Yeah. Yeah, it's been good. Good afternoon, everyone. Thank you so much for being here for the afternoon in our 44th annual Growth Conference, day two. My name is Michael Graham. I'm one of the internet analysts here at the firm. Really excited to have EverQuote here.
We've got Jayme Mendal, the CEO, Joseph Sanborn, the CFO. Gentlemen, thank you so much for joining us. It's been a wild ride here over the last couple of years, and fortunately for everyone, including your shareholders, the ride's going up right now, which is awesome. You just reported Q2, maybe talk about the results. What were the key takeaways?
Sure. Thanks for inviting us. We appreciate it. Thanks for joining us. So we had a very strong Q2. It was a record quarter for us across all major financial metrics. Revenues hit up 72% year-over-year, a record level VMD reflecting auto recovery continuing to progress into 2024. We're benefiting that on the revenue side. Progressing through our P&L, we've built strong operating leverage, as you know, the actions we took last year.
You saw those come through as in the business with adjusted EBITDA margins at 11%. I think you made a comment to me, was that our margins are up 1,100%, yeah, year to date, so that's pretty good for a company. So we're feeling really good about that, and importantly, that adjusted EBITDA is translating into operating cash flow.
We've created a model since our changes last summer, where we put a lot of discipline into how we manage the business, set us up for auto recoveries that's coming. We're benefiting not just in Adjusted EBITDA, it's flowing through the cash flow and also record net income levels as well. Something we haven't talked about historically, so it's nice to have that as well.
That's fantastic. Well, congrats on those results.
Thank you.
You know, a key driver is the auto insurance market and the recovery that we're seeing there. So, maybe just talk us through, your lens on the recovery, and I'd love to, hear what inning you think we are in the recovery. You know, is it the second inning or the eighth inning, or what do you, what do you think?
Good question. So, you know, I think it depends on the carrier. In aggregate, somewhere in the middle innings of an auto insurance recovery, you have a small handful of carriers that have largely restored their sort of historical footprint and spending patterns with a few exceptions. Those exceptions being specific states that are a bit more challenged from a regulatory standpoint, and which will likely, you know, come sort of back online next year.
But outside of that small handful of carriers, I think the majority of carriers are somewhere on the spectrum from, you know, still working through their rate increases and therefore, not really spending at all in the marketplace, to, you know, in process of beginning to kind of expand their footprint across more states and more segments. I think in aggregate, we call it sort of middle innings, but we do expect the recovery to continue to build and likely materialize, you know, fully, in 2025.
That makes sense, and that's consistent with what we've been seeing. So that's good to hear. When we think about the states, you know, that are coming online, do they... Like, we've heard that some of the larger states are still kind of behind the curve a little bit. Love to get your perspective on that, and when they do come online, do most of the carriers start spending at the same time, or are there leaders kind of hitting the tape, and then, you know, everyone else is coming through?
Yeah. So some of the, you know, more challenged states from a underwriting standpoint, also happen to be some of the larger states, California, New York, New Jersey. California being kind of the largest and most challenged from an underwriting standpoint. And the way that this would typically work is it's not like California makes a blanket change that affects everybody at the same time.
It's that all the carriers are filing for rate increases, and California is making decisions about those rate increases on a sort of one-off basis. You know, throughout the hard market, so over the last few years, they had been very reluctant to approve sizable rate increases, and that's consistent with their sort of historical practice as much more sort of consumer protectionist type insurance regulatory body.
Finally, they, you know, I think the market began to kind of crack, and, you know, late last year into early this year, they began to loosen up and approve some larger rate increases because carriers were frankly threatening to pull out of the market. So they do show signs now of being more sort of supportive of larger rate increases. Carriers are, you know, filing them, but all indications that we've received so far is that the big carriers we work with don't really expect to have full rate adequacy until next year, given the rate at which things are moving.
Do the carriers, you know, when they get rate adequacy, like, are they really quick to turn on the spending? Or, you know, because on the one hand, you don't want to-- obviously, you don't want to spend too much on customer acquisition when your kind of rates are under water, but you also don't want to be out there, you know, if you have the highest rates on the market, because then people might look at you as expensive. So you kind of have to wait till some of your competitors are out there with higher rates, too. Or just, you know, wondering if that's accurate or how that works.
