Hey, everyone. Thank you for joining us this afternoon. As the insurance analyst, I get the pleasure to periodically cover really interesting names that are a little bit outside of my traditional universe, but really have interesting growth profiles and unique opportunity sets. And the next company you're listening to, EverQuote, falls in that category. It's been an interesting journey since I assumed coverage of the company about two years ago, maybe a little less than two years ago. I had a timely upgrade last year as we saw the insurance market turn in auto, and the stocks kind of ran really well, and it's kind of settled in here, just below 20. So I gave management a list of questions, and true to form, I'm going to start with something that's not on the list.
You wouldn't be Greg if you didn't.
Yeah, exactly. So first of all, we got Jayme Mendal, the CEO, and Joseph Sanborn, CFO, here with us today. So thank you for joining us today.
Thank you for the invite.
So let's talk about the stock price performance. I'm surprised. You have great results, accelerating revenue. Your margin improvement's accelerating. free cash flow. You're hitting all of the financial metrics that I would define as being successful. And I would think that your stock price should be higher today than it is. So maybe you can start off with your views on the stock price. And just to put in a part two to the question, which is one of the questions I get from investors is there's some elevated short interest relative to some of the other names they cover. So maybe you can talk about that aspect too.
Sure. So, thanks for the question. I think we agree wholeheartedly with you. We are undervalued, and I guess maybe a little context. I think as we think about the auto recovery that started this year in earnest, we have benefited from auto recovery. As we've had auto recovery, we're getting strong top-line growth, and we built in with the changes we made last year in the summer of 2023 to our changing our business from our strategic restructuring. We've gotten really good operating leverage on EBITDA and cash flow bottom line. All of that has been driving nice interest in the stock. I think what has happened right around August is we started talking about regulatory changes that are coming in place in the start of 2025 related to FCC One-to-One Consent. We'll talk a little bit more about it.
This is sort of the last of a stretch of investor meetings for the past three, four weeks. I think this is the number one topic for folks. I think for a lot of insurance investors who understand the regulatory landscape more so, it's sort of like, "Okay, I understand insurance. This is one more thing to understand." For a lot of the traditional small-cap tech investors who follow us, I think it has been, at least the feedback we've received, is it's creating sort of a near-term uncertainty over the business. They also commend us on the performance and how we're building value. They say, "We want to see this sort of shake out." We'll talk more about it, but our view of it is we see this as an issue that we will work through, and we'll go through more specifics.
But it is a near-term thing that I think is probably having some headwind in the stock. I think the second thing is, as you see, we've had dramatic auto recovery this year. How will that continue? And we've talked a little bit about how we see this as we have a number of additional opportunities we grow into next year to continue to see growth. And we've been educating investors on that. I think that's probably a medium-term question they have on the opportunity in the stock. But those are probably the two issues that come up most frequently. And I think as you start to see more of that education coming out and seeing us getting to Q1 through the regulatory change, I think, knock on wood, we'll see some good progress in the stock.
Yeah, that makes sense, and so that's a good segue because naturally, the first issue, the FCC, the change in that's come up as an issue, and maybe for, and I know we only have, what, 25 minutes left here, but maybe you can give the high-level cliff note version of what's going on, and I thought on your earnings call, you did a good job of sort of putting it into a box on affecting just a portion of your business, so maybe you can walk through the dynamics of the legislation, what it means to your business, and how it only affects a portion of the business.
Sure. So we comply with a rule called the Telephone Consumer Protection Act, which oversees how websites collect consent specifically for the purpose of then making outbound phone calls to consumers using certain regulated technologies. And so we comply with this rule today, but the FCC has proposed a change to the rule that will go into effect in January. And the way that we comply today, and I'll explain how it's changing, is when the consumer comes through the auto insurance quote workflow, they provide us all the relevant underwriting data that we need to match and connect them with the right insurance provider for them. The last step of that process before they proceed to get their quotes, they click a button. And under that button, there's some consent language. That's the TCPA consent language.
The way that things work today is with the click of that button, that language allows us and others to collect consent on behalf of multiple parties who will then reach out to them by phone, and so this affects, to your point, a portion of our business because today, let's call it about 30% of the business or so are local agents. It's mainly the local agents who would actually pick up the phone and dial out on the consumer. The other balance of the business is all digital and is unaffected by this rule altogether. A consumer might click out to a Progressive or a GEICO and complete their quote online, so that's unaffected.
So this is really for the balance of the conversation, we're really just talking about that slice of traffic that goes to generate a lead for somebody who's going to call out to the consumer.
