Thank you all for joining us today. I'm Maria Ripps, Internet Analyst here at Canaccord Genuity, and it's my pleasure to introduce Pat Thompson, CFO of MediaAlpha. Thank you so much for joining us today.
Great to be here. Thanks, Maria.
Perfect. Let's start with a question about the broader trends across the industry. Insurance carriers and the sector have generally been slower to adopt the transition to digital. Where are we in that process?
Yeah, it's an interesting question and one I wish I had an easy answer to say, like, we're in the x inning. Unfortunately, it doesn't quite work that way because every carrier is different. I would say there are a couple of carriers that really are performance marketers in terms of how they think of the world. I spent 11 years at Expedia before coming to MediaAlpha, and these carriers, their level of sophistication with which they look at performance marketing is pretty similar to an Expedia. It is core to their marketing DNA. There are a number of other carriers that are just kind of waking up to the fact that the internet is a thing on the other side of the spectrum. There are folks at different spots on that journey.
The folks that really have embraced performance marketing are the folks that have been kind of the anchor tenants for us over time. I think the opportunity for us in the years to come is having other folks that are top five, top ten carriers really start to embrace the online channels generally, and our channel in particular as being some of the biggest and probably some of the most exciting things that we've got in front of us as a company.
That's a great overview. Last week you reported pretty strong results, constructive results, and you also announced a settlement with the FTC. Maybe talk about the settlement. I feel like investors want to make sure that settlement impacts only your under 65 business. Maybe talk about that a little bit, and just overall, what does that mean for that part of your business?
Yeah. The FTC's investigation and subsequent settlement were focused on under 65 years old. There is no, you know, essentially zero meaningful impact on that business outside of under 65 years old. Our P&C insurance business, Medicare, life insurance, that is not going to be affected by that at all. The under- 65 business, we started earlier this year implementing a number of different compliance actions on that business. Those actions are continuing, and they've had a pretty significant impact on the under 65 years old component of our health vertical. That under 65 years old last year generated $29 million in contribution that maps pretty cleanly to EBITDA for us. We guided to that being $8 million- $10 million this year and single digits for the next 12 months. We provided some transaction value numbers as well in our recent earnings materials.
That hopefully provides context for what we think the new baseline for that business is on a go-forward basis.
Cash flow was fairly strong in the quarter. You mentioned in your shareholder letter that you expect to convert a high percent of your adjusted EBITDA to free cash flow moving forward. Can you maybe talk about some of the cash flow characteristics of the business?
Yeah, for sure. I have a pretty simplistic view of cash flow and it's, you know, taking EBITDA less changes in working capital. We are a minimal net working capital business. It is just not a big use of cash for us. We're a business with essentially zero CapEx. It's in the hundreds of thousands of dollars per year. We don't capitalize software development expense, and so CapEx is almost by definition very low for us. Really the biggest use of cash for us has been on the financing side. It's interest on our debt and mandatory amortization on the debt. From an unlevered free cash flow standpoint, adjusted EBITDA over time maps relatively cleanly to unlevered free cash flow.
Got it. I want to ask you another sort of short-term question here. We noticed that you filed a Form 144 on Friday related to share sales by Chief Revenue Officer. Some investors are asking about this. Can you maybe just address that for the audience?
Yeah, we have an interesting structure called a UPSI structure, which is, you know, I won't say common, but it is present with a number of public companies. As a, you know, kind of the way one of the features of that corporate structure is that a number of our early employees are in fact not technically employees. They are K-1 partners of one of our entities. The way that works for them is they are not salaried and they receive guaranteed payments in lieu of salary. In their restricted stock grants, we are, because they are not employees, we are not able to do the traditional withhold and sell to cover for their tax liabilities. These employees, you know, literally as they're writing their quarterly estimated payments, they got to come out of pocket for that. Keith is a very early employee of the firm.
Steve and Eugene, who are our co-founders, are also in the same boat where in order, you know, if they want to effectively sell the withhold on it, they need to have a, you know, effectively disclose that. It's a little bit different from how typical companies work, but it is very much a, you know, kind of income tax covering type of sale.
