Ladies and gentlemen, good afternoon. My name is Abby, and I will be your conference operator today. At this time, I would like to welcome everyone to the EverQuote Second Quarter 2023 Earnings Conference Call. [Operator Instructions] And I will now turn the conference over to Brinlea Johnson, Investor Relations. You may begin.

Thank you. Good afternoon, and welcome to EverQuote's second quarter 2023 earnings call. We'll be discussing the results announced in our press release issued today after the market closed. With me on the call this afternoon is Jayme Mendal, EverQuote's Chief Executive Officer; and Joseph Sanborn, Chief Financial Officer of EverQuote. During the call, we will make statements related to our business that may be considered forward-looking statements under federal securities laws, including statements concerning our financial guidance for the third quarter of 2023, our growth strategy and our plans to execute on our growth strategy, key initiatives, including our direct-to-consumer agency, our investments in the business, the growth levers we expect to drive our business, our ability to maintain existing and acquire new customers, our expectations regarding recovery of the auto insurance industry and other statements regarding our plans and prospects. Forward-looking statements may be identified with words and phrases such as we expect, we believe, we intend, we anticipate, we plan, may, upcoming and similar words and phrases. These statements reflect our views only as of today and should not be considered our views as of any subsequent date. We specifically disclaim any obligation to update or revise these forward-looking statements, except as required by law. Forward-looking statements are not promises or guarantees of their future performance and are subject to a variety of risks and uncertainties that could cause the actual results to differ materially from our expectations. For a discussion of material risks and other important factors that could cause our actual results to differ materially from our expectations, please refer to those contained under the heading Risk Factors in our most recent quarterly report on Form 10-Q, our annual report on Form 10-K that is on file with the Securities and Exchange Commission and available on the Investor Relations section of our website investor.everquote.com and SEC’s website sec.gov. Finally, during the course of today's call, we refer to certain non-GAAP financial measures, which we believe are helpful to investors. A reconciliation of GAAP to non-GAAP measures was included in the press release we issued after the close of market today, which is available on the Investor Relations section of our website at investors.everquote.com. And with that, I'll turn it over to Jayme.

Thank you, Brinlea, and thank you all for joining us today. In the second quarter, EverQuote reported revenue of $68 million variable marketing margin or VMM of $24.7 million and adjusted EBITDA of negative $2.1 million. We achieved a record high VMM as a percentage of revenue of 36.3%. However, our revenue results fell below our expectations, largely driven by 2 factors that developed in the latter half of the second quarter as auto insurance carriers continue to wrestle with significant profitability challenges. First, a major carrier partner reduced its budget multiple times over the quarter, resulting in their lowest levels of spend in our marketplace since the auto insurance downturn began in late summer of 2021. Second, we experienced a substantial contraction in agent demand following reductions in carrier marketing subsidies for local agents. We exited the quarter with auto demand at a new low point, which we now expect to persist into the back half of the year. In response to this renewed pullback and continued uncertainty about the timing of a more sustainable auto recovery, we initiated a restructuring of the business in June. The restructuring included a large reduction in force, an exit of our health insurance vertical and its associated direct-to-consumer agency operations and a scale down of our DTCA operations serving the auto and home verticals. We also took actions to strengthen our balance sheet, which Joseph will cover in more detail. The combination of actions we have taken puts EverQuote in a stronger position to weather a further prolonged period of volatility in the auto insurance market. While the restructuring was catalyzed by the lower for longer auto insurance outlook, the specific decisions we made were informed by a deeper assessment of our overall strategy. We are also restoring greater focus on our…