Right.
So the rule change will require that now you can't just, the consumer can't click the button one time and grant consent to multiple parties. The consumer has to take one action per consent that they are granting. So if there's an Allstate and a State Farm agent available and you want to sell the lead to both parties, you want to connect that consumer with both State Farm and Allstate options, they would need to click different ways to do it. But imagine clicking a checkbox for State Farm and then one for Allstate before they proceed. So the industry has kind of done a lot of testing, and it seems like everybody's converging to a set of solutions which are checkbox-oriented, or maybe they're just limiting if there's only one clearly best buyer out there, just limiting it to one buyer.
That effect of these changes will be, A, there'll be fewer leads available to be sold to the local agents. The volume of leads should come down. Our testing also shows that the performance of those leads is substantially higher than it was before. Why? A, you have less competition for the consumer's business. You have fewer people trying to connect with that consumer to get their business. Two, the consumer has more explicitly opted in to that phone call. You're sort of filtering out some of the people who maybe didn't expect or didn't want a phone call to begin with. Lower volume, higher performance. With the higher performance, we've decided to raise prices to reflect the improvement in performance.
And we've largely gotten support from that from both the carriers and the actual agents who ultimately are the decision makers in this. So that's the process we're working through. The rule goes into effect late January. We've been preparing for it basically for the bulk of this year and are beginning to ramp, sort of cut over our traffic in December. And then we'll get to a full rollout by the date in January.
Excellent, so it also, as part of your answer, one of the things that's happened in the auto insurance market, as you very well know, is we went from a generational trough in profitability for your insurance carrier customers to now we're on a renaissance, and I think next year could be one of the best years for the auto insurance market on the books, and consequently, we're hearing a lot of interest from the insurance carriers. They're telling us, they're saying on public calls, they're saying, "We want to spend more on advertising. We see expense ratios moving up." Walk us through the bridge of how we see expense ratios moving up at these insurance companies like Progressive and how it's translating to revenue growth for you.
Yeah, I mean, you can see it directly as their direct expense ratios are increasing. A lot of those dollars that they're now, incremental dollars they're deploying, are coming directly to us. And so we've experienced that as substantial growth, just sticking with Progressive from Progressive over the course of this year as they've sort of leaned back in and resumed a much wider advertising footprint. Now, we all know that Progressive is kind of at the leading edge of the recovery curve. So they're ahead of, by and large, I would say all other carriers. And now you have basically the whole tail of carriers that are going through a similar process of reactivating states, reactivating different consumer segments, and deploying more advertising dollars. And it's been building over the course of this year. And I think for all those other carriers, we'll continue to build into next year.
I mean, as I said, if you think about the backdrop, you've got underwriting profitability there. You're seeing it building with more carriers. From our point of view, that means you have more carriers competing now to think about growth. So that's exciting for us. Then you overlay the backdrop of consumers who have had elevated rate increases. Rates have gone up 40% on average since coming out of COVID. So you have a backdrop of consumers seeing more and more of those increases. Their shopping behaviors are elevated. You put those two together, we think that's a very favorable dynamic for us as we look into next year.
So, you think about if those of you who know insurance were almost a leverage play in the insurance industry in how we're approaching their getting back to growth mode on a wider basis than just a single large carrier who's been doing most of it this year. Right.
So to your point, State Farm in the third quarter reported one of its lowest loss ratios in several years. And there used to be a very large customer for you. So walk us through these, and the other carriers are coming on board, coming online, as you said, opening up states on a state-by-state basis. How does that manifest itself? State Farm used to be a large customer of yours. I'm sure they paused a big chunk of their spending with you. Is it something that they turned the spigot on and it's just full force?
Or do you expect a gradual implementation, say, over the next year or two?
Yeah, so I mean, State Farm's still a good-sized customer. I would probably differentiate between two types, two segments of carriers. There's the direct-to-consumer carriers who are controlling all of their ad spend sort of centrally through their marketing departments. And then you have carriers like State Farm, Allstate, Farmers, who are distributing primarily through local agents. And they'll provide some marketing support to those local agents, but it's the agent that's actually buying the lead, making the decisions. So across the board, the reentry, the sort of recovery does tend to be done on a state-by-state basis. It's as the sort of product manager within the insurance carrier says, "Okay, we've got the profitability. Let's get back to growth." They start reactivating campaigns.
