Welcome to the 2024 RBC Capital Markets Global Healthcare Conference. I'm Ben Hendrix, RBC's Healthcare Services and Managed Care analyst. We are pleased to host SelectQuote here this morning, a direct-to-consumer health insurance broker. And with us this morning from management are Tim Danker, Chief Executive Officer, Ryan Clement, Chief Financial Officer, and President Robert Grant. Thank you, gentlemen, for being with us today.
Really appreciate it, Ben. Thank you.
Great, so, we know that you and your peers are kind of in about a two years into a strategic redesign. And you guys wondering if you could give us some color on what differentiates your strategic redesign, where we are, and where we're going, in broad strokes?
Yeah, I'd be happy to address that. We're really pleased with the results. You know, we just finished our second busiest period in the third quarter of OEP. Really strong close rates, agent productivity. We drove 30% margins, 32% margins the quarter before, so we really feel like this redesign is working. Really four pillars that we set out in the beginning of 2022. One was really employing a year-round agent model. You know, previously, we'd had a lot of what we called flex agents, so, and now we've really focused on tenured agents. Those are folks that have a lot of experience. Experience matters in a lot of industries, including ours, and now about 70% of our agents are tenured agents. They're about 1.5x-2x more productive.
We've really focused on retaining those. Our agent attrition rates are at all-time lows. We've also really focused on our customer segmentation, really trying to focus on higher-value, more persistent customers, right? So we're leveraging. We've been in this business now for 13 years. We're leveraging that data, our investments in data science and analytics, our marketing capabilities, to try to find, you know, the best, most profitable customer segments in the market. We've also spent a lot of time on desktop tools, investments that help our talented agents find the right plan fit. We think that's helped a lot. And finally, we put a lot of focus on back-end retention programs. So, that has, you know, really helped stabilize persistency. We're seeing, you know, green shoots on the LTV front.
I think if you roll all that together, you know, we've developed a much stronger MA distribution business. We've simultaneously launched our healthcare services business, which is now very material. We've diversified the business. We've created a stronger, more cash-generative business, and we think it positions us well, moving forward.
That's great, and I wanted to dig in a little bit to the healthcare services business. SelectRx, in particular, has been. You've really had a lot of great traction with that, and it's been an impressive differentiator in a difficult time for the DTC distributors. So maybe you can talk a little bit about SelectRx and-
Yeah, I'll make a few comments and hand it over to Bob. Kudos to Bob. Bob's been really the driver and architect of a lot of the strategy over the last three years, and it's been tremendous. I mean, some members of the investment community might have been scratching their heads, right, when there was a lot going on-
Mm-hmm
... in MA distribution. I think it was a bold move by the company, an important one. It really was premised out of, you know, how can we do more for our clients and needs? We talk with thousands of MA beneficiaries a day, and what can we do to help them beyond a Medicare Advantage policy? So that was kind of the thesis that led us to SelectRx, where we purchased two well-run but subscale long-term care home delivery pharmacies. We acquired less than 5,000 members. We acquired some know-how, some licensing, but really we're, you know, fast-forward to today, we now have 75,000 members. Very attractive unit economics. There's been explosive growth there. Bottom line, I think it underscores a strong value proposition for consumers.
These are consumers that have needs around adherence pharmacy, and the speed at which we got it to profitability, you know, we were able to turn this business profitable in around two years. So I think that's fairly unique for healthcare, and we think that that should be a proof point to the market, that we can enable healthcare as we kind of broaden and become a bigger healthcare services platform. Bob?
Yeah, and I think a question that's come up a lot is, you know, why pharmacy, and ultimately, don't your carrier partners do some of these things, and could that mean it's competitive? And really, it's a really unique offering, I think, that we've discussed before, right? It is designed specifically for the customer cohort that we talk to a lot, which is a little bit lower income, really high need, and low access consumers, which we've never been shy about the fact that we are very, very rural by nature.
Just as a reminder of what it is, it is not only focusing on adherence, which adherence would be, right, delivering your meds, and those, very focused on compliance, though, because if you're on more than eight drugs, which is our average consumer's on 10 medications or more, there can be really bad adverse drug reactions and other things to that. So we take all of the kind of question marks out of it by doing compliance packaging, and then ultimately, we also chase on behalf of the consumer.
