All right, good afternoon. Thanks for hanging out with us the whole day. We really appreciate your attendance at our annual Growth Stock Conference. I'm Ralph Schackart, internet analyst at William Blair. Thanks for attending, and also for your interest in EverQuote. Today, we have Jaymie, CEO, Joseph, CFO of EverQuote. I've asked and Joseph to maybe spend a couple of extra minutes on the overview of the company because there's some nuances to the vertical, the internet vertical here. So I think Jaymie's gonna kick it off, and sort of walk you through the history of how carriers set rates, maybe during the term time of the IPO, going into COVID, coming out of COVID, to present day, and then we'll kick it off in the Q&A from there.
Does that sound like a good starting point?
That works.
Great.
All right. Thanks, all, for joining. So just by way of introduction, for those who are not familiar with EverQuote, we're a leading online insurance marketplace. So we'll find consumers wherever they are on the internet, some intent to buy insurance. We'll get them to our site predominantly through programmatic paid performance marketing. We'll gather all the relevant underwriting data that would be required to make an informed decision on who would be the right insurance carrier for them, and then we'll do the work to match and connect them with that subset of insurance providers as seamlessly as possible. So value prop for the consumer is save time and money shopping for insurance, and value prop for the provider is we are a very large, highly targetable customer acquisition channel for them.
So, you know, Ralph asked me to give a little bit of, like, the sort of history. You know, we went public in 2018. At that time, it was sort of a relatively, like, normal auto insurance market, predominantly focused on auto and home insurance, so P&C. And, you know, the backdrop for auto insurance at that time was healthy, meaning, you know, rates are set by the auto insurance carriers at any given time. They do that at the state level, so they have to work through, you know, 50 sort of state regulators to get their rates set, and they're always trying to manage their rates relative to their losses, basically their expenses and their claims losses.
So, you know, in a healthy auto insurance environment, there's roughly a, you know, 5-10-point spread between premiums and and expenses, and that's referred to as the Combined ratio in the industry. In 2021, Well, it began really with COVID. So 2020, you can imagine, cars came off the market, cars came off the roads, excuse me. And at that time, there were very few car accidents occurring. So the auto insurance carriers entered this period of truly, like, windfall profitability, and that was a, you know, very good year in 2020. They had incredible appetite for new customer growth.
They were sort of reducing rates and competing for share during that period of time, and that was a period of, you know, significant growth for EverQuote, really, from our IPO through that 2020 period. In 2021, cars returned to the roads, and, you know, the carriers largely anticipated that. What they did not anticipate was that the cost to deal with claims, so to repair vehicles, to replace vehicles, would be astronomically higher than it was going into COVID. So you can think about some of the key cost drivers, like the cost to replace a vehicle out of the used car market. Used car prices were up, like, not five, 10%, like 70, 80%.
Sometime middle of 2021, the industry found itself underwater, like, in a historic way, and almost overnight, you know, auto insurance carriers realized that their rates were not nearly where they needed to be relative to the new sort of post-COVID loss environment and pulled back dramatically on all their new customer acquisition spend at that time, because to acquire a new policyholder was effectively to acquire, you know, a future loss. Even if you gave them a new customer for free, they didn't want it. Needless to say, that was, you know, very impactful for a business like ours.
We are in the business of delivering new customers to insurance carriers, and so they went through this cycle, for, you know, between 2021, really, you know, we're kind of just beginning to emerge out the other side now. So this was, like, a three-year cycle where they were increasing the insurance rates. Early on in the cycle, the losses were continuing to sort of inflate, and so they had to go through multiple cycles where they were filing for higher rates with the state departments of insurance and we're just now getting back to a more healthy, normalized underwriting environment in auto insurance, which has, you know, been a good thing for EverQuote after having gone through a challenging period over the last few years.
Great, and then last I recall, there had been some sort of fits and starts or head fakes, if that's a sort of fair way to characterize it. We thought the market recovered, and then sort of you saw some pullback. I guess, sort of, what are you seeing now that's different that potentially gives you added confidence that this is sort of sustained going forward?