In the case of a State Farm, the way that that manifests is typically in the sort of subsidy or the marketing support dollars that they're giving to their agents, and likewise, they sort of roll those back one state at a time in 2022, 2023, and this year, we've seen them start to reinstate subsidies one state at a time as the pendulum is swinging from profitability to growth state by state as they get their rate increases.
So it's an important point he's making here because you saw when the states, when the industry was going into a generational trough in terms of profitability, they were slow to cut it off or slow to scale back. And my premise is, as they turn it on, State Farm is going to be slow to, not real slow, but they're going to be slower to turn it all back on. And so it's going to be, it could be an 18-month or 24-month process to these other carriers that have lagged, get full back on board using a product unit. Is that a fair read into how you think things are going to develop?
Yeah, I would say 18-24 months is probably the distance or the time lag between Progressive's first move and then the last carrier's last move. So I think it's kind of a rolling recovery, carrier by carrier, state by state.
The other question I had for you on just the competitive landscape and how you're sitting inside that is, at this point, at this juncture in the recovery process for your business and for the auto insurance industry, has there been any competing product or alternative resource that insurance companies are favoring, like Progressive's favoring, over years? If we go back to pre-COVID when you guys were doing really well, is there anything in the marketplace today that prevents you from returning to places you were before?
No, on the contrary, I think we expect to return to and exceed where we were before for a number of reasons. First, I think the market itself is larger as premiums have gone up and advertising being sort of managed as a percentage of premium. And then number two is, I think as carriers sort of have newfound religion on balancing growth and profitability, emphasis on profitability, the ability to target for sort of risk or for expected LTV probably matters more now than it did back then. And our channel is really the only one that provides the carrier with all the underwriting data before they even make a decision whether to try and acquire that consumer and if so, how much they're going to pay for them. So it's by far the most targeted channel.
When you talk to the carriers, I was in a carrier meeting last week with a major carrier who basically characterized our channel as. It's at the top of the pyramid. Now, it's programmatic, meaning they can sort of dial it down and dial it up. So it may get in a downturn. It did get dialed down when some of their mass market long-term contracted spend didn't. But that wasn't due to anything other than it was the only knob that they could turn. So now it's going in the other direction. And I think if they could deploy all their spend through our channel, if there was enough volume to support that, they would because they would characterize our channel as the highest ROI channel that they're competing in.
Yeah. This presentation is supposed to be a fireside chat, so it's supposed to be interactive. I don't want to steal anyone's thunder if there's any questions in the audience. Go ahead, Stephanie.
Is M&A part of your strategy?
Is M&A?
So the question is, is M&A part of your growth strategy?
Sure. So the way we've sort of talked about M&A is we've been building our cash position. As our business has returned to profitability, we're adding to our cash balance, about $83 million at the end of Q3. We'll probably be in the high $90s million. If you look at our EBITDA guide for Q4, we'll add that to the balance. We don't need cash to grow for the organic business today. So M&A is certainly an option for us. When we think about M&A, though, it's very much in the context of the corporate strategy we have that we've been reiterating since our changes last year, which is it's all about P&C. It's going deeper on P&C, helping those carriers and agents be successful, helping them grow more profitably. So we'll think about M&A in the context of helping them, focusing on the market we're staying in.
And the third is, of course, the financial piece, which is it's got to drive. It's got to be accretive. It's got to drive cash flow. So I think those are certainly things we're thinking about. I would say there's opportunities that are emerging out there as we think about the insurtech landscape that may be opportunities for us that we could be faster to acquire than to build it ourselves. So that's certainly part of it. The other piece I'd say in our cash balance, a question that often comes up is, what else we might do with the cash balance? And at some point, we might think whether share buyback should be in the mix as well. There's obviously a dynamic as a small-cap having a certain amount of public float, which we've got to be conscious of.
But that's certainly another way to think about building shareholder value with the cash on. At a certain point, you want a certain cash in the balance sheet to weather whatever happens in the industry. But beyond that, you want to make sure you're deploying it to drive shareholder value appropriately.
One of the really distinguishing features of your business models. I look at your balance sheet and your Free Cash Flow positive and your debt levels.
No debt.
You have no debt. So it's an enviable position to give you a lot of flexibility. So you talked about the changing rules that you're going to have to deal with in January next year. We've talked a little bit about growth. Part of the component of the income statement would be the Variable Marketing Margin. And with some increased costs, maybe in the first quarter or second quarter due to 30% of your business, maybe walk us through how you see the Variable Marketing Margin moving, evolving through the year?
