All right. Morning, everyone. Cory Carpenter, Internet Analyst at JP Morgan. Excited to have EverQuote with us. Jayme and Joseph, thanks for joining.
Thanks. Good to be here.
For those newer to the story, I thought it'd be helpful to start with a high-level overview of the business and how Ever fits in the broader insurance industry.
Sure. So EverQuote's a leading online insurance marketplace. We find consumers wherever they are on the internet with some intent to buy insurance. We gather the relevant underwriting data from them, and then we do the work to match and connect them with the right subset of providers for them. So for the consumer, the value proposition is, you know, save time and money shopping for auto and home insurance. For the provider, we serve as a highly targeted customer acquisition channel at scale because we collect all the consumer's relevant underwriting information.
So the P&C industry, it's gone through some pretty radical times the past couple of years. Could you just rewind back perhaps to COVID and walk through the dynamics that have been impacting the industry?
Sure. So when COVID hit in 2020, almost overnight, you know, cars came off the roads, and as a result, the insurance carriers entered a period of windfall profitability because there were no accidents, and they were continuing to collect premiums. So that was a very profitable period, the year of 2020. 2021, as things began to normalize, cars came back on the road, you know, accident frequency returned to more, you know, normalized historical levels. That was more or less anticipated by the carriers. What they didn't anticipate was that the rampant inflationary environment would mean that the cost to repair and replace vehicles, it's known as severity in the industry, would be astronomically higher than it was pre-COVID. And so this period of healthy profitability swung to a period of somewhat horrible lack of profitability.
It has taken the industry, and we're still kind of in the later stages of it, but it has taken the industry years to work through it. So 2022, 2023, were years in which carriers were really focused on increasing their rates while losses stabilized, and during that period of time, they really had very little appetite for new customer acquisition, because to acquire another customer was likely to acquire an unprofitable customer. We are in the business, effectively of delivering customers to insurance carriers, and so during that period, you know, we lost a lot of demand out of our marketplace on the provider side. It was kind of a challenging period that caused us to kind of refocus, streamline the business, get back to basics, and, you know, are now beginning to realize some of the benefits of those actions.
So where are we in the recovery, and how has it played out thus far relative to what you were expecting?
So we are, you know, we are well into the recovery at this point. We sort of anticipated that 2024 would be the, the, the year of recovery. The only thing that has surprised us so far this year was how quickly it has materialized, at least with a, a handful of carriers. So we expected it to build somewhat slowly over the course of the year. What has happened instead is that we saw a very big step up in the sort of first part of the year, and that led to, you know, really strong results relative to our expectations in, in the first quarter and, and, you know, continued strength into the second quarter of the year.
So that was the main surprise, but by and large, you know, it is developing as expected this year, and we do expect it to kind of extend into next year as carriers continue to take rate, earn those rates in, and get back into customer acquisition mode.
So Joseph, for you, just in terms of how that translates to the financials, last quarter, you mentioned the recovery may not be linear. Seasonality could be obscured from prior years. How are you thinking about the key variables impacting revenue the next few quarters?
Sure. So, thanks for the question. Maybe to give some context, we started this year. We gave our guide in February, and we had a really strong March, you know, stronger than we expected. And so when we looked at the strength of Q1 and what we're projecting in Q2, the midpoint of our guide, you know, we see a really front-loaded recovery this year, and maybe just a little bit of context on sort of what's going on. In the February call, we did not give an annual guide, and a lot of analysts and investors were saying: How do we think about the rest of the year?
And so a lot of folks sort of looked to seasonal patterns, and what we described in the February call on seasonal patterns is, the seasonal patterns over the past 5 years of being a public company have varied wildly, but in general, they had a pattern of start the year, you go down a bit in Q2, up in Q3, down in Q4. If you look at what's happening between what we've said in Q1 and what happened in Q1 and what's the guide is for Q2, you actually have a 13% up from Q2 over Q1, so you're already breaking the seasonal pattern. And so one of the comment we had is, when we look at recovery right now, it's hard to see the seasonal pattern applying just given that guide.