What chase means is we coordinate all of their doctors, all of their pharmacies, all of those types of things, try to make it a really seamless transition, because what we find is, with that kind of population that's really struggling and taking that many meds, they struggle to get those every month, and go and pick one up at CVS, get some mail order, other things like that, where we just feel like we're a fit for all that are in that situation, which has been really, really good and why you've seen it grow.
Yeah, 75,000 members since up 67%. Very impressive growth. So how, how should we think about this growth trajectory, kind of maybe in relation to the core Medicare Advantage distribution business? Or, you know, is there a correlation there? Is there a way we should think about how that scales?
Yeah, that's a great question, and I think, you know, one thing I'd say is, it is tied to the membership or to the conversations we have within Medicare. However, it is not done growing. So even if you see lack of kind of growth, which we've seen a little bit more on the Medicare side, we've still been kind of explosively growing this because of the interest level. And then we're also now focusing on third-party marketing and other ways and other avenues of growth. But I will say, you know, we will grow, you know, pretty significantly, not to the tune of what we've grown as a percentage-wise so far, but pretty significantly, even if it was just on the back of our Medicare Advantage conversations, even at the size we're at today. So the interest is there.
You know, we feel really, really good about that. And as a reminder, too, it's our way to monetize people that don't buy a policy from us. And the majority of these folks now that are on our SelectRx plan don't necessarily have a policy with SelectQuote, which I think is a key differentiator, because that marketing cost is a sunk cost, right? I mean, it's you spend it, and historically, all we monetized was the actual lead itself towards buying a Medicare Advantage policy. This has massively increased our rev to CAC, and Ryan will talk about what it does to margins as an overall business. But one thing we want to be viewed at over time is a more holistic marketer towards everything, because that's where we're really going.
Got you. And, Ryan, maybe you can take over on the margin side, because I believe we might have seen a little bit of compression as we make these investments. But it seems like if the growth is kind of getting closer to a steady state, maybe we are marginal.
Yeah. No, absolutely. Obviously, the results have been really, really strong. They've exceeded our original expectations from a growth perspective. It is, you know, an offering that is highly synergistic with the Medicare business. We recognize AEP and OEP as an area of opportunity, and we made significant investments in preparation, particularly, you know, largely headcount-driven investments. Obviously, the results, you know, were outsized, and we're really, really pleased with the 12,000 incremental customers we added in the OEP season, 10,000, the season, or the AEP season the quarter before, bringing total customer count to 75,000. We're on a roughly $500 million revenue run rate. A lot of these customers we've recently acquired are not at, you know, full boxes.
So it does take a while, and we've shared openly that it takes a couple of months to get people fully optimized, and all of the prescriptions synced and in those boxes. So as you know, members do mature, and we do expect, like, the Q4 and Q1 season to be, you know, the growth to be a bit moderated, but as they mature, you're putting incremental margin dollars in each box that's already being shipped out. We've talked about the drug margins at, you know, mid-20s. So each one of those drugs that goes in does add to the overall EBITDA in a material way, and so we'd expect to see margin progression over time. We're really excited about the growth.
We think it sets the stage for a strong 2025, and look forward to sharing more details on that, you know, when we set our guide in August.
Great. Now, I want to switch gears a little bit. In your investor deck, you had a very compelling, I guess, illustrative securitization design that you're working on. I know one of the big challenges in this business in the last couple of years is, as you and your peers have worked through the redesign, financing this business. But it seems like we have a pretty innovative idea in terms of securitization. Maybe you could run us through how that can help the cash flow profile of the traditional MA business.
Yeah. I'll hit on a few points and turn it over to Ryan, who's really been leading our, you know, our capital structuring effort. I mean, we've been very focused on business results, you know, for the past nine quarters, and we feel really good about where the business stands. We certainly understand the need to address our capital structure, and that has been a priority for us. We've looked at a variety of options, but we've highlighted securitization as a potential option, and one that we think is very shareholder-friendly. You know, there's conceptually three benefits, and Ryan can expand upon them, but one is, right, it can help provide a meaningful paydown, and a delevering of our balance sheet, and that's needed, absolutely.