Sure. So Variable Marketing Margin is revenue less advertising costs, called Variable Marketing Margin. And obviously, the percentage is the associated percentage. That percentage for us, if you look at our marketplace business, we've said at the start of 2020, it was like 29%. So put aside what's in the public financials, which includes the verticals we exited in 2023. As we progressed into the end of last year and start of this year, we had to go into the mid- to high-30s, reflecting an unusually low RPM that was very depressed. What we've said for this year is, hey, it'll probably be in the 30% range. It was 31% in Q2, very little over 30% in Q3. Our guide implies like the high-20s now. As we work through these changes on FCC, it's a little bit of a dynamic.
So it's when do price increase come in versus changes in traffic costs? As we work those through, we think there could be some headwinds in the VMM margin percentage. It probably dips into the high 20s, which is what's reflecting our guide for Q4. We think that could continue in the first part of the year, probably normalize back to around that 30% by the middle of next year. And the question from there is, is there opportunities to build it longer term? We think there are opportunities longer term to continue to add VMM margin, particularly with the investments we use in our bidding technologies, how we better leverage the data we have to drive performance. But for this, again, next year may dip into the high 20s, first half of the year back to mid 30s.
But we could be sitting.
I mean, the low 30s back.
We could be sitting here a year from now, right? And you could be talking about, hey, you're going to have some easy comps in VMM because of the challenges you had to deal with early on this year. You've absorbed some of the costs here in the fourth quarter. You're going to have more of a hit in the first quarter. But if I look out a couple of quarters, you're going to get a pickup. Is that?
I think that's a fair way to think about it. Yep, fair way to think about it. And I think you think about more broadly on the change on this whole regulatory change, which is very simplistically, we've said, hey, typically Q4 goes up and Q1 on a top line basis. You usually have double-digit revenue growth, budgets reset for carriers at the start of the year. We've said people have been concerned about this regulatory change to my earlier comments starting out, will this be negative growth Q4 to Q1? And we go, no. We think it's going to be more muted growth. Most analysts are saying sort of, yourself included, sort of single-digit % growth Q4 to Q1.
We think that's an environment where even with all that, we'll still have EBITDA margins around 11-ish% for next year, maybe a little lower in Q1, a little bit higher as we exit the year. But we think we'll work this through and we'll still be driving nice cash flow to the bottom line.
Yeah. It's an interesting comment for them to talk about in a challenging couple of quarters they're going to have EBITDA margins at a double-digit range because I remember when I first met you guys, I was strongly pushing for you to get double-digit EBITDA margins, and you've been successful, so congratulations on that.
Thank you.
One of the things you've mentioned on previous calls is this aspirational longer-term objective of maybe getting close to a 20% margin. Obviously, a lot of things have to happen to get there, but maybe you can fill in some of the pieces, big picture pieces that might help us sort of map how that evolves.
Sure. So maybe a couple of things. So first, when you think about the growth opportunity we've talked about, we think there's still a lot of growth to come for the business over the next several years. The next piece is how do we manage as the dollars come to the VMM line, how much goes to the bottom line versus how much is spent on incremental cash operating expenses. And in some ways, it is a managed outcome. And I think one of the things that we have done as a business, we've said, hey, we'll get to 20% EBITDA margins in the long term. We may not be forecasting we're going to add a lot next year, but we think we'll be adding more along the way. And the simple reason is we're a technology company.
At the end of the day, the investments we make are in engineers and product people and analysts to drive better use of our data. We're using AI as part of that as well. And all of that makes us more effective as a business and gets more operating leverage. And I think one of the silver linings of this downturn for us as a company has been the fact that we've gone to a model of we're very disciplined how we think about making investments. Is it going to drive ROI? And it's not coming from Jamie and myself. It's coming from the broader leadership team because it's almost the analogy I give us. We didn't just go on a diet to lose some pounds and lose some expenses, and then we go back to binging again. This is sort of a new way of life, right?
It is a lifestyle choice. We are going to drive cash flow in this business, and we see ample ways to do it by being disciplined in how we add those investments.
Oh, go ahead.
If you kind of think about a customer's journey when they go on the platform and they search for insurance, how are they routed to the digital channel versus an agent where that actually calls them, I guess? And as you kind of think about maybe less of these changes around the agent side, you're figuring out ways to deal with it. But does more of that volume just shift to the digital channel?
Yeah, good questions. So to answer the first question, they're not mutually exclusive. So what we're trying to do is find the narrow set of insurance products, insurance options that are the best fit for a particular consumer. Now, in some cases, that insurance product is distributed by the carrier digitally, in which case we would try and get them into that digital quoting flow. In some cases, like State Farm is the largest auto insurance carrier there. They have a really good product, but they will only sell it to you through an agent. So we have to get that consumer over to an agent. So you could imagine we conclude that, hey, Progressive and State Farm are the best two options for this consumer.
