4 million. For the full year, we are adjusting our prior guidance lower to incorporate a lower level of auto insurance demand and a more gradual industry recovery in the second half of the year as follows: We expect revenue to be between $400 million and $420 million, a year-over-year decrease of 4% at the midpoint. We expect VMM to be between $110 and $120 million, a year-over-year decrease of 8% at the midpoint and we expect adjusted EBITDA of between negative $15 million and negative $5 million. In summary, we delivered results better than our guidance for the first quarter but expect a slower recovery in auto insurance carrier demand, which we’ve reflected in our outlook. While there is no doubt that we are impacted by this difficult cycle in auto insurance, we continue to execute well in areas of strategic focus and believe we will be well positioned as auto insurance carriers begin to normalize their acquisition spend. Jayme and I will now answer your questions.

Questions and Answers:

Operator

Thank you. [Operator Instructions] The first question is from the line of Michael Graham with Canaccord. Your line is open.

Michael Graham — Canaccord Genuity Inc. — Analyst

Hey, thanks a lot for all the detail on the auto macro guys. I just wanted to kind of drill in a little more to the comment you made about observing the state by state price regulation and sort of the approvals there. We’ve had feedback that when carriers are sort of priced too low, they don’t want to advertise for obvious reasons, you know. It’s adding to lack of profitability and then in the early days of getting price increases approved, they are sort of the first ones in the state. It doesn’t make that much sense to advertise because at that point in time, they are overpriced relative to competitors and so it really takes most of the carriers in the state to kind of get approved. And so I was just wanting to have you kind of just give a little more color on, in terms of where you think we are with some of those state by state process is if you could.

Jayme Mendal — Chief Executive Officer

Yes, thanks, Mike. This is Jayme. So, and that’s right. I think that’s accurate. What we are observing is there were earlier movers and later movers in the cycle, both with respect to pulling back on advertising spend and with respect to filing rates and so what will happen is your earlier movers will get their rates approved and now they are profitable in a given state but they may not be competitive in that state. And so we need to wait for some of the other carriers to raise their rates as well before they fully unleash budget in that given state. So the way that this sort of is manifesting in the recovery that we’re watching unfold is large carrier X with major customer of ours, was an earlier mover. they get their rate increases through and what they are reaffirming for us is that they by middle of the year, call it July, we’re going to be reactivated in all of our states and what you should expect from us is we’ll reactivate all states with sort of varying levels of pricing or bids and we’d expect to ratchet those bids up over the second half of the year so that we exit the year with more normalized levels as our competitiveness improves while others catch up and increase their rates. Does that makes sense, Mike?

Michael Graham — Canaccord Genuity Inc. — Analyst

It does. That’s helpful and I can appreciate that dynamic. And I also just wanted to ask John, if I could, for any more color you can provide on sort of the mix of guidance on the revenue side between Q3 and Q4. Just any high-level comments on how you expect the second half to trend from a linearity perspective.

John Wagner — Chief Financial Officer

Sure. So we’ve reflected. Well, what we have seen early in the quarter as well as information that’s very recent on the quarter as to what we would expect in Q2, I think at the low end of that guidance range we’ve assumed fairly similar performance going through Q3 and then of course Q4 we would see an increase in performance related to the annual enrollment period within health and also in the back half of the year, we do as Jamie mentioned, we do expect some of the carriers to continue to be turning on. So there. I think what we’re seeing is that carriers are in different stages in their cycles but there are certainly those and I think Jaime’s example of a large carrier who has indicated to us that they will turn on all states in the second half is indicative of one of the carriers that is kind of going through the cycle faster. So we do think there is some uptick as we move through the back half of the year.

Michael Graham — Canaccord Genuity Inc. — Analyst

Okay, thanks a lot. Really appreciate it.

Jayme Mendal — Chief Executive Officer

Thanks, Mike.

Operator

Thank you, Mr. Graham. The next question is from the line of Ralph Schackart with William Blair. Your line is open.

Ralph Schackart — William Blair — Analyst

Good afternoon and thanks for taking the question. I’m just curious what the behavior has been from carriers that have largely price rate at this point or comments that it’s sort of largely behind them. Just you’ve seen this same sort of headwind activity. Just trying to get a sense of how broad based this is across your carrier base and I have a follow-up.

