Good afternoon. I'm Duane Morgan with the, health care services and managed care coverage here at RBC, and we're continuing our fireside chess this afternoon with SelectQuote. With us today, we have Tim Decker, CEO, Raf Sudan and Bob Brandt. Thank you all gentlemen for being here today with us, and, welcome to the RBC, conference. I guess I'd to start out first, talking about your results and really what you've been able to do very consistently, really since being a new public company.
Obviously, lot of capital market activity in your face, but I think you've really been able to put up very consistent growth and financial results when other at times other operators have struggled. So I guess before we get into the nitty gritty, maybe just at a high level, give me some of the key attributes you think that drive your success and how you've been able to be much more consistent.
Yeah. Thanks, Frank, and thanks for hosting us. We appreciate it. Frank, I think it really goes back to the quality of the build of our platform, and an ROI mindset that we've been very intentional about, for our thirty five years plus in business. Certainly why us and some of our competitors distribute somewhat similar MA plans.
I think the way that you approach the market in terms of marketing aspects, technology, use of data, how to utilize your agent force and the underlying operational processes can have very, can drive very different results. And I think you can see the quality of our build and our foundation in the consistency of our results. I think to your question, we've really focused on three core elements. One is certainly been our highly skilled agent force. We've always had a philosophy dating back to 1985 that the products and services that we distribute are complex.
And they're ones where a highly skilled professional agent, can add a lot of value to clients. And if done right, can add a lot financially to our bottom line. So we've always had 100% internal agent force. I know we've talked with you at length about that. We've invested a significant amount into running what we call a professional inside sales center.
We're operating on a true choice platform. Our agents are aligned to the best interests of the consumer. And we really build our processes to make our agents more productive, while also ensuring that they write high quality business so that we can drive the types of LTVs that we do. I think on the marketing front, that's another core aspect of the build. We'd like to call it a wide funnel omnichannel approach.
And that combined with sophistication around data and technology has allowed us really to squeeze out every available marketing ROI dollar we can on our growing acquisition spend. And I think the last component has really been technology. It's built to make our agents more productive to make our clients stickier, through better plan matching, doctor and drug matching. And I think it's also very adaptable and flexible, which allows us to make changes, as we see them in the business. So I think because of that, very focused and intentional build, we've been able to scale without proverbial kind of cracks in the dam.
And I think you can see that in our unit economics and our LTVs, the lead the industry by a wide margin. You can see it in highly attractive EBITDA margins, both of which have stayed and held up very, very well in a period of rapid growth, and driving faster growth than the industry at more profitable levels. And I think at the end of the day, it just speaks to building it right from the ground up. And so now, we're going to take this acquisition platform, into an adjacent space. We are announcing population health.
We think that this is really important aspect for consumers, for carriers, for service providers in a bigger market. So I think the foundation of our business is very strong at its core. We're still in the same large addressable market for MA distribution, and the business is quite frankly hitting on all cylinders. But now population health can really expand our addressable market. At the end of the day, we can produce more, revenue streams, large EBITDA streams on the backs of kind of our existing marketing spend we have in public.
Got you. I definitely want to go there just a little bit. But, and maybe before we do that, back just specifically to the your third fiscal quarter that you just reported, the March. In the call, you discussed a specific cohort enrollment cohort, the 2019 cohort and the need to make some adjustments for tail revenue at the end of your fiscal year next quarter. So can you explain that cohort, the need to take that adjustment?
Any other particular call outs about that specific cohort? And you know, anything any differences in that one? And is it any is there a chance that this might likely repeat?
Yeah. Maybe I'll take that, Frank. First of all, you know, there's no new news here. It's not a surprise. We've talked about the 19 cohort having lower persistency for the last several quarters and the prospect of a potential sort of cohort tail adjustment has been in our forecast and effectively our guidance for the last couple of quarters as well.
It is isolated to the twenty nineteen cohort. I probably should have been a little bit clearer on the call. We sort of mentioned several cohorts were underperforming that was relative to fiscal twenty nineteen Because we define a cohort as a quarter product and carrier combination, there are multiple cohort combinations for any given fiscal year. So several of the '19 MA cohorts are underperforming. Cohorts before '19 have actually been performing ahead of expectations.
Cohorts after '19 have had lower persistency assumed in their LTV. And since then, we've also made some changes to our tech and sales process to do a better job matching drugs and doctors, which we know are one of the primary reasons why people switch plans. And when they do switch plans, most of the switching does tend to happen in the first couple of years. Once you get to renewal year three or four, the annual persistency is higher and it's more stable, and the variability also just tends to go down. So, we're not seeing the same dynamic with later cohorts than we are with the with the 19 cohort.