Thank you, Jayme, for the warm introduction. Good afternoon, everyone. During my nearly 4 years with EverQuote, I've had the pleasure of meeting many of our investors. As I step into the CFO role, I look forward to continuing our dialogue and sharing with you the progress we are making at EverQuote. I will start by discussing our financial results for the second quarter then update you on recent actions taken since the end of Q2 before providing guidance for the third quarter. Our total revenue for the second quarter of $68 million represented a decline of 33% year-over-year and was lower than our previous guidance range for Q2 revenue. Despite the revenue shortfall, we delivered Variable Marketing Margin, or VMM, and adjusted EBITDA above the midpoint of our guidance as our operating teams continue to execute well in a deeply challenging environment. Q2 revenue from our auto insurance vertical decreased 39% year-over-year to $49.7 million, a sequential decline of 45% for Q1. The second quarter is typically a seasonally weaker period in our auto insurance vertical. In addition, substantially weakened demand in Q2 from our largest carrier customer called a very strong start to the year. Our third party or local agent network was more resilient, representing 50% of total revenues in Q2, but it also experienced a year-over-year revenue decline, primarily driven by another one of our large carrier partners reducing their agent subsidies within the quarter. As a result, we exited the quarter with auto revenues at a new low point since the downturn began in late summer 2021. Revenue from our other insurance verticals, which includes home and renters, life and health insurance verticals, decreased 11% year-over-year to $18.2 million in the second quarter and represented 27% of revenue. The decline in revenue was mostly attributable…

[Operator Instructions] And we will take our first question from Michael Graham with Canaccord. Your line is open.

I want to wish John Wagner well and Joseph, congratulations. I wanted to ask two questions, guys. The first one is on just liquidity and sort of capital needs and just maybe address how you're thinking about your balance sheet and how comfortable you are with it here for the balance of the year, I guess? And then secondly, Jayme, you mentioned in your prepared remarks that you felt like in the auto vertical, where you were sort of maintaining your core business that you feel like you have a good competitive moat that you're building around. Can you just maybe address some of the sort of key points and sort of the focus of like building or maintaining a competitive moat in auto?

Sure. Why don't -- I'll take the second question first, and then I'll turn it over to Joseph to talk about liquidity. As we approach -- as we worked our way through Q2, there was -- we saw a fairly dramatic drawdown in auto demand. And with that, I think we performed a strategic assessment with the conclusion of which was we will benefit from greater strategic focus and improved capital utilization and capital efficiency. And that kind of forced the decision to reduce the workforce, exit health and Medicare and really focus on P&C specifically. One of the big motivators behind that was we were -- we took stock of what are our truly differentiated assets. And we believe those to be our local agent network, where we have an installed base of about 7,000 plus local agents who rely on us to grow their agency. Traffic volume, particularly in P&C and auto and home, where we believe we are the largest source of online insurance traffic in those verticals. And then a lot of the data and technology infrastructure we've built around that. And so in a world where we're making decisions about whether to go wider and less deep or less wide and more deep, we decided to go less wide and more deep and to do so in P&C, where we feel we have these assets that we can really build on and around to deliver more value for customers and ultimately more value for shareholders over time.

I'll take your first question, Mike. Thank you for your welcome as well. So in terms of our liquidity position, we ended second quarter with $31 million in cash on the balance sheet. To that, we've done -- we mentioned two actions we've taken since the end of the quarter to further strengthen the balance sheet. One was the sale of our health assets at another incremental $13 million. We also modified our loan with Western Alliance Bank to a $25 million facility. Again, not planning to use that facility, but we modified the terms to give us much more flexibility reflecting the current environment. And so adding those all together, we have in excess of $60 million of liquidity. So we feel that is ample liquidity for the business for a prolonged auto downturn. In terms of cash utilization, as we look through this quarter, what you're seeing is that we're returning to a model where EBITDA will become a closer proxy for cash flow use in the quarter. Obviously, adjusted for ebbs and flows of working capital between quarter and and month-to-month. So we feel we have ample liquidity given the prolonged downturn given the actions we've taken since Q2.

And we will take our next question from Ralph Schackart with William Blair. Your line is open.