Yeah, I think what's, you know, what is changing now is the sort of competitive pressure is coming back into the market. So initially, I think carriers wanted to have a very high level of confidence in their underwriting profitability before they began, you know, ramping their marketing spend, and that seemed to be the case in 2022, 2023.
Now, as we get into 2024, and it's abundantly clear that at least some carriers are very healthy from an underwriting standpoint, right? Progressive being, you know, one example. They just released their results for last month. They posted an 88, you know, combined ratio. So they have very healthy underwriting profitability, and they're out there spending aggressively in the market to take share.
Once this competitive dynamic kicks in, I think it, it applies more pressure to other carriers to, you know, to kind of lean in and get back to growth to avoid losing too much share, which they're all very concerned about right now.
Any thoughts on, like, we've heard reports of rates in some of these states being up as much as 40%-50%?
And this is coming, you know, it's obviously necessary, given the supply chain-driven, you know, cost escalation that the carriers saw to, you know, on claims. But, at the same time, these big rate increases are coming at a time when consumers are kind of getting a little softer by most reports. And so, they obviously need auto insurance to get around and drive, but just wondering if you have any thoughts on how the ecosystem should respond to a weaker consumer?
Sure. I mean, I guess a little bit on the consumer. So you think about auto insurance. It's a top five expenditure for the average family. So when you think about it at the highest level, in the environment we're in right now with, you know, people, you know, pocketbooks being tighter, people are saying, "Here's an opportunity to save."
So one thing whether it's manifested itself in our marketplace, you've had a lot of consumer shopping at really high levels. Started last year, and it's continued into this year, these record levels. And what that results is the carriers now are halving rates. It's an opportunity where the demand is there.
You're seeing carriers able to take advantage of that as they're coming in, and that, and that pressure from consumers, we see that persisting, you know, in this period. We see it's an area where consumers are trying... If you think about an environment we're in right now, potentially recessionary, you could see a dynamic where a consumer is saying, "Geez, how do I find ways to save?" And it's a big one.
You know, I just an anecdotal example on just awareness of insurance rates. I at an annual conference I go every year in January, investors usually don't talk about their own auto insurance rates. It's usually the average family, not the average investor family. This year, my 13 meetings, 5 of the folks were bringing up in January. That just continued throughout the year.
So, I think it's widespread, and I think that is the dynamic where for us, it's a very good environment where consumers broadly want to be able to shop on insurance right now. They see it's... The increase has been so high.
I know. In our household, we're just kicking the 20-year-old males off of the policy.
Yeah.
That's our way of getting back at it. One of the things that we see is that, you know, your recovery's been so steep that, we really feel like digital, you know, when you look at the carrier's marketing mix, brand, you know, television, all the things, that, that digital must be gaining a lot of share of wallet, and, I'm just wondering if you feel that that's true or not, and, you know, any kind of, you know, color you can put around that.
Yeah. So I mean, I think looking back over, you know, a longer time horizon and even predating the downturn, we saw digital ad spend, so digital marketing spend within insurance, growing at an outsized rate relative to overall advertising. And so I think it is reasonable to assume that in insurance, as is the case just about everywhere, digital is taking share from, you know, non-digital channels.
And then within digital, you know, our channel is particularly valuable in insurance because we do all the work to collect the relevant underwriting information about a consumer before the advertiser, before the carrier has an opportunity to bid on it. And so what that enables is a far more targeted advertising approach in our channel than they can get in just about any other channel, even digital channels, where they may have you know, high intent or some ability to target.
You know, our channel's particularly like uniquely suited to hyper targeting, and that at a time like this, when the carriers are very concerned about profitability and what risk they're taking on, is very valuable. And so I do think we have seen sort of our channel kind of take share more broadly, and I think that will continue to propagate as the recovery unfolds.