Yeah, there's a couple things. So what we look for is a healthy underwriting environment, meaning the auto insurance carriers are producing combined ratios that are in line with their targets or below their targets. And what we are seeing now is almost across the board, most carriers look to be in relatively healthy condition from an underwriting profitability standpoint. And if you compare it to where they were last year, you're seeing, you know, 10-20 points of combined ratios improvement from last year to this year, and it's fairly broad-based. So most carriers are getting back to a healthier place. That is being reflected, you know, with the spend that is beginning to reenter the marketplace, and so the underlying profitability is healthy.
Spend is, you know, coming back into the marketplace, so the recovery is beginning to play out as we would expect. And then what gives us a little bit of added confidence that this time it's, it's here to stay, is that a lot of the cost drivers which were driving up losses earlier in the cycle, so, you know, used car prices, some of the labor indices that we look at have largely, if not stabilized, if not, if not come down, at least stabilized. So that would suggest that this kind of healthier underwriting environment is, is likely here to stay, right? It's got some staying power for the foreseeable future.
Maybe if you kind of split your business or think about it from the carrier side versus the agent side, you know, are you seeing similar trends? Are there any sort of differences between them?
Yeah, so we have two kind of segments on the distribution side of our marketplace. We have direct-to-consumer carriers who want to take the consumers, you know, directly. These are companies like Progressive, GEICO, that kind of set up their distribution to sell policies directly to the consumer. And then we've got a very large, largest agent network in the industry. So other carriers like, you know, State Farm or Allstate or Farmers distribute predominantly or exclusively through local agents. So we've kind of built the relationships both with those direct carriers and with the local agents to be able to provide a comprehensive set of options for the consumer. And these two channels, they behave slightly differently.
The direct carriers, you know, engage with us in a sort of centralized, programmatic kind of way, and so they were very quick to respond to the hard market in pulling back spend, pausing states, you know, reducing their spending levels. They're also quicker to sort of reactivate as we come through the other side of the cycle. The agent channel tends to move a bit more slowly because the carriers don't really want to disrupt their primary source of distribution. So it took them a little bit longer to pull back on their spend or their carrier support of the agents. It's a bit more stable through the downturn and is now, you know, we would expect it to kind of be a bit lagged on the upswing as well.
So maybe kind of summarize the recovery, so to speak. Where are we sort of in that cycle? I think maybe on the most recent call, wasn't sure if it was you or Joseph, that said that you may have seen sort of a quicker pull-through, on the front end, but just sort of if you could kind of frame where we are today.
Sure. So we, you know, we came into the year expecting a sort of steady recovery through 2024 and likely extending into 2025. What we saw was a bit more of a dramatic step-up in the first part of the year than we expected, which was, you know, resulted in some outperformance relative to expectations in the first part of the year. So that was good. That, though, we think was a bit of like a pull forward in terms of what we expected this year. We can see very clearly, likely another leg up in 2025, which is going to be driven by a handful of states which have been slower to grant rate approvals, so they're just like the laggards from a regulatory standpoint. And those are big states.
They're states like California, states like New York, where we have clear signal from the carriers that they expect those to come back online next year. So we had a big leg up in the first part of this year. We expect another leg up, you know, out next year. And then I think in the middle, you've got a question about exactly like, who will, you know, reactivate what campaigns or what budget or what states when? You know, you have this sort of first mover carrier or carriers that sort of gone already. And then you've got everyone else is kind of on a spectrum where, you know, as they get their underwriting healthier, they are releasing more spend. It's just we don't have great visibility because of how volatile things have been in terms of exactly who will take what actions when.
I think the general thrust is, you know, moving in the right direction and we'll see how the back part of the year plays out.
Let me kind of turn into market share and the financials. You made some changes during the downturn to the business. You've had to make some, you know, tough business decisions and exit some businesses. Maybe kind of walk through what changed and then how that positions you going forward for having, I guess, sort of a sharper focus on, you know, where you're, the market segments where you are today and how that will sort of translate to market share gains.