There are a couple of things that make the 19 cohort unique. Because we're always using historical persistency assumptions for the LTV calculations. Before 02/2019, we've never had an OEP season. So, basically, the 19 cohort had persistency assumptions from prior years that didn't include that type of switching activity. Obviously, OEP has has expanded people's ability to switch switch, you know, policies, and that's ultimately a huge net win because we can sell more policies, but it was never really in the experience for the 19 LTV.
So the later cohorts, now catch that type of activity with respect to OEP switching. Another dynamic is that the carriers made some pretty big changes to plan design, in future years plans that sort of made them more attractive relative to 19 cohort. And then lastly, just our our CCA team, our customer care team has also ramped up, you know, the proactive outreach to customers. And, really, our recapture rate has been increasing for the last couple of years. So now it's currently 27%.
60% of those recaptured customers happen with a new carrier. So in that example, it's sort of a lost policy for the original carrier, and that negatively impacts six zero six persistency and ultimately sort of, you know, cohort tail adjustments. But on a customer basis, there's there's really no impact, and it's really a new policy with that new carrier, which has a new tail to it. And, actually, it tends to be a net positive from a dollar perspective because we get the rates that are in place at that point in time versus which tend to be higher than when the when the original plan was sold. And then just the last point I would make is that even with this potential adjustment in the fourth quarter, for the 19 cohort, that cohort is on track to deliver an IRR, in excess of 30% in sort of margins that would be above 40%.
And so we've had this slide in our investor deck, that shows the cohort view of cash flow, over time, and we'll update that in the fourth quarter. But, basically, the 19 cohort has already broken even, so it's already repaid the entire cost of writing those policies. And all additional cash that comes, from here on out will be fair profit.
Got you. And I guess, know, absent the tail adjustment detail, can you talk more about the third quarter and what you really saw there in the trends and how that really informs your views about the next AEP and OEP that will be coming up later this year?
Sure. I'll take that one, Frank. Again, we'd underscore the third quarter was a really strong quarter overall, five consecutive quarters of 100% growth in our in terms of senior revenue, 35% EBITDA margins, 17% higher agent productivity, while we grew our agent force by 75% year over year, stable and industry leading LTVs of over $13.25 dollars rev CAC north of 3x and significant growth in our cash efficient final expense business. So those are kind of the results as you're questioning trends that we've seen, I'd say both in OEP and the prior AEP period. We think our core strategy and execution is playing out.
So I think as far as next year, we'll continue to expand marketing capabilities and sources. We can see the strength of what we're driving in terms of rev to CACs and margins. We think the wide phone approach is the best way to address them to really capture this large addressable market. It needs to be combined with workflow and technology and data. We're going to continue to invest there in a wide variety of assets, both digital as well as traditional offline TV and probably on the margin, more strategic partnerships.
We do think the acquisitions that we've made have been successfully integrated. They are certainly helping us continue to drive our growth and capabilities. A second item is really around technology. We've seen it play dividends in both OEP and AEP. The desktop tools that we've referenced on prior calls are indeed helping both upfront in terms of, you know, better plan matching, doctor and drug matching and certainly agent productivity.
And I think when we do get to the discussion around population health, the flexible adaptable architecture has allowed us to, you know, seize opportunities, if you will, when they come to our doorstep. And so we'll continue to make a lot of investments into our flexible tech. Hiring has been a question by a lot of folks. Since the onset of COVID, we've literally hired thousands of people. While we've been working from home for fifteen months, the vast, vast majority of those folks outside of our traditional geographic footprint, we have always recruited from diverse backgrounds, all walks of life, I like to say.
And now we're recruiting on a national basis with associates in 40 states. So we think that is something that's very important. It's certainly a key growth driver. We've continued to build capabilities into our direct to consumer recruiting. Bob and his team have done a fantastic job from technology standpoint with SelectQuote University that allows us to absorb bigger and bigger classes, while still providing the required kind of attention and skills training to be a great agent.
And then finally, I would say our dialogue with our consumers, with our carrier partners, with an emerging group of of MA BDC service providers, and others. They just demonstrates to us that the opportunity and population health is real, is tangible. And we think there's significant value we can provide to the broader ecosystem to all those constituents that I named. We certainly believe there are new meaningful revenue and earnings streams. As I mentioned, we think we can leverage this in a very low risk way by really leveraging the hundreds of millions of dollars we now have in play to help grow our MA distribution business.