Oh, yeah, that makes sense. I appreciate you addressing it. Some of the investors highlighted that with us. As you noted last week on the earnings call, carriers are returning to historical spend levels and carrier profitability remains robust. How should we think about key growth drivers going forward?
Yeah, I think we're in a pretty nice industry, pretty nice industry backdrop right now where profitability is good. I think that the challenge a lot of carriers have is that the growth that they've put up, the top line growth they've put up over the last few years has been driven almost entirely or more than entirely by rate increases. Most of the policy in force growth has gone to a handful of players and really one player in the industry. We're in a spot now where rate increases are starting to moderate. A lot of these carriers are going to see their revenue growth rate, their premium dollars, the growth rates really start to decline.
I think the opportunity for us and what has me really excited is a bunch of these folks, they might have grown 10%- 15% for the last few years because rates were going up 10%- 15%. Their go-forward growth rate is going to be a lot slower, and the pressure is going to mount. I think they're going to feel more pressure to grow volumes, to grow customers. Our business, it is a lower funnel business. It's super data rich. We are absolutely fantastic at allowing carriers to target their ideal customers and the customers where they're most likely to win. We are a channel that, and we have also a lot of tools that allow us to help carriers do that very well and very efficiently without really meaningful headcount investment.
We think we're very well positioned to make that happen, and it's an opportunity we're actually very excited about in the next year or two.
I guess maybe expanding on that point, as we think about sort of your auto vertical, how should we think about sort of you gaining share as opposed to growth coming from sort of broader industry trends, which it seems like that's moderating now a little bit.
Yeah. We have been a beneficiary of industry growth as has the whole sector. I think that growth is still continuing. I think you can see the numbers everybody's guiding to for Q3. Carriers are still actively looking for growth and are actively increasing aggregate marketing spend. We think that rising tide is, it's probably 18 months it's been happening. We think there's still more room to run on that side. We also feel like we are gaining share. We measure share primarily on the publisher side for us, which is, are we winning more publishers? We also have the ability to look at the growth rates we're putting up and guiding to vis-a-vis a select set of other competitors. We like the numbers that we're putting up. We're obviously eager to see the share gain continue.
Maybe spend a minute talking about what differentiates your platform from some other competitors out there.
Yeah. I think the biggest differentiator is what our core business model is. At our core, we are a two-sided online B2B marketplace. We have hundreds of publishers. You can think of those as businesses that have consumers that have some sort of insurance interest or insurance intent. Those could be price comparison sites, financial apps, lead generators, or carriers themselves. For example, a carrier might not underwrite people with DUIs, they might not underwrite in Massachusetts, or they might have customers that are unlikely to convert that they can market to. I think we are different from a lot of our public peers in that that is the absolute focus of our business. As far as what we think drives us winning over time, one of the big things for us is monetization.
Publishers make decisions based on how well it monetizes, how much it costs, and how good the service is. Those are the three main factors they look at. On the monetization side, transparency is core to what we do. We feel that as we offer more transparency to advertisers, we get more dispersion in bids. As you get more dispersion in bids, you get ultimately better monetization for publishers. By virtue of our scale, being the industry's largest, we also have some differentiated advertiser relationships where they may only advertise with us, which allows us to deliver more to our publishers. We feel like we're very well positioned. We're investing heavily on these vectors, whether it's excellent account management on the publisher side, onboarding and deepening advertiser relationships, or having the best data, which ultimately makes the platform work more efficiently and allows everybody to see better returns.
It's that day-to-day operational playbook that drives a lot of our success.
Some of your supply partners are also your demand partners. Can you maybe talk about that dynamic on the platform and how important you feel that is for your business overall?
Yeah. 15 of the top 20 carriers are demand partners of ours in auto insurance. Almost half of those carriers are publishers of ours. What that means is you could have a major carrier, and I go to their site, I enter all my information for a quote, and they either show their rate with ads underneath it, or they show ads on top with the rate below, or they may just show ads with no rate because they don't have a rate to return. This is super strategic business for us for a couple of reasons. First off, that is immensely high-quality traffic coming from the carriers because the consumer has gone for a quote, like they're ready to buy when they're on a carrier site getting quotes. Secondly, it deepens the relationship with the carrier where it's similar to a lot of financial services.