Sure.
Sure, yeah. Thanks, Ralph. Maybe the actions we took last year, in June of last year, we did a pretty significant strategic realignment. The result of that was we exited the health vertical, which our health vertical, for those who are not familiar with it, we started in 2020, and we went into that vertical and also added first-party distribution, meaning we had our own agents as well. So we exited all of that, with the restructure we did. It resulted in about 30% reduction in our workforce, 'cause in addition to doing it in the health, we scaled back the DTC business we had on the P&C side as well.
That resulted about a 20% cost reduction, and then notably, we got back to our roots of focusing on an asset-light model, really focused on tech and data-driven differentiation, which was really the story we went public with, and the story was really our roots. And, you know, for those of you who... The history of us is we were a Cambridge-based company. We were right, very close to MIT, and the whole view was we're not insurance guys by background. We were how to use data and technology to acquire consumers the best performing providers. So we're sort of going back to that focus.
The idea of going deep on P&C was, as we thought about the different verticals we're in and the different ways we were trying to be in first-party and third-party distribution, we came to the conclusion is, where are our core assets, where we can actually win long term? And we looked at that, and we said, within P&C, we've been at this for a long time. We are in Q1, we were the largest P&C marketplace. It reflects the fact that we have deep experience in auto. We've been in home for a long time. But you overlay with that all the data and technology we've amassed, that we continue to benefit. The other piece you wrap around that is this third-party distribution on the agent side, which Jayme referenced.
It's about 6,500 local agents, and that is something that has been very much more resilient in the downturn, just given the nature of that dynamic around agents, and carrier is not wanting to disrupt how they work with their agents. The second piece is it gives a piece of distribution for consumers access to insurance options that often are great matches for them. And, you know, a large portion of insurance options for consumers would not be accessible if you never access those agents. So that's why we went deeper on the P&C marketplace. What that's done from a financial viewpoint is it's now made us a business where we've become cash flow positive. We had record Adjusted EBITDA record. We also have record net income in Q1.
Got us back to a position where Adjusted EBITDAs are a really good proxy for operating cash flow, so it makes Ralph's job easy when he's doing his model, which we've tried to help you along the way.
It's Mary, actually, not me.
Maria. So for Maria, I'd say that's really, you know, a lot of the intention we've got for investors is we've got in we did made some really tough decisions. We built operating leverage in the model. We're now seeing the benefits; we're getting recovery. You overlay with that, we, by going deeper in P&C, we think we believe we're setting up an opportunity to really win long term and build a deeper competitive mode in that area.
Maybe you can double-click on that for a second. So the recovery, hopefully, is behind us. You've made the operational changes, taken a lot of costs out of the business. So that incremental dollar that you're capturing going forward, give us a sense of the scale that you can, you know, sort of, deliver in, in terms of, to the bottom line.
Sure. So for context, we were losing money last year, so we had... Even when we had Adjusted EBITDA, that was negative cash flow. So what we committed to last year when we were going out right after restructuring is two things: We get back to cash flow positive. We said we'd do that in 2024, in the first half. We actually did that really at the start of the year. Second thing, we said we'd get back to pre-downturn, Adjusted EBITDA margin. So Jayme mentioned summer 2021 was when the downturn really began in earnest. Our pre-downturn Adjusted EBITDA margin is, like, 5.5%-6%. Q1, we are over 8%. So we sort of, you know, did we had record margins as well as record Adjusted EBITDA.
As we think about managing it this year, way we think about it is first, we're going to control the things that are in our control and manage them tightly, like on operating expenses. What we've showed to the investors after our restructuring last year is that we know how to manage the leverage of the business related to how we invest and how we look at returns in those areas, and you've seen us continue to do that this year. The result of that is we've had OpEx that started the year. We had a modest increase in the implied by the guide this year, and we'll continue to be disciplined in expanding that.