So what we see for the second part of the year is something as follows, which is we are not seeing a seasonal increase from Q3 over Q2. We don't have the visibility to see that. And the way to think about it right now is, what are we seeing right now in the business, right? So we had one really large carrier start the year very strong, and that is continuing to Q2. We have another group of carriers, which I would say are sort of, you know, enthusiastic about recovery, but a bit of fits and starts, right? You know, we can see them coming back into the marketplace.
I've given a few examples on our earnings call where, you know, the carriers are coming back into the market, enthusiastic about getting back to growth mode, but they're sort of figuring it out. And the analogy I'd give you is, or the, maybe the explanation I'd give you is, think if you're the CMO of one of these carriers. You're not the largest, the CMO of the largest carrier, you're one of the others, and you're being told on one side, "Grow, grow, grow," by your CEO, and your CFO is saying, "Let's make sure we do this carefully." And so as you go about doing that... none of these carriers really have a playbook for how to come out of a, of not doing growth for three years.
So as they think about that, you're seeing a bit of, you know, fits and starts. And a few examples we gave, help make it real for folks is, we had one of our top 10 carriers in April, they actually were down from March. In and of itself, not unusual, but it was actually the lowest month of the fourth, for the first part of the year, first four months of the year. We had another carrier who started aggressively going into states before other carriers were there and started to pull back as they saw increasing competition for customer acquisition.
In all of that, we, when we see those things, we say, "Geez, let's figure out. We see the change, so let's reach out and figure what's going on." And what you'd realize in talking to carriers is, okay, we're working it through, and we see that, and we'll continue to do that. But what that means for us as we think about the second half of the year, a couple pieces. That group of carriers, unpredictable, I'd say, is the way to describe it, you know, especially in the near term, the focus on growth is clearly there over the next several quarters, but seeing how it's going to play out is an open question.
And then for our largest carrier, the comments we've given are, they've said they've opened a number of states, and they have more states opening through Q2 that are implied in our guide, are included in our guide. If you look ahead for what other states could open, there's some large states, but unclear that the, with heavy regulatory environment, unlikely they'll open in the second half of the year in a meaningful way. So you see those more in 2025, and that's also baked into our guide. So when you put that all together, you say, second half of the year, hard to see that seasonality going up from Q2 to Q3. Then you also have a dynamic where, you know, it's clear visibility to what's the next bump is a little unclear.
So also, your 2Q guide, I mean, basically has auto revenue back to prior highs. Could you talk about the dynamic? Look, auto policy prices are up at least, I think, 50% plus from three years ago. We can all feel that. How does that impact carrier customer acquisition budgets? Is it as simple as if policy prices are 50% higher, you know, carrier spend goes up 50%? Or how do you think about that?
Sure. So I'll, I'll first maybe hit your point, which is in our Q2 guide, what we've said is the midpoint of that guide not only is seasonally up from 13% from Q1, but also is would be at or near peak levels for auto. So thank you for reminding me of that, which we last saw in Q1 of 2023. If you look at the increase in spend, the carriers have had up to 50% increase in rates, you know, depending on which carrier and which state. You know, generally speaking, and as things normalize for carriers, what you see is they spend 10%-15% of their premium dollars on marketing costs, right? That's a historical pattern for the carriers.
As you see a 50% increase, we're not saying that every carrier is going to have a 50% increase in their marketing spend, but certainly, it's a strong tailwind for us as it develops, and we'll see exactly what percentage it involves, but we certainly are encouraged by it. Put that into context. Going into the auto downturn in 2021, we were early in insurance going online. The rest of the world has shifted more online in this period, so insurance is probably even more of a lag, and you see this additional benefit for us of large rate increases. I think that puts a nice combination of tailwinds behind us.
A lot of the discussion's been focused on kind of the direct carrier channel, given they've led the recovery. You also have an agency channel within auto. Could you talk about your agency presence? You know, how big is that channel relative to your carrier business?