If you have one product, a customer is sticky. If you have two products or three products, they're stickier. We see that as well. Finally, when a carrier is a publisher, we tend to find that they're willing to spend more on the marketing side because they're getting higher returns on every marketing dollar because they've got some subset of consumers that they bring to the website that don't monetize, that are unlikely to convert. If they can monetize them through advertising, they're actually better off and thus can pay more for traffic. We think it's a very virtuous cycle. It's a business we've been in for a long time. It's a business we keep investing in, and it's one that we're very excited about going forward.
Perfect. I want to ask you about the mix of private versus open marketplace. You've seen that mix sort of shifting more toward private over time. I guess talk about what's driving that and how do you see this, like these dynamics playing out over the next couple of years?
Our private marketplace product is really one that is designed for the large publishers and their largest advertisers. We're in a spot right now where the demand landscape is relatively top-heavy and concentrated in a handful or even fewer than a handful of big advertisers. We've seen that private marketplace product gaining some traction. I think I talked about earlier on in the session that one of the things we're excited about is having other carriers embrace this performance marketing mindset, focus on growth, and embrace the channel. To the extent we can be successful at that over time, that will start to drive our mix in the opposite direction, which is a more economically lucrative direction for us. We're putting a lot of effort there. It's something we're optimistic about occurring over time.
Perfect. Let's talk about other verticals. Within, there are two sub-verticals within your health vertical, under 65 years old and Medicare. We talked about under 65 years old. Maybe talk about what you're seeing in your Medicare vertical and what are some of the sort of key trends there.
Yeah. Medicare is our strategic focus within our health vertical. What Medicare is for us is really Medicare Advantage. It's the vast, vast majority of what we're doing there. Medicare Advantage, for those of you that don't know, is effectively a privatized HMO solution for Medicare that consumers opt into. They typically get some sort of other incentive for opting into that. It's a market where over half of Medicare-eligible folks have opted into Medicare Advantage. Over $500 billion is spent on the product every year. The carriers are struggling in that business right now. I think the medical costs, so effectively claims cost for them, has run hotter than expectations. They've been retrenching their plans to try to get profitability where they want it to be.
The implication of that is we're seeing lots of consumer shopping, but carriers are not active advertisers, generally very active advertisers for us at the moment. The financial profile of the business at the moment is disappointing in the short term. The long-term opportunity we think is vast because folks aging into Medicare at 65 years old are much more internet-enabled than folks that are 75 years old and 80 years old. That trend is only going to continue every year. It's a complicated product. It's an important purchase decision with a lot of comparison. We think it is primed for online shopping. We're investing to be at the forefront as that market recovers and as it continues to move online over time.
Got it. Are there any other verticals that you think may make sense for MediaAlpha?
Over time, I would say, potentially, I think we are very focused on insurance today where auto insurance, big and growing market, homeowners insurance, big and growing market, Medicare, big and growing, life insurance, decent sized market. There is a ton of untapped opportunity for us in insurance. That is the near-term focus for us, unlocking that.
Got it. I want to ask you about AI and sort of AI-driven traffic and how that's impacting the landscape overall. As we've seen sort of AI-generated traffic taking share from traditional search, what does that mean for your platform and just sort of how are you positioned maybe compared to some other platforms out there?
Certainly. I think our publisher model is core to who we are. Our publisher model is very well equipped to adapt to a changing search landscape. As we look across our publisher base, we've got folks that are employing basically every different marketing strategy. We've got folks that are SEO, we have folks that are SEM, we have folks that do branded ads on connected TV, we have people that do TikTok, Snapchat, Facebook, YouTube, you name it, emailers. One of the beauties of our publisher base is there are a number of folks who basically specialize in capitalizing on new and emerging channels. With hundreds of these publishers, I can't tell you which ones are going to be the winner on Perplexity or ChatGPT or Google AI.