We don't know how the top side will go this for the rest of the year, but what we'd say is you won't see Adjusted EBITDA margins below 6%, and we'll keep it above there. And you and we've said at the upper end, you sort of see, you know, what we had in Q1, 8%. You know, if you push me, which, you know, Ralph likes to do when we have these calls, is if you had is there a chance you'd get double-digit margins in a given quarter? And in theory, yes, you could, especially if, you know, the last month of the quarter was really strong, those dollars would flow to the bottom line, which would give you a double-digit Adjusted EBITDA margin.
Wouldn't say it was the new normal, but you could certainly see that didn't ever happen in a given quarter.
And then?
Going to next year, we haven't given a lot of guidance for the model and precision, but we have said we are committed to having expanding Adjusted EBITDA margin. So if it's in the 6%-8% range this year, you know, we'd start by saying it would be 7%-9%. Next year, you'll see us building upon that. But at the same time, the long-term model we've always talked about is, you know, 20, 20-ish% growth on the top line. We're still committing to that type of growth.
And then there's differences between the margin structure between the carrier business and the agent business. Maybe kind of walk us through that and how much impact that could have, I guess, in 2024 and potentially in 2025?
Sure. So if you look at our two businesses, the carrier business, think of it as you're doing enterprise sales, so it's long time to, you know, building relationships and developing them. But you have more leverage in the model because you have a strong business development team, but you don't have the resources to support them as you would with the small businesses. On the agent side, it's really effectively managing small businesses and supporting small business. So a lot of that we do through our technology platform, but there is sort of somewhat more cost there. So the way to think about from a business viewpoint is we've talked about at the VMM level, the variable marketing margin level, which is revenue less advertising costs.
So VMM margins, generally speaking, are higher in the agency business than they are in the carrier channel, the direct carrier channel, just reflecting you're selling to small business versus larger carriers. And you also have more cost flow that we have to reflect. We haven't really talked about it more at the Adjusted EBITDA line, but maybe in future times we'll do well.
VMM is obviously a key metric for the company. Maybe kind of walk through some of the, sort of the volatility that you're seeing in that metric. Then, assuming ad budgets continue to come back, that puts you upward bias on the Google network, so to speak, you know, how does that impact the business as well?
Sure.
Potentially.
So Variable Marketing Margin, if you look at our business over time, you've generally seen us adding to Variable Marketing Margin within our marketplace business over time. And last year, you know, it's been confusing for investors, so I'll cut through. So last year, the Variable Marketing Margin percentage averaged about 35% in the year, but it and it was driven by a couple factors that I would say unique, right? One factor was you had this direct-to-consumer agency business, which we've largely exited, which had a higher VMM margin. But the second half of the year was notably driven by a very depressed advertising environment. So you get very it was relatively attractive to buy advertising, you get very high margin on it.
So if you look at how to normalize and to think about going forward, say, in 2023, if you factor out those things, the business started with a marketplace VMM margin, like 29%-30%, started 2023. If you look at what we've said for this year, we've said Q1, we said just under 34%. Assume it'll normalize this year into the low 30s, 31%-32%, which it says we're-- was 29%-30% start of last year. We're adding, you know, 200-300 basis points by the end of this year. I think that's a good way to think about it. And over time, you'll see us continue to have some improvement. It's important to note, though, that we're always mindful of managing VMM margin, but also the VMM dollars.
If we, you know, we think about the incremental dollars we can receive, and that's on a day-to-day basis, that's really how we operate the business. We certainly look at the margin at a regularly throughout the quarter, but that's. We, on a day-to-day basis, the teams are operating to driving VMM dollars.
... Just on the product side, as companies are starting to talk about, at least on the internet, returning back to growth. As you think about products, you know, where are, where are your products today at, on, on the consumer side, as for the agents and the enterprise? And then I know historically, you've worked with legacy AI or old school AI, whatever you wanna call it, but as you layer on Gen AI, you know, how does that impact your ability to roll out products faster?