Yeah, I can take this one. So we have, I mean, two primary distribution channels. We have the direct carriers, so these are carriers that largely want to acquire customers through a direct-to-consumer channel. These are Progressives, GEICOs of the world. Then we also have a large agency channel, and the majority of insurance is actually distributed through local agents. Most of our business is with the captive agents, so that's like State Farm, Farmers, Allstate, where if you want to get product from one of those insurance carriers, you've got to go through one of their local agents. And we provide that sort of mechanism to connect the online insurance shopper with that local agent. As it relates to, you know, where are they in the cycle, the agent channel tends to move more slowly than the carrier channel.
You know, when the carriers need to cut back on advertising spend, the first thing they can do, and the thing with the least sort of cascading effects, is to just pull back on their direct spend, and so that's where we saw it hit first. And then, you know, they're a bit more methodical in any changes they make to the agent channel because they don't like to disrupt their primary point of distribution, which is these agents, who actually, you know, have emotions unlike the campaigns that are running in Google or with EverQuote. So that was slower to develop, but beginning in early 2023, we saw carriers start to actually restrict underwriting, pull back economic support for agents in terms of their customer acquisition dollars.
And now, as we turn the corner to 2024, we're starting to see that loosen up a bit, but our expectation is, as they were sort of slower to enter the effects of the hard market cycle, they'll be slower to exit. And so we would expect the agent demand to continue to build over the course of this year and into next year.
And then-
Let me give you a little size on that, context on its percentage of revenues. So historically, the agents channel was sort of mid- to high-30s% prior to the downturn, was sort of a good, a good way to think about it. During the downturn, it hit peaks where it got, you know, it did hit 50+%-
Mm-hmm.
Because the denominator of carriers on the direct side went down. So we'll see that, we'll see it normalize over time as we get back to... We'd expect it to normalize back into that sort of, you know, high thirties range as we get recovery, but we'll see exactly how it plays out.
Could you talk about the different, kind of margin dynamics between those two channels?
Sure. So generally speaking, the VMM margin of the agent channel is somewhat higher than the direct channel. You know, not always, not every, not with every traffic channel, but generally speaking. So one of the impacts, the way that manifests itself, if you look at our Q2 guide, for example, our VMM margin is just under 31%. We had signaled it, we had signaled this when we did our February call. But when you think about what drove that down a very warm percent, was certainly the increase in advertising costs, but the other piece is just the mix. When you have a mix towards direct channel, it tends to bring it down. As you get agency recovering, you'd expect to get some benefit of that over time.
... Okay, so could you talk about the primary channels where you acquire customers? Any rough splits around, like, search, social, et cetera. And then when you sell leads, you know, how does that break down between clicks, calls, data, et cetera?
Sure. So we don't break out, you know, by channels or traffic acquisition, but what we can say is it's a fairly well-diversified portfolio of traffic. You know, we try and find consumers wherever they are on the internet, so intent to buy insurance. And so that includes display channels, social channels, search, you know, affiliate partnerships, and on down the line. We, you know, we continue to sort of test into and expand into new channels, you know, as our monetization permits. Now, as it relates to referral by referral type, so I think you asked, like, calls versus clicks versus leads. I think historically, calls is probably you know, been stable around 10% of the business.
And then the balance between clicks and leads is pretty proportional to our direct carrier versus our agent segment, 'cause it tends to be the direct carriers who are buying clicks into their online workflows, whereas the local agents need to get, you know, the consumer sort of transitioned from the online shopping process to the offline buying cycle, and so they're buying leads predominantly.
I failed to mention at the beginning, but if you have questions, you can submit them online. We have an iPad that'll show it, or if you want to ask one, in the audience, feel free to raise your hand. So during the downturn, the auto downturn, you went through a restructuring, you sold your health business. Could you talk about some of the changes you made and just the thought process behind your decision to really double down on auto?