The thing I can tell you is we've got hundreds of people that are making bets, and some of those bets are going to pay off. I can also tell you that there are new entrants that we maybe aren't even aware of yet. They're also making bets, and some of them are going to emerge. I am highly confident given our reputation, the quality of our offering, and our scale that we will win more than our fair share of those folks and be very well positioned to capitalize on the changing search landscape, unlike some other companies that might be heavily dependent on driving their own traffic and thus more vulnerable to executing well in a pretty dynamic and unpredictable environment.
What are your thoughts on the agentic AI impact in the insurance industry more broadly?
Yeah. I would say, I think that question probably has two components, which is, first off, I'm really excited about what the agentic AI can do for us, given all of the data that we have. We've got a tremendous amount of shopping data, conversion data, consumer submitted data, first party, second party, third party, you name it, we've got it. Having LLMs or other agentic AI to be able to capitalize and optimize with that data is super, super exciting. We're getting up the curve to start to capitalize on that. It's a super exciting mid-term, long-term opportunity of how do we capitalize on all this data that's going to be at the core of that. The second piece of that, I think, is how will AI change the consumer shopping experience? Probably almost more so than that, the role of the insurance agent in the ecosystem.
I think folks are experimenting with that. Hard to say exactly how that's going to play out. I think it will make aspects of that smoother and allow probably more of a convergence of how consumers shop for insurance. It'll be less of, hey, I'm going to pick up the phone and talk to an agent, but maybe I'll deal with an agent chatbot who ingests the information, provides a quote, and then passes it over to someone else. There will be lots of changes in how that's going to happen. We think, once again, given our partnership model, we're going to be well equipped to help drive that.
Got it. That makes sense. I think we have just a couple of minutes left here. Let's touch on a couple of questions on financials. You guided Q3 transaction value growth in the range of sort of low to mid-20s, with continuous strength in P&C insurance and then offset by declines in health insurance that we just talked about. What's your overall guidance philosophy and how conservative do you think this may be, your guidance may be?
From a philosophical standpoint, we guide to what we have a high degree of confidence in. It's really being momentum-based for us plus known and expected items. Nothing earth-shattering there. The thing I would say is our track record of delivery against guidance over the last three years, I think, has been pretty good. It's something we believe is important. As we make commitments to investors, we endeavor to fulfill those commitments. It's super important. That's something that we hold as being a high priority for ourselves.
Investors certainly appreciate that. Recognizing that you're not guiding to 2026, how should we think about maybe key growth variables next year, given continued momentum in the business, offset by more difficult comps and the evolution of your health business?
Yeah. Yeah. I think you probably, you actually summarized the key drivers in that question, which is, you know, P&C insurance has good momentum right now. As we look forward into next year, we haven't given any hard guidance, but, you know, we're feeling good about the trends in P&C insurance and pretty optimistic that it should be a pretty good year on that side of the house. The health business, I think I talked about some of those numbers before, which is $29 million of profit in 2024, $8 million- $10 million this year. If I had to put a number out there for next year, it's probably going to be mid-single digits of profit. That'll be, you know, a bit of a headwind as, you know, that rolls through. We think we're in the midst of a good market backdrop for P&C insurance.
You know, we're feeling pretty optimistic about what the future looks like.
Perfect. Maybe just to wrap up our discussion, as you think about your business over the next year or two, what are you most excited about?
Yeah. It's two things that I think we touched on earlier. One would be broadening and deepening the demand set for us. We are having more constructive and positive discussions with carriers than we've ever had before, where there are folks that are sharing data that we thought they might never share with us. There are folks that are open to testing things that, a year or two years ago, they almost rolled their eyes when we suggested. That is the kind of thing that over a one to two-year time period can have a really, really powerful effect on our business, particularly if we can get some top five, top ten carriers to start really punching in their weight class. The second piece over a one to two-year period is data. We believe we have more data than anybody in the insurance space.
We're just getting started on capitalizing with that. The capabilities we have and the tools that are available are both growing at a rapid rate. We're really excited to see what we can do with that, and we think that can be a source of long-term sustained competitive advantage for us.
Great. With that, we're out of time. Thank you so much for the discussion, and thank you all for joining.