So congrats, Joseph on the new role. During the prepared remarks, Jim, you talked about focusing perhaps on AI and applications for insurance distribution. Just curious if you could provide some more context to that as the more traditional AI? Or are you looking to leverage Gen AI at some capacity. And then I have a follow-up.

Sure. So our simplistic framework for thinking about this is sort of 2 categories of application. One is in operational efficiency. It's more internal use cases. And then the second in more customer-facing features. The focus to date has been primarily on the first category. And we've already begun to deploy use cases, which are starting to show signs of success and build some adoption internally. And so in a recent example, we leveraged AI capabilities to automate a set of activities in one of our sales functions and that improved the efficiency of that team by about 80%. We have similar examples beginning to take shape in engineering, and we're working on kind of extending it outwards to build adoption internally first. But I think one of the big opportunities that we have, and again, it's part of the rationale for focusing more narrowly on P&C and going deeper is that we have a wealth of insurance distribution data in this market where we can tie consumer data and attributes that we've collected on millions and millions of consumers to outcomes down funnel with thousands of local agents and agents and dozens of insurance carriers. And I think with that data, there will be opportunities to really apply some of the new technology as it comes out to better match and connect consumers with the right insurance providers for them, to right-price our traffic acquisition as we bid for traffic upmarket and to improve providers' efficiency and their spend with us. So there are a whole bunch of use cases that we see out there, and we're just beginning to step our way through it, but we see a huge opportunity given the unique data that we have to emerge as a leader in the space.

And then maybe just on the sort of the EBITDA burn at this point. Just philosophically, you have a continued prolonged or longer than expected, tough macro environment with your carrier partners. Would there be a certain level that you'd want to manage the burn to? Or would you perhaps look to sort of balance that out with potentially tapping the loan facility?

So let me start I'll start and you can build. I think we -- as we made some of the decisions that we did this quarter, we had a couple of financial objectives. One was to reduce our cash breakeven revenue level. And so we did that successfully. Like we dramatically improved the capital efficiency of the business by taking the actions that we took. And I think in doing so, we've brought down the revenue level that would be required to generate breakeven or better cash flow by 35% to 40%. Then we have the consideration around profitability and adjusted EBITDA based on a set of assumptions about the auto recovery. And for the last 18 to 24 months, Ralph, you know we've seen these peaks and troughs, right? And right now, we happen to be at the lowest trough of the downturn of the sort of volatile period. But as Joseph mentioned in his remarks, like we do expect recovery to build as we get into 2024. And so what we've done is we made a cut that we felt was appropriate but that enables us to continue to invest in certain parts of the business where we see significant opportunity in our renewed area of focus within P&C. And we're going to continue to operate with sort of very significant discipline on the operating expense line as we progress through the year and watch for the market to begin to recover. So we feel very good about our liquidity position. I think we have the ability to maintain modest investments in areas where we feel it to be important. But we will continue to manage our expenses very, very tightly as we progress through the balance of this year. And as we get into next year, I do think we'll [indiscernible].

Yes. So just adding on to Jayme, so thank you is, we're going to -- as Jayme said, we're going to continue to manage our expenses carefully in a disciplined way. We want to make -- we made these decisions around strategic focus, exiting our health business and focusing more deeply on P&C. Part of the rationale and the level of cuts we took was to make sure we were well positioned for auto recovery. We think that is critical. We've been going through this storm for quite some time. We want to come out of it as a strong leader in the space. And so we think with the reductions we took sets us up to have the resources to continue to be invested positions for that. The second part is we're also mindful of continuing to manage expenses and adapting them appropriately to the environment. What I would say is that our goal as a team is that for the first half of 2024, we will be cash flow breakeven and EBITDA positive in the first half of calendar year '24.

We will take our next question from Cory Carpenter with JPMorgan. Your line is open.

