Greetings. Thank you for standing by, and welcome to the MediaAlpha Q1 2021 Earnings Call. At this time all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator instructions] Pleased be advised that today's conference is being recorded. [Operator instructions] I would now like to hand the conference over to your speaker today, Denise Garcia, Investor Relations. Please go ahead.

Thank you, operator. Our discussion today will include forward-looking statements about our outlook for future financial results, including our financial guidance for the second quarter and the full year 2021, which are based on assumptions, forecasts, expectations, and information currently available to management. These forward-looking statements are subject to risks and uncertainties that could cause future results or events to differ materially from today's guidance. Please refer to the earnings release we filed with the SEC on Form 8-K and the shareholder letter we posted to the Investor Relations section of our website today for a fuller explanation of those risks and uncertainties and the limits applicable to forward-looking statements. MediaAlpha will routinely post information that may be important to investors on our IR website, investors.mediaalpha.com, and we use this website as a means of disclosing material information to the public in a broad, non-exclusionary manner for the purposes of the SEC's regulation fair disclosure. In addition, we will be referring to a certain actual and projected financial metrics of MediaAlpha, which are non-GAAP financial measures. These metrics include adjusted EBITDA, contribution, and contribution margin, and we present them in order to supplement your understanding and assessment of our financial performance. Non-GAAP measures should not be considered as substitute for or superior to financial measures calculated in accordance with GAAP. The most directly comparable GAAP measures, as well as reconciliations of the non-GAAP measures to those GAAP measures, are available in our first-quarter earnings release. As a reminder, we've published a shareholder letter on our IR website, and we'll refer to that during this Q&A session. Now, I'll turn the call over to Steve.

OK. Thanks, Denise. Hi, everyone. We're pleased to report yet another record-breaking quarter. Our top-line transaction value in the first quarter of 2021 was $262.5 million, an increase of 58% year over year and above the high end of our guidance range. Our outstanding performance was driven by continued strength of our P&C vertical, where we saw 74% year-over-year growth, as well as excellent momentum in our health insurance vertical, which achieved 51% year-over-year growth. As we discussed in our shareholder letter, our industry-leading scale, growth rate, and operating leverage are unmistakable signs that our model was working. Our scale advantages are enabling us to offer increasing efficiencies to our partners, both through superior economics and data science. Moreover, we continue to see greenfield opportunities ahead of us. In 2020, a year when we saw the effects of COVID-19 accelerate the insurance sector's adoption of online distribution channels, the insurance industry still spent only 21% of its marketing dollars online as compared with 65% for marketers across all industries. We're pleased with how well we're positioned to capture this market opportunity and look forward to strong continued growth in 2021 in our core insurance markets as reflected in our increased full-year guidance. With that, we'll open it up to your questions.

[Operator instructions] And your first question comes from the line of Cory Carpenter with J.P. Morgan. Please go ahead.

Hi, thanks. Thanks for the questions. Maybe, Steve, just to start off. Could you talk about what you're seeing with carrier spend? Clearly, it remained strong in the quarter. But just what you're seeing as the economy opens, miles driven starts to normalize. And maybe in particular, what's giving you the confidence to raise the guide at this point in the year? And then I have a follow-up for Tigran as well, but I'll stop there.

Yes. Cory, in terms of the carrier spend in the P&C space, particularly with auto insurance carriers, we still continue to see the same things that we talked a bit about in our last call, which is that employment numbers are up, everyone knows that. Miles driven is up, but not to the extent that you would expect based on employment numbers. And I think importantly commuting miles still aren't back. And so from what we're seeing and hearing from our insurance partners, our insurance carrier partners, is that they expect things to remain at these levels and have above normal loss ratios. And I think that in the second half of this year, you start to see some diverging opinions on whether or not the commuting miles will come back and frequency will then revert back to normal. I think Adam had a great report about this where he makes a strong case that I think commuting miles will stay down below historical levels. And hence, frequency will be below historical levels because of just changing expectations of workplace. But then you see others talking more about things getting back to normal and the frequency levels going back to normal in the second half of this year. I mean, where I stand on this, I mean, just in this – my perspective, less as an insurance industry person and as a CEO, I certainly think that our driving behavior is going to continue – I'm sorry, the expectations of working from our offices are going to change. And so my bet is that commuting miles will start to stay down and that profitability will stay high. And hence, the soft market will continue certainly through the end of this year and then into next year. But that's our view on it and that's exactly still – that's what we're hearing from our insurance carrier partners as well.

That's helpful. And then just for Tigran, it looks like you're expecting more of the business to shift to the private marketplace. Could you maybe just help us with what's driving that and maybe how you think about the mix longer term? Thank you.

Sure, Cory. That's a great question. We do see some of our larger partners going direct via the private platform deployment with select key advertisers. And that's really a validation of what our platform was built to enable in the first place. And so what I'd point to is Q1 performance, right, coming in at the top end of the range on transaction value. And while you see the GAAP revenue number flow down at a net rate for some of that increased transaction value via private platform, you see contribution dollars, right? The measure and value that we're bringing to shareholders and to our partners increase and keep pace with that transaction value growth. From a longer-term perspective, it can be hard to gauge exactly kind of where this will move. But we believe there's an equilibrium point here, right. As new partners ramp and take advantage of the demand-side dynamics at play here with continued soft market in P&C and increased carrier demand for consumer referrals, we're going to see open marketplace transactions increase. And so you see that with a statistic we made available in the shareholder letter where the cohort of supply partners that are smaller but meaningful in the open marketplace are growing nicely year over year at a clip of 51% and actual number of partners increasing as well.

Great. Thank you.

And your next question comes from the line of Frank Morgan with RBC Capital Markets.