Secondly, it would enable us to extend maturities on our term loan at an overall lower cost of capital. And then finally, we're not looking for this to be kind of a one and done. We view securitization potentially as a permanent part of our capital structure, meaning we can do this for, you know, the initial delevering. We can put future policies and future tranches into a securitization vehicle and further delever the business. So, a lot there, and turn it over to Ryan for other points.
Yeah. I think, especially when you think about, like, the longer-term capital structure, like, we do think that securitization is flexible and attractive. It allows us to do a couple of things, especially when you think about production going forward. One, it does allow us to maintain the relationship with the customer. We would be the broker of record, on all those policies. We're not giving that up in the process. Alongside that, we're also not selling these policies or, you know, giving up some portion of the cash flows. We're simply issuing notes, bonds, based off of the expected residual amount that we would be receiving. It allows us to, by way of the financing mechanism, pull forward some of the cash flow. It improves the overall, you know, internal rates of return.
So we see it as very attractive. Once those bonds are repaid, the incremental revenue stream that comes, 'cause we are, you know, we're, we're obviously booking with a 15% constraint, we've been encouraged by what we're seeing, you know, excess cash flows come back to the company. So, you know, we do see it as an attractive form of financing that ultimately leads to lower cost of capital, and when paired with, you know, the, the kind of cash flow that we're seeing more broadly within the business and healthcare services, an environment where we can further delever the balance sheet over time.
Would you see this as a permanent mechanism for securitizing every new policy or every new receivable that comes in? Or could you have the flexibility to just take a portion of that as needed and use it like a revolver or?
It's a great question. And what I'd say is, we believe that all the policies that we are writing are securitizable in nature. So that would allow us to securitize policies. We wouldn't necessarily have the obligation to do that, but we could do that. And that's really in the nature, that when we write a policy, there is a contract that underpins the financial relationship associated with the carrier and the policy we wrote. So as long as it's in place, there's a revenue stream. And so, again, I think it's at the company's option. You know, we're working towards getting that sort of construct in place.
And just with the securitization, are you thinking about maybe eventually putting in more of a long-term traditional financing, like, later? Or would this have an expiration at a certain date that would be-
Yeah, I think, from our perspective, there's a number of different ways we can finance the business. Securitization, in our mind, is, you know, the most attractive form of financing, and we're working towards that. It's not the only form. We do see—you know, we've got a roughly $1 billion receivables balance, and so when we securitize, and successfully do that, it creates, you know, an opportunity for us to pay down our term debt. That is our objective. And then on a go-forward basis, to securitize, that will allow us to further de-lever. But as mentioned, I think there are a number of different ways that it can be tackled.
We, you know, with the kind of initial securitization, the intent is to make a material paydown and refinance the existing term debt to a maturity that's beyond kind of the current date that the notes are due.
I would quickly add, Ben, I mean, you watch the progression of the company from one that was really, a few years ago, you know, oriented towards growth and market share accumulation, really, to one that's been driving towards self-sufficiency. You know, we've made public comments. We expect to be operating cash flow positive this year. We're approaching free cash flow positive. That's been a big move for the company. And as you think about healthcare services and other things that are cash, you know, generative, that puts us, you know, more on a glide plane, we think, for even further improvements to our capital structure, given the cash flow dynamic of the company.
It seems like you have, among our coverage, you have probably the most conservative constraint assumption, with the 15%. Seems like it would fit well with securitization. Maybe you could kind of talk about your overall view of the health of the receivables pool.
Yeah, I think we've been really encouraged with the policy production and the leading indicators we've been observing. We've been talking about that for a while. Certainly really encouraged by the most recent renewal event. So, you know, we feel very good about the back book and the cash flows, the renewals that we're seeing. And yeah, I think certainly the 15% constraint is conservative in nature. We do think it's prudent to maintain that posture. But we're certainly encouraged, and it's something that, you know, over time, we may evaluate. I would agree with you. I think we probably are the most conservative, you know, amongst our peers.