A few questions for you. It sounds like you sold parts of the health business but still retain others. Just curious what do you have left? And how are you thinking about the wind down of that? And then just with that in mind, any context you can give us in terms of what you're assuming for the other vertical in 3Q from a revenue contribution perspective? And then, sorry, third, just -- any color you can give on why you expect VMM margins to decline sequentially in 3Q would be helpful.

At that third one, Cory.

The VMM guide in 3Q, I think you did 36% in margins in 2Q, you guided to about 32% in 3Q. Just curious the drivers there.

Sure. So let me start with the exit of the health protocol. So just to go over what we decided. We entered the health vertical on June 30, meaning there was no health revenues in our business going forth. We exit the vertical completely at that point. So that's the first piece I would tell you. I know the press release says we sold select assets. I think we sold almost every select maybe there's a desk computer left, but that is to appeal to the lawyers and the accountants. We sold all the assets -- with the principal asset was the $32.2 million contract -- commission receivable contract asset we had on the balance sheet. That represented the estimate of the cash flows we expect to receive over the next 7 years. We sold that for the $13.2 million in cash. In addition to that, as part of the transaction, we sold some -- we helped transition some employees and find employment opportunities with MyPlan Advocate, which is obviously a nice thing for our employees and gave us a smoother transition for them, which we were pleased with. So that's with regards to the health business and the exit. And again, there's no revenue from the health vertical coming into Q3. What you will see in Q3, as we finalize the accounting on the sale of the assets, which took place on August 1, in Q3, there'll be a noncash charge, reflecting the sale of the contract asset for $13.2 million given the contract as we expected to receive over time. So that will be a charge that will appear in the quarter, and we're finalizing the treatment of that right now, and we'll give that guidance we due in next quarter. In terms of the other insurance verticals,…

[Operator Instructions] We will take our next question from Dan Day with B. Riley Securities. Your line is open.

So a little more detail just on the pullback to subsidies and agent channel. So how much visibility do you have in terms of how long that will last? Is it any better than the carrier marketplace spending? How aggressive have those reductions been? And really, is it just like 1 or 2 carriers? Or is it fairly broad-based so far?

Yes, sure. Thanks, Dan. So the agent subsidies are primarily -- they're relatively concentrated in a small number of carriers. The big change in Q2 was one of the larger of those carriers cut back subsidies in a number of states, representing a good portion of their agent demand. And so in those states, we saw agents who had less subsidy dollar support from the carrier pullback in terms of their demand. With respect to the expectation going forward, I think it's similar to what we expect for the rest of the marketplace, which is that -- the balance of 2023, we do not expect to see recovery in those subsidy dollars. I do think as we look ahead to 2024, the messaging we're receiving is that we will likely see some of those dollars return, but it wouldn't be like a light switch in the sense that they return to early 2023 levels right at the beginning of 2024. It will likely follow some path of the carrier being able to get sufficient rate to be comfortable with their profitability on a state-by-state basis over the course of 2024.

And then just a follow-up. So the decision not to fully exit DTCA in home and health, just you talked a little bit about it, what you like about that business? Maybe just a little more detail on that, why to keep sort of a smaller presence there? And then longer term, like do you see this as just a temporary scale back that, maybe you'll add more P&C agents when the recovery happens? Or is it sort of just -- it is what it is at this point?