Yep, that's what it seems like from our perspective as well. So clicking into some of your profitability metrics for a minute, and let's talk about VMM or variable marketing margin, which in the quarter increased to $36.5 million. It was the highest level in over 6 quarters. It was only 31.1% of revenue, which was down quite a bit from the 35%-37% you've been, you know, kind of clocking. You addressed that you expect to see upside to VMM from that level over time, but some near-term kind of pressure or consistency there. So maybe just talk a little bit about what's the big impacts on VMM in the near term?
So let me just to define VMM for those who aren't familiar with the term. It's revenues less advertising expenses, variable marketing margin, and variable marketing margin percentage is the derived percentage, so just for context.
So at the end of last year, we had record VMM margin percentages. They were 35, 37% the second half of the year. That reflected a very depressed advertising environment, and that environment, there's an opportunity to have really outsized margins. As we started this year, we pretty strong and secondly, as we start to see auto recovery, we'd expect to see the normalizing back to the lower 30s.
Q1 was, you know, as we expected, when we did our February call, we said, "This will come in, you know, 33-34." It was actually close to 34, and we said at the time, assume we'd be around 31 for Q2, and that's exactly where we landed. You know, I think one difference we have now versus where we were when we talked about VMM margin last year, we said:
Hey, assume this will be low 30s for the rest of the year. The change we made in this quarter's announcement was, we said: Hey, we could see this actually dipping into the high 20s, and high 20% range, 28%-29% is implied by our guidance range... and really what that reflects is two factors. One is, it is a much more competitive advertising environment.
Think about this context, as we pulled back really dramatically, we had this opportunity to get outsized margins, as it's recovering much more quickly than we expected. As you think about advertising channels coming online, it results in a, you know, an imbalance, and that results in pricing being relatively higher now for competition on advertising. We think that normalized over time. That's one piece.
The other piece we've talked about is preparation for a regulatory change, gonna start in Q1, and the impact of that is really some of the testing and preparation effectively has the same advertising cost, but not monetizing as effectively because we try to test these, you know, changes in what prepare for one-to-one consent in Q1. That also has some downward pressure on the VMM margin.
We think the combination of those two will largely continue through this year into the start of next year. You know, the ability to have that, you know, one investor says: "Hey, what's gonna make that better or worse?" And it just as the advertising environment got, you know, notably worse, more competitive as we went into the second half of this year than we expected, you know, if that moderates, you have the upside potential there.
At the same time, we're still doing this preparation for FCC, which has some downward pressure on it. So that's kinda how we think. Now, look beyond the start of next year, where do we see it? We see it normalizing sometime in the second quarter next year, in that low thirties again.
We've talked about in our prior discussions about our investments in our bidding technology, and really, how do we leverage our data and our insights? We're the largest P&C insurance marketplace. We've been focusing on auto since 2010. We've amassed a huge amount of data, and the thing for us is, how do we invest in technology that allows us to better leverage that data to drive performance?
As we do that, we see it going back into the 30s, and we'll build from there and as we end the second half of next year. So it's just temporary dynamic, given the environment, just the rapid changes in the market in a short period of time.
Yeah, that makes sense. Do you think that the higher media costs or the higher, you know, the tougher advertising competitive environment, how much of that is driven by similarly situated buyers out there in similar places on the web, like, doing what you guys are doing versus more of a macro, you know, advertising market situation?
I think the competition we're seeing is largely concentrated in industry-specific channels. So it's more likely to be the carriers themselves and other insurance-specific advertisers, as opposed to some broad shift in, you know, more global advertising dynamics.
Yeah. Okay. But the good news is, like, even though your percentage, your VMM percentage is lower, your dollars are a lot higher.
Right.
So we'll take that—
Yeah, we-
Because it's not structural, you know?
That's right.
It's a function of the recovery, basically.
Right. Right. That's right.
Yeah, that makes sense. Okay, so you mentioned the FCC, you know, situation, and you addressed it on the Q2 call, that there's a new rule around telemarketing that is impacting your model. Just talk us through that and how you're thinking about, you know, preparing to mitigate the effect of that.