Sure. So I'll, I'll start, you can add on. So, so in June of 2023, we did a strategic realignment of the business. The result of that was we exited our health vertical, we had a 30% reduction in our workforce, 20% reduction in sort of operating expenses, and really, we came out of that really focused on P&C. P&C being the auto and home vertical. Auto's roughly 85% of business, home's about 15% today. We look at the-- we looked at where we could win long term, and we did, we did a, a real review, and we said, "Hey, P&C, we have data and tech and assets that are... Data, assets, and technology are very valuable.
We've built a real expertise in that area." You overlay the third-party agency business we built, which we think is a unique asset, has been quite resilient in the downturn. We think it's really differentiated in distribution. And third is just the scale of the business we built in P&C. When you put those all together, we said, "That's an area we can win long term," and we said, "Let's go deeper and help our clients succeed." And part of that was a result of the feedback we got from our clients. In the first part of last year, we spent some time talking to, you know, agents, talking to carriers, saying, "What can we do to help be more, help you, help work with you better?" And one of the key things was they want us to go deeper in working with them.
So we said, as opposed to being at a mile wide and an inch deep, we're gonna really focus and go deeper on P&C, and we think that's gonna allow us to do things that help our carriers and agents be more successful, solve more complex pain points, which we think in turn will leverage our data in a way that helps them do that, and over time, build a stronger competitive moat. So that's what we've done. If you think about the results coming out of that, from a financial viewpoint, we've now Adjusted EBITDA as a really good proxy for operating cash flow. We took the business, which was a marketplace business, and went public.
We did lots of expansion into not just health, but also having first-party distribution, both health agents and P&C agents. We've exited the health business entirely, sold it off later in the summer, and we have a very small P&C agency business today. And all of that comes into we're making an asset-light model, going back to our roots, focusing in on P&C. We think that's gonna help us win better long term. And in the near term, it's created really nice conversion from adjusted EBITDA to free cash flow. And the operating leverage, you know, that we built in the model really manifested itself in Q1, where you saw us actually get adjusted EBITDA at a record level, $7.5 million. You also had net income, something that's historically have not talked about EverQuote, of almost $2 million. I think that really is represented, those changes really paying dividends already.
Just given where you are in the cycle and the, you know, magnitude of sequential growth you're seeing, you know, 100, 100-ish% in auto or carrier channel, how much incremental investment is needed to support top-line growth through the cycle upswing, and are there any areas you're looking to make discretionary investments?
So you want to start... I'll start with discretionary investments. You want to talk about the areas, the key areas?
Go ahead.
Yeah, sure. So, in terms of investment for this year, we don't really see a lot of investment needs to have auto recovery for this year. You know, the business is, as you think about the way we've set up the, the model, this is a year where any investments we really make are really paying out dividends for future years and investing in growth for future years. The only increase you really would see this year may be the, the marginal hire in customer service or variable comp. And then maybe from the investment areas, you want to touch on?
Yeah, I think the couple of areas that we're really focused on right now are really extending our data moat, so those would be investments in analysts, you know, data science, AI, engineering, all in that area. Because we, you know, we think we have a real advantage in both the scale and depth of data that we have. We've been able to drive a lot of value with that in our traffic bidding, in our personalization of our experience, in our routing. So we have a roadmap there that we really want to accelerate. And then the other part, the other area where, you know, we see opportunity to invest is in the local agent channel.
We have relationships with, you know, thousands of local agents, but we see opportunities there, both in terms of expanding into the independent agent segment. So about half the agents out there are captive agents, are captive to one carrier, about half are independent, representing many carriers. We do very little with the independent agents today, but just begun to get, you know, to penetrate that segment and think we can continue to build there. And then there's another dimension of growth with the agents, which is to effectively take on more of their customer acquisition needs, particularly as it relates to digital marketing. And so expanding kind of our share of wallet by delivering better products, more products into that segment of customers, we see as an opportunity and an area we're going to continue to invest.
Any questions in the audience? All right. Home insurance, you mentioned this briefly, about 15% of revenue. Could you just talk about your outlook on the home vertical, why you stayed in it, although you exited health?