We try and push the consumer through digitally to Progressive's workflow, and then we would probably sell a lead to a local State Farm agent, and that agent would reach out to give that consumer their second quote, their State Farm quote, and then the second question was about.
The shift to digital transition.
The shift from offline to agents to digital. I think to an extent, yes, and we're seeing some of that, right, so these carriers that have historically been more concentrated with local agent distribution beginning to stand up their own direct distribution, so digital distribution, to try and capture some of that volume that they may be losing through the leads channel, and there are a couple of examples of captive carriers who have recently ramped spend digitally to try and get ahead of and offset potential volume loss in the lead channel.
Inside the personalized segment, there's auto and home. I feel like maybe the interest level by carriers in growing home is probably a little bit more depressed relative to their interest in growing auto. Maybe you can talk about your perspectives of what you're seeing, your customers, and their interest levels. More importantly, as we look forward, we assume that at some point there's going to be a reemergence of interest in property too. Talk to us about how that product mix works for you guys.
Yeah, I think that's right. I think the carriers, because of the scale of auto, it really took precedence over home during the downturn. It was the thing they needed to fix and solve for with the highest urgency. And so they did, and we're starting to now see them sort of get back to a growth mentality in auto. Home, we've managed to actually grow our home business almost in spite of the market still being relatively challenged. That's largely been due to some increased resource investment, just growth of traffic, expanding some of our traffic channels there, and continuing to build what distribution we can. But I feel like the market winds have not quite converted from headwind to tailwind in home yet. I do think that's coming. I think we're getting some more appetite for home volume from carriers as we start planning for next year.
And so I think it will just kind of probably follow a similar curve to auto, but on a delayed time frame.
I know the carriers like State Farm like to focus on the bundle because they believe it improves retention, so I'm sure that as the interest levels pick back up in states, they'll come back to the property piece as well, so we only have a couple of minutes left, and the elephant in the room outside of some of the challenges, near-term challenges you face with regulation would be just the whole concept around technology. You mentioned in one of your answers, artificial intelligence, large language models, generative AI. As I sit back and look at your business model, one of the areas that I struggle to really have a lot of confidence in is your ability to stay ahead of those changes, and my concern for your company and your business model would be potential disintermediation risks that might emerge as a result of that.
So in the remaining couple of minutes, maybe talk a little bit about how you're approaching AI, why you think you're a leading agent of change in that regard, and how you're deploying it inside your organization.
Sure. So in terms of how we deploy it today, I mean, we kind of think about two categories. One is adopting, I mean, really just adopting tools where we can that drive efficiency. And so whether that's Copilot to make our engineers more efficient or a number of sales tools to make our sales teams more efficient, there's been solid adoption of some of these tools, and they are driving efficiency sort of operationally. Then I think you get to the more interesting piece, which is, okay, where are we actually deploying it though to make the business more effective for our customers? And the place where we have the most history is in our sort of bidding and routing systems, where those have been increasingly powered by AI, specifically machine learning, over the last three years, and now run almost entirely without human intervention day to day.
And we've seen some of the benefits of that in the VMM and our ability to continue to sort of scale traffic. As we get sort of further out into the future, we continue to look for use cases where I don't know if I would characterize it as disintermediation or I don't remember what word you use, but where are there applications that could meaningfully change the sort of buying process for consumers? And there's a number of places that we've sort of tested with or are sort of conducting some R&D around. Number one, I think the sort of traditional form experience in lead gen today on some time horizon could transition into more of a conversational modality. And so that's where a Gen AI type product might make sense.
I think that's our sort of space to win, given the distribution strength that we have and all the data that we have on consumers. That's a category. We look at AI voice specifically. We do a lot of outbound dialing to consumers on behalf of local agents to help foster these connections. We've done some testing in that space, I'd say a year ago. Sort of the latency of that technology didn't quite. It's not production ready, but I think it's definitely getting there and probably will be at some point. The ability to actually use AI voice to help sort of concierge consumers through the process, we think, is an opportunity. There are a number of areas where we see applications, and it's an area of focus for us.
We've hit the 30-minute mark, and I feel like I could talk to you for another 30 minutes, but I have to be mindful of the other people. First of all, congratulations on your success over the last year, and I hope you're even more successful next year. Thank you for your time and presentation.
Thank you, Greg. Thank you.