So we think it's very logical. We've always been about adding value to consumers and to carriers and we think that the money will follow to stockholders as well.
Okay. We're going to go to population full bore now. Good segue there. So I guess how long have you been thinking about this strategy? And maybe for some of the investors, of maybe describe kind of your view.
There's a lot of talk about population health that gets used a lot, but kind of your view of population health and specifically the platform that you have acquired to really drive this strategy? And maybe just go into some more detail behind that actual you know, why why you're actually going after this market from this from this perspective?
Well, Bob Grant has been the leader in the architect. I think he should, he should lead this discussion.
Yeah. So good question, Frank. I think we've we've talked about for a while that we were starting down the path of working with our carriers on, furthering our value chain. Right? So making introductions to value based care providers, providing more prescription drug education.
And then over the last, you know, six months to nine months, we've really formulated this this business plan realizing that there are gaps, within how far we can take that conversation and our consumers were demanding more out of us than at the time we were able to get. So, we ended up launching this business that that obviously is in the health care services space. Really has three pillars to it. One, I would say, is really just data collection on behalf of the carriers. Right?
You know, a big, portion of what they're asked to do is collecting data, on consumers so that they can build their plans and their kind of, care plans around the specific needs of that client. You know, we're obviously, the perfect person to do it since we have such active dialogue with our consumers. And I think a lot of folks thought we were just a consumer acquisition funnel. Really, where we were differentiated is not just our consumer acquisition. There's lots of folks in that space.
We have differentiated ourselves in the consumer engagement funnel, in the fact that we speak to over 85% of our clients on the back end of the policy, and they really asked us for for more and more engagement, which we are able to give them through Population Health. So that data collection is kind of a key to the onboarding portion of of Population Health. Then from there, we really got the care side of the house where, you know, we've asked the carriers and our definition of Population health to be, perfect for this portion. Who is bending that cost curve in health care, and who would you like your clients to work with? You know, especially if they're kind of in that chronic, they have a certain chronic diseases.
So we worked with them, got introductions, and have started onboarding, you know, quality care providers, in that space, and making introductions to those care providers on interested parties within our book of population health. Again, kind of realize that those businesses maybe weren't complex call center logistics businesses, but they were more they're great at the actual care they provide when you go into the facility, but we could help them kind of shore up the onboarding experience and further their offering out of the center. So we're working with a lot of those folks to understand how we can help them to schedule appointments, how we can help facilitate data collection after those appointments, and really help them with the piece of their business that's not necessarily their core competency, so non in center, solutions. And then the third piece was was really on the the pharmacy side, obviously. We we went down and we purchased ExpressNeds because we looked for a partner that could help us solve something that we we saw was a need, which is low adherence amongst, kind of treatable chronic conditions with eight or more drugs.
Right? What what we found is our clients are having to go to multiple pharmacies to solve this. A lot of them don't have rides, don't have a way to get there. And since they're treatable products, they don't always, you know, as a lot of the the doctors that we work with now talk about it, they don't always feel bad. So they won't proactively go pick up their drugs on time sometimes and things like that.
So we searched the marketplace for a solution that we thought would be a good fit to solve that problem and really just didn't find anything that we liked as much as ExpressNets, which was a smaller business that had really high adherence rates and a really good education bent towards the risk of polypharmacy and some of the issues that arise with that. So we we realized also that our technology was the perfect addition to their solution on onboarding and sign ups and everything that we can do. So basically, you're taking our, $150,000,000 plus piece of technology, bolted it onto their business to make the sign up and onboarding experience significantly better, and then using what they were good at, which is delivery and education of the why you need to take your drugs consistently and why, you need to take them as prescribed and delivering those complex situations to your door. It's differentiated too because we can obviously target the addressable market that actually needs to be addressed versus a lot of the solutions that have been created rely on traditional marketing that may not recruit the necessary patients to do that. Right?
They may just recruit folks that are just doing it for ease of use, and and they don't really need as robust a service as they've created. So they may have two to three drugs and and no chronic conditions. That's not really who we're trying to solve here. So we're really excited about what we're building and and how we can scale it.
Gotcha. Yeah. This strikes me as a business or a service line that's, you know, probably works better incrementally what you're already doing or leveraging what you already have as opposed to somebody going out trying to build this from scratch. So, maybe talk a little bit about what you think are the near term operational and financial implications and opportunities here, but but financial and and also strategic long term, how this may in fact help your your base legacy, you know, MA business. So it's a it's a business unit.
Yeah. I'm sorry.