Yeah. So, from a product point of view, you know, we have, we have sort of doubled down on our focus on P&C. So one way you can think about products is vertical markets, auto and home being the two sort of dominant verticals that we're in today. You could see us, you know, continuing to sort of expand within P&C to some of the sort of ancillary products that our, you know, customers, our agents and carriers want to sell to consumers, and that consumers tend to bundle together with an auto or a homeowner's policy. So ancillary verticals would be like one dimension of growth from a product point of view. Another would be with like our local agent market, where we, you know, have historically, predominantly sold like leads or calls, but really like referrals to the agents.
I think there is an opportunity to provide more value-add services and products to those agents to help them with, you know, their growth needs. We have a product called Lead Connection Service, where, for example, we'll do some of the outbound, like outreach and engagement of that consumer on their behalf. But there's probably a suite of products that we could wrap the agent in that would help them get more performance from our marketplace, make these relationships sort of stickier, broader, than they have been in the past. And then with carriers, you know, we focus a lot on our targeting and bidding products and technology, a product called Smart Campaigns, which really allows carriers to. It allows us to provide our core strength in bidding and sort of extend it to the carrier.
So give them some smart bidding products using some, like, the ML platforms that we use for our own internal bidding. So those would be some areas, you know, that we're continue to invest in from a product standpoint. As it relates to AI, you know, as you said, like, we were built largely on, like, using technology to apply, like, data largely in a performance marketing context. And so we have a number of, like, ML platforms that are making a lot of the decisions, you know, within the company at any given time. But as it relates to Gen AI, we kind of break it into, like, two types of applications for it. One are more intern...
One is more sort of internal or sort of efficiency-focused, and that's where, you know, we've already got some, like, adoption of products in for different functions, where they're using Gen AI tools to help them do their jobs more efficiently. It's been part of how we've driven some of the efficiency that we have over the last year or two. And then I think you've got the sort of customer-facing applications of Gen AI, and that's where I think we're starting to, you know, test into certain applications. Again, I think there are some that are, you know, we can conceive of, but that where the technology is not quite ready for like a consumer-facing production environment yet.
But I think a lot of what we're learning through using it for internal use cases is sort of setting us up for those kinds of things when the technology is ready.
One investor asked, you know, "What's the need for these types of marketplaces with Gen AI? Why wouldn't I just go to ChatGPT and say, 'Lower my cost' or put in my profile?" I'm guessing there's a deliberate opaqueness at the carrier level, but sort of walk me through why that wouldn't be a reasonable scenario.
Yeah, the carrier, I mean, the carriers, have, have gone to great lengths to avoid exposing their pricing, to Google or, you know, and I'm sure the same will be true of any future, platform that, that exists out there. And the reason for that is one of, like, fear for adverse selection. So in other markets outside of the US, where price, you know, price comparison has made its way into as like the dominant mode of, of insurance shopping, it's largely been a race to the bottom for carriers because what you end up with is a, you know, price in KAYAK, right? And people will gravitate to the lower price. Well, who's likely to have the lowest price? Probably the person who's mispriced for that risk, the carrier that's mispriced.
And so that set off a relatively vicious cycle in that market for the insurance carriers. In the US, you have carriers that are sort of wise to that reality. They've invested a tremendous amount behind their brand, and they guard their pricing, you know, very closely. So you have to jump through a... You have to go to sort of great lengths to actually get prices from carriers, including incurring a lot of cost to run reports and things like that. And so the market structure doesn't quite lend itself to like the type of experience that, you know, price comparison or really, like a Gen AI-based model like ChatGPT could make that much easier.
And so I think our view is we want to be the sort of partner to the carrier and to the agent, so to the provider who helps bring them, you know, into the digital age. And I'm sure there will be applications with Gen AI whereby we can improve the way that they connect with consumers, whether that's through ChatGPT or other tools in the future. But I think it will, you know, take sort of a partnership-based approach with them, as opposed to it being something that just happens to the industry from the outside.
Meaning that they would have to be receptive to providing some data.
That's right. That's right. Providing integration, providing the data, and that there's a very high bar for them to, to be willing to do that.