Mm-hmm. And, just to switch gears a little bit to this upcoming AEP, clearly, we have what is shaping up to be maybe an extraordinary environment for shopping, with some of the carriers talking about really focusing on margins, pulling back on membership growth, maybe declining, considerable declines in membership. It seems like it's a good setup for a lot of plan switching. How are you guys positioning specifically for that opportunity?
Yeah, I mean, I think for us, it's kind of more of the same, but it will be unique, and I do think, with that uniqueness comes some benefit, for our type of business, because people will need a lot more assistance. I think what's gonna be unique about this environment, too, is kind of plan terms or crosswalks, which are a little bit different, right, than we've historically seen. And we've seen it at a smaller scale, but, those environments typically are extremely good for our business. So, we feel great about that, and we feel like we're gonna be extremely helpful to consumers this AEP, and there will be a very different choice that people are making as some carriers pull back.
And you see others that just really need to maintain status quo in order to gain market share.
Mm-hmm.
And I think they'll take some back that we saw kind of happen last year. And we've seen a market like this, that people kind of forget when... We had a carrier a few years ago that took a lot of market share and then pulled back quite a bit, and then that created a really, really positive tailwind in that next AEP, so.
Great. And how do we think about balancing, you guys have done a great job, you know, you mentioned a bit, your longer tenured agents, you know, in trying to get better retention of those productive agents, so it seems like persistency has gotten better. But how do you balance that ahead of maybe what could be a lot of, you know, what kind of looks to outside observers like it could generate a lot of churn?
Yeah, no, it's, it's a great question. I think if you look to what we have done in our strategic redesign over the last few years, you nailed it well on the head, right? We have tenured agents that produce significantly better persistency than we've seen in the past. The other thing we've done is we have a 15% constraint, which really makes a very conservative book. But I would say, you know, on top of that, we have been very targeted about the consumers that we market to and ultimately bring into our ecosystem.
Mm-hmm.
We feel like the healthiness of our book has never been in a better spot, and that will lead to outsized results as compared to the market on persistency. We actually saw that. I mean, there was, you know, a carrier, who you guys all know, that took a ton of market share last year, yet our persistency remained-
Mm
You know, very, very good, through that period of time. The last thing I would mention is Right Choice. I know others are kind of talking about their standing up teams, dedicated to saving people on plans.
Mm.
That's, it is complicated. We've been doing it for multiple years now. We know exactly how to staff it, exactly what to do with it, what calls it'll generate. We are assuming it'll generate more calls this year than we've seen in the past. But with Right Choice, we've seen a ton of benefit and less switching, because a lot of times just because a carrier is doing a crosswalk, for example, and they were by far the number one most competitive carrier in that specific county, that does not mean their pullback is not gonna make them still the most competitive. And if they call somebody else, right, what happens is they switch to the wrong plan.
So we see that happen all the time, and we feel like our model is set up, you know, to really save our book and keep it in whole while we're benefiting from the environment. And again, we saw that last year, and we saw that during the AEP, where, you know, another carrier had significantly pulled back, and then we still remained extremely persistent and still beat our expectations, so.
Mm-hmm. And I think you alluded to this, but a lot of your peers are really kind of doubling down on some carrier-dedicated models. And can you talk about kind of your involvement in that type of business?
Yeah. So we were. You know, we believe we were kind of at the forefront of that, and we will continue to grow as much as that specific industry grows. It is smaller, though, than the general shopping, because the response rates to dedicated carrier marketing are not as high as choice, right?
Mm-hmm.
So we'll grow it, but as a percentage of our business, it'll probably remain, you know, roughly the same or even smaller, just as that market is not as big as it was. I think for smaller players, right, they can grow it, you know, a little bit more, and it looks more material, even though we're the largest player in that space.
Mm-hmm. And then maybe we can shift a little bit to the regulatory backdrop. I know that CMS has given a little bit more color on kind of their on the guidelines for marketing rules, and maybe you could get your take on it. I know you guys were reviewing this when it came out, and just wanted to see if you found anything new and exciting in there that is either-
Obviously the-
... either, either applicable or not applicable to the way you guys manage your platform.