Yeah, sure. So, you know, our decision when we exited health was to really go deep within P&C. And so P&C insurance is, you know, basically the anchor products there on the personal line side are auto insurance and home insurance, and they're often bundled together, as I'm sure most people know. They're sold together. It's the same carriers and agents that are, you know, that are focused on auto and home insurance. And so in that pursuit of, you know, going deeper with our P&C customers, home is, you know, a product that is critical to accomplishing that.
There may be other sort of ancillary or adjacent P&C products in the future that would fit more cleanly into that strategy, where we have really high distribution leverage, as opposed to, you know, health or Medicare insurance, which was a bit more far afield from a distribution standpoint.
Any examples of the ancillary P&C?
Yeah, sure. I mean, there you could think of, like, almost subproducts within. Some people may think about it under the auto and home umbrella, but something like motorcycle or RV, you know, toys, so boats. You know, within home, there are similar examples, like flood insurance or, you know, fire, quake. So these are kind of products that are distributed by the same set of carriers and agents. They are consumed by the same consumers, and it allows us to help sort of create a more holistic P&C marketplace for both sides.
So I want to talk a bit about just the competitive landscape, your moats. There's a number of insurance lead generation companies out there. I won't name them here, but what's differentiated about EverQuote? How do you think of your competitive moat?
Sure. So we are... I mean, we are the largest P&C insurance marketplace by scale. And with that, I think, comes a handful of advantages. Number one is, I mentioned our data moat earlier, right? But the more consumers we see shopping for insurance, the more matches we make to providers, the more data we get back from providers on the outcomes of those matches, the LTV of those consumers, the better sort of mousetrap we're able to create. And so we believe we have a moat in the data assets that we have and how we use them, the technology that we've built on top of them. You know, the other points of distinction I'd point to are the local agent network.
We have the largest local agent network out there, and we're continuing to invest in extending the advantage with those local agents by adding, you know, by adding agents and going deeper with them. And then I think there's another point of distinction, which is simply our focus. So if you look at a lot of the other marketplaces or lead gen companies out there, they.
I think all of them are in many more lines of business than we are, right? So whether that's within insurance and health and Medicare or other financial services or, you know, in some cases, more far afield, like home services or things like that. We think there's a real trade-off between going wide and going deep, and our point of view is that by... The market is sufficiently large that if you can add more value by going deep, that is a winning strategy.
Have you seen any notable share shifts in the industry coming out of the hard cycle?
No. I mean, you know, during the hard cycle, I think everybody, by and large, was really focused on driving, you know, maximizing profitability within a very constrained sort of budget envelope because there were very few carriers or agents actually looking to acquire customers. And so there was a whole lot of optimization going on, which was really actively reducing volume during periods of time.
Now, as we get back to a more normalized state of the industry, and, you know, again, that'll materialize over some number of quarters, potentially, you know, years, then I think it's probably, this is the right moment in time to begin thinking about share again. But we haven't noticed anything different. Like I said, we remain the leading P&C marketplace by scale, and that's, you know, in the context of us having really managed heavily to margin optimization over the last year, so.
Last one on the industry broadly. Just, I think one of the things that surprised us was there was the lack of consolidation in the down cycle. You know, do you think the industry needs or could benefit from consolidation, and what's your appetite for acquisitions?
So I would say, you know, we feel very good about the hand we have, and, you know, we think we have a winning hand long term, and as a company that does not need that M&A to make it work, right? We, we feel very good about our strategy. I would say that if as consolidations, you know, start to take place in the space, and, and we've observed it and others have commented that will happen, we think there's an opportunity for us potentially to accelerate what we're already doing in our core strategy. But for us, it really has to fit the sort of over the plate focused on P&C. As Jayme said, we believe there's benefits to going deep in this area and not going wide.