Sure. So the rule that's sort of in focus is the TCPA or Telephone Consumer Protection Act, and that really deals with, you know, consent collection that is required to reach out to consumers telephonically using certain technologies. And so we operate, you know, under the TCPA today, and there's a change that's occurring to that rule.
The way that it occurs today is, you know, a consumer will come through our site, and when they basically submit in advance to go get their quotes, there's text under the button, which effectively represents them providing consent for multiple parties to reach out to them telephonically using these technologies. So today, they can click once and provide consent to multiple parties. Call that one-to-many consent.
Where the industry seems to be converging in terms of interpreting this new rule is that it will cause us to move to a place which is we're characterizing as one-to-one consent, meaning one action per insurance provider that will reach out to them. So now, instead of pressing one button and providing consent to multiple parties, you need to press a button per party that will reach out to you.
Seems trivial, but what happens when you introduce that sort of added friction in the experience for the consumer? Is some portion of consumers will opt into fewer options than they otherwise would have. And the net result of that will be less lead volume available to be sold to... primarily, this deals with the local agents. We'll sort of come back to that in a minute.
But the leads that are sold, our testing shows, have considerably higher performance, so higher quality. So the likely net effect is you end up in a world with less lead volume, but higher performance or quality, and therefore higher pricing. And those things can, you know, they're offsetting in terms of their impact to our financial performance.
It's a better experience for the consumer, gives them a bit more control, a better consumer experience for the agent because it gives them higher performing or higher quality product, higher quality leads. And so from our point of view, it's a net positive for the industry. I think we're well-positioned as the largest player in the industry to respond to this, and we've been sort of planning and testing and preparing our response now, and we feel very confident in our plan.
But it does create some, you know, uncertainty about how all the different sort of stakeholders will react, right? How do the agents receive the price increase? What do other players in the industry do in terms of their implementation of the response? And so we'll just, you know, have to manage through that over the next 3-4 quarters.
But by and large, we, you know, we feel sort of positive about where we are relative to this change that's coming up in January. And then just to contextualize it for everyone, you know, what we are talking about, what's in scope of this is really just the sort of offline part of the business, right? So when you're selling a lead to somebody who's gonna reach out telephonically, and that represents maybe 25%-30% of the business. The digital part where your consumer clicks out to, you know, Progressive or one of these carrier sites, is largely unaffected by any changes to the TCPA.
That makes a lot of sense, and I get the, you know, that you lose some customers out of the funnel or they'll select fewer carriers. I get that headwind. Is the higher quality because kind of exactly for that same reason? Because, like, as the consumer, you know, you don't want to ask me to verify consent for too many carriers, so you're gonna give me the ones that I'm the best match for, and so as I click on those, I just match up more closely with the particular policy characteristics that that carrier is offering?
Right. I think there's a few factors. Number one is that, right, we're forced to down select to sort of really represent the... in sort of rank order, the most likely to convert sort of options for them, so the best fit for them. Number two is the consumer has now sort of more explicitly provided consent for each provider, and in doing so, you know, is more likely to know what to expect next, right?
So they're gonna get a phone call from a State Farm agent, right? That is actually probably just more explicit, and therefore, the connection rate is higher than it was before. And then the third thing is, from the agent's point of view, you are competing with fewer other agents for that consumer's business, and so that lack of competition means your conversion rate will go up.
And maybe as you think about this change, we just give you a little context on the financials, right? So Jayme said 25%-30% of our business. You know, as we think that through, that we've been, we've been spending time—we've been doing the testing over the past few quarters to say: what is the impact? And this—it's important to say it's not a single variable.
There's changes to traffic, customer flows, how different carriers may interpret this. When you go through all of those, based on all the work we've been doing, we see this as, you know, net, net, probably a more muted start to the year than you normally would have, with Q1 being sequentially up over Q4. We typically have this as budget resets. Q1s go up, goes up over Q4.
You know, we think that'll be a more muted sequential increase, reflecting that this will be one, sort of a near-term headwind we'll work through. Yes, there's a lot of operational pieces we'll have to think through to manage it, but I think it is important to also see this, we see this as an opportunity as well. When we think about a regulatory change like this, we are the largest P&C marketplace.