And then just maybe kind of on the regulatory front, there might be some sort of changes being discussed at FCC level.
Yeah.
Maybe sort of walk us through what those are and potential implications for the business.
Yeah, sure. So, the FCC released a new rule related to the TCPA, which is the Telephone Consumer Protection Act, and that sort of dictates what consent is required to be collected from a consumer in order to do telephonic outreach to them. So just to contextualize that as it relates to our business, you know, we have the direct carrier marketplace, which is predominantly digital, so consumers will, you know, click out to carrier sites. That's unaffected by this. Then we have the other part of the market, which is, you know, us selling leads or phone calls to agents, and that would be affected by this. So the industry is going through a process of trying to actually interpret the rule and specific implications for marketplaces like ours.
I'll say, though, based on a number of discussions with carriers, there's still not like a sort of shared perspective within the industry on exactly what the interpretation is or how it ought to affect us. But I would say that the more conservative interpretation would suggest that you know, would suggest a move from what we would refer to as one-to-many consent, so from one-to-many consent to one-to-one consent. To explain what that means, today, when somebody submits a quote request from us, when they you know, submit that quote request, they're granting consent for multiple sellers to reach out to them, and then we could sell the lead you know, one or more times based on that consent. In a one-to-one consent world, they would need to give, like, individual consent for each seller.
And, and so, like, the impact of that from a practically speaking, is the consumer has to give more explicit consent, you know, per seller, and therefore, you'd expect to have sort of less consent given and fewer lead sales occurring. But the lead sales that do occur would be of much higher quality or conversion rate, and that's what some of our early testing shows. So net-net, I think the impact would be fewer lead sales, but higher performance, and therefore, it would be accompanied with a price increase. So fewer lead sales, higher prices. From our point of view, I think it's a favorable thing for the industry. I think it'll improve performance for providers. It'll probably create a better experience for consumers. I think larger marketplaces like ours, who can adapt to a regulatory change like this, are sort of well positioned.
You know, our goal is to manage through it with, you know, minimal impact and ultimately, like, a better experience for customers and, and for consumers.
The testing you're doing right now, just to make sure I understand, you're seeing a net-net, sort of neutral to potentially positive for the business, or?
Yeah, I think the testing we're doing right now, and we're continuing to iterate on the tests, would suggest that the amount of sort of opt-in that you get, right? So the ability to sell leads, the number of lead sales that you can make would come down, but those lead sales that you can now make actually would perform or convert at a higher rate. So, you know, there's an offsetting... There's some sort of these offsetting forces, which you would address by pricing-
Pricing.
in terms of like, you know, limiting its impact on the business.
Good time. Got time for a question or two if there's any from the audience. Great, maybe just in closing, if you're an investor sitting in the audience, and they're sort of tracking the progression of recovery, you know, what should they look at? Should they just look at Progressive releasing, sort of updates as sort of a signpost? Like, if you were an investor, what would you be tracking?
Yeah, I think you'd start with carrier underwriting profitability, and so there are public carriers that release data monthly or quarterly. Progressive is, you know, has releases monthly and in detail, so you want to watch their combined ratio. That's a good leading indicator of spend in channels like ours. Allstate, you know, Travelers, or Hartford, these are some of public companies that report that at least on a quarterly basis. So I think you'd start there. If you want to kind of get one step out in terms of leading indicators, you look at some of the key cost drivers of losses. So how are used car prices trending? How are certain, you know, labor or part indices trending?
Then, you know, then you kind of look at performance for us and some of our peers, and, like, those things should all hang together on some amount of lag. But, you know, by and large, I think we sort of reiterate that it does feel like the industry is returning to a much more healthy state than it has seen in a long time. We're beginning to see the impact of that flowing into our business. I think first half, you know, we have seen a lot of it come through, and then we can see a lot more. We can see another leg up in 2025.
And having made some of the hard decisions that we made, as Joseph described, I think we are very well positioned now, seeing the operating leverage in the business, to really benefit from.