Jayme Mendal — Chief Executive Officer

Yeah, so let me try to take that one, Ralph. At this point if we look across basically all of the top carriers rank order in terms of spend a year ago and we look at them today, how many have significantly pulled back their spend with us as they’ve moved to increase their rates and the answer is now all of them but that wasn’t the case coming into the year. There were still a couple of carriers, large carriers who were somewhat holding out. They were refiling their rates but they were holding out on pulling back their acquisition spend to see if they could sort of get through to the other side and that’s some of what we saw in March, April and now May is that those hold out carriers have pulled back on their acquisition spend to the point where we now can look at our entire carrier base and it does start to look like, all of the air is out of the tires and we expect that to start sort of coming back in as we progressed through the second half of the year.

Ralph Schackart — William Blair — Analyst

Okay, great. And then just one — just on the demand side in the marketplace side, can you maybe talk about that activity as rates have being put on consumers. what that activity looks like with consumers. Are they coming to the platform to shop for better rates. Just any color you could provide there would be helpful.

Jayme Mendal — Chief Executive Officer

Yeah, I I think that the increase in rates across the board does appear to be driving more shopping activity. So in our customer acquisition, we have seen strong performance so far this year. I think we mentioned double-digit growth year-over-year in terms of a quote request volume and that’s been somewhat balanced across our owned and operated channels growing as well as our Verified Partner Network growing. So the demand does appear to be up as a result of the rates increasing and as they continue — rates continue to move upwards it should only provide a tailwind in the form of more shopping volume.

Ralph Schackart — William Blair — Analyst

Okay, that’s helpful. Thanks, Jayme.

Jayme Mendal — Chief Executive Officer

Thanks, Ralph.

Operator

Thank you, Mr. Schackart. The next question is from the line of Jed Kelly with Oppenheimer. Your line is open.

Unidentified Participant — — Analyst

It’s actually Sam on for Jed. Thanks for taking my question. Just wondering, if you could dig into what you said of mentioning you expect full somewhat normalization in the first half ’23. Just wondering how your outlook for the recovery has changed since the last call and if you’re seeing any impact from competition or this is more industry related.

John Wagner — Chief Financial Officer

Sure. So I guess if you look at how we’ve changed in terms of our outlook, first, I would say I take the second part of that and say it’s absolutely industry related. And I think I think you’ve already heard our past comments echoed by carriers and other competitors in the distribution area, we’re one of the first to release here. So we’re kind of on the vanguard but I think you’ll hear the story repeated. I think what’s changed in our outlook is that we still expect improvement starting in the second half of the year. What really has changed is that we expected Q1 stronger demand coming from the carriers and indeed, we saw that stronger demand, stronger pricing, but we didn’t expect is to see that some of those gains given up late in the quarter, so that to extend into Q2. So I think we expected that the gains we would make in Q1 that are largely associated with the budget cycle and new dollars coming to us that we would see those come back, really retrench in the way the carriers were looking at the dollars. So what we’ve reflected now in our outlook is that we think Q2 is this second trough of demand and that we start to build off of that. So I think when you look at that as compared to our outlook prior, we thought Q2 would be stronger and we thought that the build in the second half of the year would be stronger. We’ve now taken that kind of a more moderate view on the build in the second half and then extending into 2023 with a full recovery.

Unidentified Participant — — Analyst

Very helpful, thank you.

Jayme Mendal — Chief Executive Officer

Thanks, Sam.

Operator

Thank you. The next question is from the line of Aaron Kessler with Raymond James. Your line is open.

Unidentified Participant — — Analyst

Hi, this is Alex on for Aaron Kessler. Maybe just wanted to ask about maybe your guidance and and if anything has changed for your expectations for agent hiring with maybe a pullback and auto, if that’s going to change anything of how you invest for the DTCA.

Jayme Mendal — Chief Executive Officer

So, hey Alex, this Jayme. The performance of DTCA continues to meet or exceed our expectations across the board and had a really strong Q1 and then in fact in many ways it was a big part of why you you didn’t see what otherwise could have been a much more challenging set of circumstances in the first quarter of this year. So I think the strategy to invest there as a more stable and diversified distribution channel has been borne out really through some of the challenges we faced recently and our appetite to continue investing remains strong. I think we will be continually evaluating our — how we weigh that level of investment against the performance of the marketplace. At the end of the day the marketplace has historically funded a lot of investments in DTCA and other new opportunities and so I think as we look at the new shape of the recovery, there there are some trade-offs that we’ll evaluate with respect to the rate at which we ramp the DTCA this year but we continue to invest behind it. It continues to improve in terms of its unit economics and its performance and so we just try to keep that balance in mind.