So as we think about opportunities for M&A, you'll see us be very focused on, you know, what I call one standard deviation away from where we're at, which is focused on P&C. It's accelerating something we're already doing in our strategy, and overlaying with that has financial returns that drive cash flow, just as we're thinking in our core business.
... So, once the auto market does fully recover, which could be quarters, could be, could be years, how do you think about the right normalized growth for EverQuote in, in the margin profile of the business?
Sure. So historically, we've talked about 20+% growth on the top line and getting to 25% Adjusted EBITDA margins. And I will not forget a comment that were just before the downturn from one of our investors, who said, "Geez, you're around 5%-6% Adjusted EBITDA margins for some time," for in the couple of years prior to the downturn, "but you were growing the top line nicely." And he said, "5%-6%, so if you're going to get 25%, that could be 100 basis points. So that's like 20 years. I will be dead, or at least not being an investor." And so when I think about that, one of the things I think we're trying to do now in our model is, yes, we're gonna have growth.
We're also trying to bring back improving Adjusted EBITDA margins. So this year we've got it to, you know, assume it's 6%-8% for the year, give or take. We'll manage expenses accordingly. Obviously, if we have a really strong quarter, stronger than we're expecting, could you have a result where a single quarter goes to double digits? That's, I guess, theoretically, mathematically possible. But I would say assume it's 6%-8% for the year, and then you'd see next year, maybe 7%-9%. We haven't talked in a lot of details about our model going forward. As we come out of the auto downturn and get more focused on the future of EverQuote, we'll be updating, you know, having a time to update everyone on sort of the strategy of EverQuote and talking more about that model.
Any audience questions? Then I have two more, and we'll wrap up. All right, so, I think I have to ask you this every year, but when you're at the conference this time next year... you know, are we still in a cycle upswing, or kind of where are we on the recovery path, if you have a crystal ball?
Well, we'd have to go back and check our answer from last year and the year before to see if my crystal ball works. But I would say we're in the tail end of the recovery. As I think Joseph alluded to earlier, you have a handful of states, primarily states like California, New York, Michigan. These are states that have a sort of notoriously difficult regulatory regime, and carriers, by and large, don't expect to have rate adequacy in those states in 2024. They think that it's possible that they'll get there in 2025. So you take those states together, it's probably 10%-20% of the population.
But I think at a minimum, you'd have kind of a tail end of a recovery, which includes those states in 2025. And then I think the question is how many of the carriers are still just kind of working their way through the rate increase, you know, later this year versus 2025. But I imagine there will be some amount of slippage into 2025. So handful of carriers, a handful of states that will probably not get back to normal until next year.
Okay. And then just, there's been a myopic focus on the cycle and the turns. But maybe, Jayme, stepping back, what are the one or two things you're most excited about in the years ahead or you think could be most transformative to EverQuote?
Yeah. So I think for us, it's, it's, you know, there's this theme right now of transitioning from defense to offense, right? We've gone through a very challenging period for the company, and it's gone on for 2-3 years at this point. But we've made the necessary changes to get through that and emerge a stronger business. And in Q1, you know, things began to play out exactly as we expected. You know, record operating cash flow, record Adjusted EBITDA and net income, right? And so we are operating from a strong position of strength, clean balance sheet. We have a team that's been largely sort of, like, hardened through this experience and is now very focused on P&C and a more, like, crisp and clear strategy than I think we've had in some time.
And so for us, it's really working through this process of articulating where are we gonna place some concentrated bets and getting back on offense over the next couple of years, 'cause we, we continue to believe that it's just a matter of, it's more a matter of, of when than if. Like, the insurance industry is moving into the digital age, and, and insurance distribution is moving into the digital age. We have a leading position within P&C insurance in online distribution, and we think that, that there's just a tremendous amount of opportunity of tailwind to, to build into. And, you know, in the end, there will be, one, if not more than one, really sort of meaningful, big companies in this space, and we think EverQuote's, as well positioned as any to, to become that company.
Okay, great. I think we'll leave it there. Thank you, all.
Thanks, Cory.
Thank you, Cory.
Thanks, all.