Always new and exciting.
Yeah.
We're used to managing a regulatory environment for 13 years, so-
Mm-hmm
... that's a regular part of business for us. But, you know, tops of the trees, this is about alignment of incentives, ensuring that seniors get unbiased advice. You know, double-clicking down a little bit, ensuring that independent agents aren't using financial incentives to maybe guide consumers in a plan that might not be the best fit for them. So, we agree with the overarching, you know, goals of CMS. For 40 years, we've operated a true choice platform, where our agents provide unbiased counsel and advice. Specific to the recent language, it really, from our vantage point, delineated that there's different rules that apply to different participants in the industry. SelectQuote's a third-party marketing organization, or TPMO.
There's pretty clear language from our standpoint, like CMS's intent is to not have the fee limitations with respect to TPMOs. As you can imagine, we've been in dialogue with our carrier partners on this issue. They've reiterated, right, our importance to the system or the value add that we provide beneficiaries. So I think there's overall alignment there, and we don't view this as having a material impact to our business.
Do you see that, do you have peers out there, whether public or not, and you think this is gonna be a headwind and may kind of spur one of your peers to talk about a lot of consolidation capacity coming out of the business. Do you think that this could be an opportunity?
Yeah
... for you guys to pick up some?
I think maybe even independent of the regulatory front, I think you're seeing some of that taking place. You know, right now, we kind of call it this natural rationalization that's going on in the industry. There's been a large public company that's, you know, divesting their Medicare distribution arm. There could be others to follow. We think that we are very, you know, well-positioned. We're very much focused on sticking to our own knitting, execution of our own business, the growth of the healthcare services platform. But we do believe, you know, this is one where the stronger, more diversified, more capability-rich platforms are ultimately the ones that are gonna win. There is a big end market here.
I think we are doing our part to demonstrate attractive unit economics, attractive margins, and the same big market that, you know, everybody's been kind of centered on for the past five years. So I think we're doing our part. I think there will be some additional disruption, but that also provides... And we're seeing this play through in things like marketing, right? We're seeing a more rational marketing environment. I think it bodes well for the players that are here long term, and we certainly believe we will be one of those.
Great. In the last couple of minutes, maybe you guys can talk, a really nice guidance raise, for fiscal 2024, with Bob Grant, and maybe you guys could spend the last couple of minutes talking about the drivers there. What's changed, and, and your confidence level in the year?
Yeah, you know, we, we've been really pleased with the business and its overall performance. As you alluded to, you know, this most, you know, last week, we upped the guide for the second straight quarter, bringing revenue to $1.25 billion-$1.3 billion. That was up 27% at the midpoint on a year-over-year basis. EBITDA, you know, $100 million-$110 million, up 41% year-over-year at the midpoint. From a driver's perspective, obviously, the senior business, we were really, really pleased. It performed well in AEP, it performed well in OEP. Margins, you know, 30%, exceeded our expectations, and so, really set the stage for, for the increase. We've talked about, you know, the healthcare services business and the growth we're seeing there.
We're really encouraged, that's driving, you know, revenue growth, and, we think, you know, more broadly, will, will lead to increasing levels of revenue and EBITDA and, and growth in 2025. We look forward to sharing more details on that front, in August, when we set the guide. You know, with, implied in that guide is margin progression, and that really is, you know, the continued results from the senior division from year to year, as well as kind of taking the healthcare services business from one that was dilutive to now one that's cash accretive. And so, again, we're just, you know, really pleased with the results.
Yeah, I would just say, just to kind of close it out, we're on this migration to becoming, you know, a broader healthcare services platform. That is really kind of our North Star. The Medicare market is an important part of that business. It's the first entry into SelectQuote, and one where we believe that business, on a standalone basis, we're proving out that it's very attractive. But then when you combine it with what we're doing in healthcare services, you know, we've built a lot in SRX. There's other things that we're evaluating. We'd expect that margin progression as we go into fiscal 2025, and we think that positions the company for, you know, really, really solid progress moving forward.
Well, great. Thank you guys for coming in today, and really appreciate you being here.
Thank you, Ben.
Thank you. Appreciate it.