Unidentified Participant — — Analyst

Okay. And as I think about I guess the cash flow coming through, I know you said it would be negative as you invest. It looks like the health vertical had close to $10 million in Q1, which would I guess offset the cash flow coming in from Q4. Is that correct.

John Wagner — Chief Financial Officer

Yeah, you’re looking at a quarter in which we had negative operating expenses and overall the business had positive adjusted EBITDA but DTCA has cash year. So as you go forward, as there is pressure on adjusted EBITDA, especially in these middle quarters you would expect a higher use of cash. And then as we come into Q4, you’ll see higher contribution from DTCA but also we think improving — an improving story within the marketplace. So you kind of track a combination of DTCA contribution, which is a use of cash but also marketplace EBITDA which came in the — as the recovery takes place can become a source of cash but we continue to think that for the balance of the year, we’re going to be a net user of cash in a way that is consistent with what you’ve seen in Q4 and Q1, and actually accelerated due to the EBITDA profile as we go through the end of the year.

Unidentified Participant — — Analyst

Okay, I appreciate that.

Operator

Thank you, Mr. Kessler. [Operator Instructions] The next question is from Cory Carpenter with JP Morgan. Your line is open.

Cory Carpenter — JP Morgan — Analyst

Thanks for the questions. I had two. Just one more on the auto carrier stuff. I just want to make sure we understand what’s changed in recent weeks on the carrier side. Is the message from carriers just that states have taken longer to pass through price increases. Are you’re basically implying some more of a state specific issue delaying the recovery or could there also be other macro variable in the play here like perhaps used car pricing or some situation that’s happening in Europe, that’s also taking longer to play out. And then separately on the DTCA business, could you just talk about which is how you think about the sustainability of growth from here. Any target on how big you think this could be as a percentage of your business over time. Thank you.

Jayme Mendal — Chief Executive Officer

Thanks, Cory. So I’ll take the first question. With respect to what’s driving the delay in recovery, I don’t think there has been any change in terms of certain states holding out or not improving rates as you know, as we or the carriers expected earlier in the year. The broad macro considerations are certainly a part of why the loss environment has gotten to where it is in the first place. And you mentioned you used car market inflation and used cars being a big part of it. I think the thing that surprised us was that there would be the sort of this second wave of carriers who kind of held out on adjusting their acquisition spend until March or April or May of this year. We knew they were all experiencing similar profitability issues. We knew they were all increasing rates and we sort of anticipated that they would uniformly over some period of time if they were going to pull back on acquisition spend, they would have made those decisions before the spring of this year. And so the fact that they were 2 or 3 meaningful size carriers who really waited quite a bit longer than the rest to really reduce their acquisition spend, that was the thing that caught us off guard that there would be, so that would happen so much later in the cycle.

John Wagner — Chief Financial Officer

The second one on really what the potential of DTCA is in the long term. So I think, we think about DTCA and other verticals as diversity within our distribution that really is a combination of those could grow to be greater than 50% of what we do. So really the marketplace distribution could become over time the minority and DTCA and the other verticals outside of auto could become the majority. So I think you’ve started to see that with how DTCA has performed. DTCA has proven it can be a high growth lever for the business and one that we control more so than some of the marketplace dynamics.

Cory Carpenter — JP Morgan — Analyst

Very helpful, thank you both.

Jayme Mendal — Chief Executive Officer

Thanks, Cory.

Operator

Thank you, Mr. Carpenter. There are no additional questions waiting at this time. I will now turn it to the management team for any closing remarks.

Jayme Mendal — Chief Executive Officer

Alright, well, thanks everyone for joining us today. The Q1 performance just further validated our strategy. The diversification in verticals and distribution channels really enabled us to grow and deliver positive adjusted EBITDA despite unprecedented headwinds in the auto insurance market. It’s unfortunate that in Q2, these headwinds have intensified. Seasonality will also dampened the offsetting effect of our diversification and Health Medicare as we exit the open enrollment period and that sets us up for a challenging middle part of the year. But nonetheless, we continue to expect that auto industry recovery beginning in the second half of this year, which we anticipate will continue into 2023. Throughout the downturn, we’ve continued making progress, progress with local agents, in our direct consumer agency and that positions us really well for strong performance when the auto industry does in fact recover. Despite the market’s current challenges, our team remains laser focused on execution. We’re energized and we continue building the one-stop shop for insurance in the digital age. Thank you all.

Operator

That concludes the EverQuote’s first quarter 2022 earnings call. [Operator Closing Remarks]