We see an opportunity. You know, we've been really ahead of this, and we have a chance to really work with our carriers. We've been talking with our carriers. We've had carriers say, "You're further ahead of this than my own compliance people in explaining things to me." We view this as an opportunity to really come out of this even stronger. We've always said coming out of the downturn, as we have changes, we're gonna... We're going to position us for the long-term leadership. We think this is another opportunity to do that.
That makes sense. All right, thanks for that explanation. So let's move away from auto for a second and talk about home and renters, which was just under 10% of revenue in Q2. You know, just maybe talk about how this vertical compares and contrasts to auto and P&C, and, yeah, just how you're thinking about the growth prospects there.
Sure. So our home vertical's been growing nicely and had 30% growth the last, I think, 30+% over the last 3 or 4 quarters, reaching record levels of revenue and VMD dollars. So we feel good about the home vertical. It's got some good momentum behind it. It's still we're relatively under-indexed to premium compared to auto, so we know that there's just some inherent room to sort of grow as we continue to invest in that vertical.
And this is all with the backdrop of a homeowner's market, which is pretty it's in pretty rough shape from an underwriting standpoint. So, you know, I think the P&C carriers, who tend to write auto and homeowners' lines, have really focused on getting their rates sorted in auto insurance first.
But some of the same hard market dynamics that applied to auto also applied to home, and they're probably further behind in terms of sorting out rate increases in the homeowners market and getting that back to underwriting health. So I think there is some sort of market tailwind in the recovery of the homeowners market somewhere out in the future.
It's a little bit harder to see because, you know, I think we're starting to actually see the progress in the auto underwriting performance. In homeowners, it's still not there yet, but, you know, the carriers will sort that out and should provide sort of some tailwind to that vertical as they do over the next couple of years.
Sounds good. Just while we're on this other verticals, you know, you, you did a commendable job of simplifying the business, cutting costs, becoming more efficient during the downturn, and now you're approaching this upturn with a leaner, company, fewer products, fewer verticals. How are you thinking about whether or not you wanna kinda use some of the strength to leg into adjacencies or new products, or, you know, how do you just think about, like, the strategic elements of growing the company through this, upturn?
Yeah, I mean, One of the very conscious decisions we made last year was to focus on P&C, which is the, you know, auto and home markets, where we have been operating for 10+ years. We are the sort of leading player in terms of digital marketplaces for these lines of insurance.
We've amassed an immense amount of data that we can use to our advantage, and we have really strong and sort of compelling customer relationships, both with the large carriers and with thousands of local agents. So, you know, our strategy has evolved to one which is focused on going deeper into these verticals, as opposed to broader, and really becoming the number one growth partner to P&C insurance providers.
Our view is that the market itself is plenty large to support our sort of medium-term growth ambitions, and that there's real value in going deeper with agents and with carriers to understand their growth needs more holistically, even, you know, starting to think beyond just lead gen, you know, clicks and leads that we sell them today. Figuring out what other products, what other kind of value-add services that are directly adjacent to the ones we offer today and leverage our strengths and our data to help them grow more effectively. So that's kind of the thrust of the strategy going forward.
That makes sense. And then just in the last few seconds we have here, I just wanted to ask about your balance sheet and your liquidity profile, because I think, like, a year ago, you know, when you weren't profitable and you were running a little low on cash, you know, people were sort of a little worried about that, but you've really kinda turned that around. Nice, solidly profitable. You've generated a bunch of cash here over the last little bit, but how are you thinking about, like, the balance sheet and your liquidity profile?
So, thanks for noticing that. We worked hard on that. We like cash a lot, and we had $61 million in cash at the end of Q2, and basically, our Adjusted EBITDA is a good proxy for adding incremental cash. So $14-$17 million guide, we'll add $14-$17 million cash flow this year, this Q3. And we see this as we don't need cash to grow the business organically.
We'll see opportunities. We may selectively look at M&A. I'd say, as we think about M&A, that what I would be very focused on is, it is gonna be squarely within P&C. It's sort of, as I like to say, when I was an M&A banker, it's only one standard-