Sure. So just to clarify, we exited DTCA entirely in health and Medicare which we exited the verticals. And with that, our DTCA operations, and that represented the majority of our Asian headcount. And then within P&C, which is the other DTCA operation that we have, we significantly reduced the agent headcount. And we did so because we -- because of our renewed commitment to capital efficiency in the business. And so if you go back to the rationale for getting into this -- into the DTCA in the first place, it -- there was a strategic rationale and then there was some growth that it was meant to generate. And we made this decision at a time when the auto insurance market was in a healthier place. And of course, conditions on the ground have changed, and so we're revisiting some of those assumptions. Where we are today, we have a basically scaled down P&C DTCA operation today. So we have agents who are selling auto and home insurance. The strategic rationale that existed back when continues to exist today and get proven out. And that is that these agents can provide incremental coverage to the marketplace. They can provide options to consumers who come in when we don't have a good third-party option for them. They can generate a lot of insight about what happens with consumers down funnel. So we've got a lot of real-time data on quality of traffic and LTV profile of consumers that we can use to improve our overall traffic operations. And it serves as a bit of an internal customer, which we treat this like innovation lab as we try and improve our offering for third-party agents as well. So the majority of those things can be accomplished with a smaller footprint, and that's what we're trying to hold on to. I think the piece that -- the notion that we are letting go of is DTCA as a stand-alone growth driver because that's not consistent with our renewed focus on capital efficiency. And so I would expect that its current incarnation, which is a much smaller agent base will be the state in which it persists for the foreseeable future.

And we will take our final question from Jed Kelly with Oppenheimer. Your line is open.

just looking at sort of the, I guess, nonvariable marketing expenses implied in the guide, I think it's around like $22 million in the third quarter. Is that the proper run rate to assume going forward? And then, Joseph, just circling back on your free cash flow breakeven comments around the first half of next year, sort of what kind of gives you confidence to put that type of guidance out there?

Sure. So I think first -- so thanks, Jed, for the question. So I think, first, in terms of the operating expense level, I think you've got a reasonable ballpark on that. If you put that in context to where we ended Q2 and what the guidance we've given. We said it was going to be 15% reduction in structural costs and you're us doing that in Q3. So I think that's first. And then as we look to next year, as we think about the business, we think there's -- we do believe there will be some auto recovery in the course of next year -- in the first half of next year. As Jayme talk touched on, we have dramatically lowered the cash flow breakeven point of the business to the actions we've taken. We've done it by 35% to 40% versus where we were in the start of the year. So what that means in practice speaking is very modest recovery from current levels even below where we were earlier in the year. It allows us below where we were in Q2, allows us to feel confident of getting to cash flow EBITDA breakeven. And as I said, the difference in EBITDA and cash flow right now, very similar. The differences are modest and really is working capital quarter [indiscernible] so versus when we had DTCA, we had a heavy cash investment upfront, where we realize it over time. As we've gone to more of an asset-light model, great emphasis on capital efficiency and return on capital, you're seeing that stronger connection between adjusted EBITDA being a proxy for cash flow in a period.

And then just a follow-up. Just I think every insurance marketer is a thing going through this. Jayme, where do you see the competitive landscape shaking out when this recovery happens? I mean do you think everyone will benefit? Or do you think there'll be much fewer players? Or do you see a period of consolidation? Just -- how do you see things shaking out when we do eventually get to a recovery?

Yes. Thanks, Jed. So I think we've -- well, it's been a challenging period for everyone. We have performed relatively well in that by all measures, if you just sort of track insurance revenue from companies in the competitive set, we have gained market share through the downturn. And we feel very good about our competitive position. As you look ahead, I think the recovery will certainly will lift all -- the rising tide will lift all boats. It's hard for me to speculate on whether or not there will be consolidation. But I feel very good about EverQuote's competitive position as we come out of the downturn, having gained market share and now especially having added focus and emphasis on the auto insurance market, I think we will continue to build on our edge with these local agents, and in doing so, emerge in a fairly differentiated position relative to the rest of the market.

And there are no further questions at this time. I will now turn the call back to management for closing remarks.

Thanks all for joining us today. So as the auto insurance market volatility persists. We took significant action this quarter to strengthen our position for further prolonged downturn. We dramatically improved our capital efficiency. We strengthened our balance sheet. We streamlined expenses. And we bolstered our focus in areas where we can build on and around our most differentiated assets. I'm confident that the changes we made will accelerate our ability to provide compelling value to our customers, insurance provider partners and our shareholders moving forward. Thanks for your time.

Ladies and gentlemen, this concludes today's call. We thank you for your participation. You may now disconnect.