Okay.
I'll talk about the strategic real quick and then turn it over to Raf for the financial, portion of that. So strategically, you're exactly right, Blake. Well, this is a good, stand alone economic business. It it really relies on our core competency, which is the distribution side and the leads that we create through that. So, you know, we are are leveraging a consumer need to launch this business.
And the operational side of that, really, our legacy technology that we built that's fairly new and and it's code based and everything was extremely flexible and applicable to the consumer engagement and patient engagement side of what we saw within health care. So we're leveraging that side and, you know, relatively quickly. We alluded to the fact that we built, the solution for population health in general in about 90. And we feel that we can do the same thing within patient engagement and SelectRX that we can leverage what we built and build it relatively quickly in a very unique solution. So operationally, we think we can solve a really complicated problem through a lot of the tools that we've already built.
Perhaps you wanna start with the financial implication?
Yeah. I think financially, you know, in our presentation, we gave some examples on the SelectRx side about what that could look like at scale, which and we shared a couple of examples. One at 50,000 members and six prescription drugs and another 100,000. And obviously, in the lifetime values associated with that are very attractive. It's a little bit different that side just because there's an ongoing service obligation.
So we'll book revenue and EBITDA on a cash basis versus lifetime. But even on just on the P and L revenue and EBITDA, you know, we're talking at those types of levels, 200,000,000 of revenue up to $500,000,000 of revenue. And and then on the EBITDA side, you know, 22,000,000 to 90,000,000. So, very attractive, and also very cash efficient. With respect to sort of short, you know, medium term, you know, there's incremental cost this fourth quarter associated with these investments.
Right? That's in the in the mid to high single digit. There's not really that much incremental revenue in the fourth quarter. Next year, from a revenue perspective, like you will see, you will feel the impact of these activities, from an EBITDA perspective, the incremental costs and investments that we're making will basically be off offset by by the revenue, generated next year. So there's not gonna be really a drag.
We don't expect there to be a drag on earnings relative to these investments. Certainly from a lifetime revenue and EBITDA, like, there'll be significant value added next year. And then looking forward to fiscal twenty three, you'll see in the p and l revenue, EBITDA, and then obviously lifetime will be will be attractive as well. In terms of how fast we can get to some of those, scale numbers that we showed in our presentation, you know, that's not five to six years out. And over the next couple of months and quarters, I think we'll provide some more perspective, on how we're ramping.
I think the the the key points are relative to the opportunity. This is a relatively low cost investment to make. One, we're leveraging spend that we're already spending in the business to generate policies. Right? So, basically, leveraging the the 500,000 plus policies we're selling on an annual basis.
Plus the people who don't buy a policy from us. Right? There there's hundreds of thousands of people that don't buy a policy that could still benefit from the solution. And it really just leverages that existing infrastructure to drive incremental revenue, reinforces the core business, and these policies and services that we're adding are very cash efficient. So from that perspective, it just enhances, that cash efficiency.
Gotcha. Fascinating strategy, and it does appear, if you're at breakeven next year, looks like, yeah, the the the the risk reward there looks fairly favorable. In light of that, does this in any way really affect your, your cash and your capital position over the next couple of years? I mean, I I can see how having a a more upfront cash business, a non-six zero six business could enhance that. But is there anything else that we should think about in terms of how it enhances your cash flow and maybe how it affects your long term capital plan.
Yeah. I mean, I think a couple things to keep in mind there. Right? So the first is we have been growing revenue and EBITDA, at a faster pace while using less cash. Normally in our model, right, that actually would consume more cash, but we've been able to operate more efficiently, in part also because of the agent productivity that we've gotten.
That's the first thing. The second thing is a bigger piece of our revenue is coming from first year cash items. In the quarter, that's 48% of our senior revenue came from first year cash items. That was up from 32% a year ago. On a consolidated basis, that's 54% of revenue.
So over 50% of our revenues from year one cash items. The third thing is we're significantly growing the LHA final expense business, which is very cash efficient. And as that continues to grow, you know, we grew a 176% in the quarter, significant growth sequentially as well. And then lastly, these additional services, which are very cash efficient, only enhance that. So, you know, relative to where the company sits and relative to the, the incremental capital that we raised as as part of the refinancing in February, we feel like we've got plenty of capital, to grow the business based on these initiatives that we've announced here.
Got you.
Hey, I would love to keep going. Unfortunately, we're, at the end of our time. So thank you all for being here today. Tim and Raf and Bob, thank you so much for participating, and, good luck with the rest of your day. Thank you.