Actually, Tigran, I'll stay on that point. That was one of my questions. Looking at those – I think you called them out, that are open market transactions greater than $1 million of transaction value. How long does it really take to see those – over what period of time do those actually grow? And is there a size where those eventually tap out?

No. I think you see those partners grow with market demand. And so we've seen those partners grow sequentially quarter over quarter from the Q1 2020 cohort. And you see that as you look back at older cohorts as well. Some of those partners are better at scaling than others. And those that get to very, very significant scale may choose to go direct with some carriers. But we don't really see that happening unless it's a partner of massive scale.

Got you. And just sort of an accounting question, I noticed a fairly noticeable sequential drop in the cash, and it looks like there was a fairly big reduction in payables. Anything that you would call out about that? Is that anything unusual or just kind of normal seasonal patterns for working capital management?

It's really normal seasonal patterns, so driven by the timing of when we release our supplier payments. So you can see some lumpiness in that outflow from quarter to quarter. On a normalized basis, nothing's really changed in our working capital cycle, really just the effect of timing of when we released the large supplier payments. So we see about a $34 million outflow there in Q1. And the offset is a good collection cycle, right, on the receivables side. And note that Q4 is a seasonal kind of peak for us, right. And so you build up some receivables there and start to collect on that in future quarters. But nothing for me to call out, nothing of concern. They're very much normal cycle Q1 trends.

Got you. And I know we just – on the health insurance side of the business, another year of good, solid growth there. But just to want to, I guess, get your confirmation. Should we expect that business to slow down over the next couple of quarters given the normal seasonal pattern of that business before we get back to a year-end AEP again? Or anything that you would call out on the health insurance side? Or any observations about how the OEP went? Thanks.

Frank, we had a strong…

Yes – sorry. Let me make a comment about just – yes, we did have a strong OEP. And then we did see a greater spend from health insurance carriers during the special enrollment period as well. And so a lot of our insurance carrier partners in the under-65 health space were up, you know, two times, three times from past years or past outside of open enrollment periods. And so we were happy to see that. So we feel good about the upcoming open enrollment period. But I'll let Tigran answer the rest of your question.

Yeah. And I think Steve hit it on the head there. With great open enrollment, we've seen nice performance through the extended special enrollment period, but seasonal trends will take hold in Q2 and Q3 before you see again that spike in Q4.

Okay. Thanks.

[Operator Instructions] Your next comes from line of Daniel Grosslight with Citi. Please go ahead.

Hi, guys. Thanks for taking the question. I'll maybe focus on the shift from open to private, more on a segment basis. If I just look at the conversion values, that's revenue divided by transaction value, it looks like the greatest delta this quarter on a sequential basis was in P&C and then followed by health. I was wondering if there was anything specific to call out in P&C as we think about this shift from open market to private market and what that will mean for conversion rates for the rest of the year into next year.

Daniel, I'll take that first, which is, I mean, I don't think there's anything specific to call out with respect to P&C. I think the dynamics at play is really that we had rapid growth in the P&C vertical, in part because of the acceleration of the adoption of direct-to-consumer by insurance carriers during last year, during COVID. And so with the influx of demand, I think the existing supply partners that we had benefited from that. They scaled very nicely from that. And so as supply partners scale, then our partnership really then is able to be flexible enough to shift to a model where if they choose, they can deploy or they can start working directly with insurance carriers through a private marketplace they set up. And so the natural gating factor there is that insurance carriers are only willing to work directly with larger supply partners. And so as these insurance – as these supply partners scale like some of them did nicely last year, more partners essentially qualified and met that threshold for some of the insurance carriers so that they can work directly together. As Tigran pointed out, the influx in demand then also attracts new supply partners, and we're seeing like nice growth within our open exchange of smaller supply partners, and we expect them to continue to grow nicely. And keep in mind, some of the biggest partners that we have right now were really very small partners two years ago, three years ago. And so this, in part, in enabling these partners to grow and scale, is really part of our model. And we're happy to be able to continue to work with them under our private marketplace model because that's designed for these partners who've been successful within our ecosystem.

Got it. All right. That makes sense. And then just looking at the guidance, it seems like the assumption is you'll continue to see a shift to private for 2Q, and then you'll see the influx of these smaller and medium-sized partners come online in Q3 and Q4. Am I interpreting that correctly?

Dan, that's right. And that's also impacted by seasonality and also can have a little bit of an impact on the optics there of the flow-through. But by and large, you got it right.

Got it. Okay. That makes sense. And then in the health segment, can you remind us – sorry, go ahead.

Sorry, Dan, let me just jump in. I do want to make sure that this is the reason that we focus on transaction value, right, because we love working with our partners. And as they scale and they shift to a private marketplace model, that's by design. And so we're not, at any given time in the near term, overly concerned about the mix of private versus open. And that's why we focus on transaction value and then the next line down in terms of overall contribution. And so I just wanted to make that clear that as Tigran pointed out, over the long-term, we do expect there to be some equilibrium point as new partners come in. And there's a natural check to the private marketplace model because of the demand side and their willingness to work with a number of partners directly and that being limited. But at the end of the day, the shifts that we expect to see in the near term is really why we're focused on transaction value above all.

Yes. That makes sense. Okay. And can you remind us on the health segment, what percent of transaction value is from the IFP or under 65 versus Medicare?

Under 65 is roughly 40%, 50% of the transaction value.

Okay. And is that more weighted this year because of the SAP and you expect that to trend down in 2022?

That's right. I think we see accelerating growth in Medicare as others have seen. And so naturally, I think you'll see a mix shift toward Medicare.

Got it. Okay. And then one last one for me. Any update on the agent strategy and uptake you're seeing there?

Yes. As we mentioned last quarter, Dan, we continue to be focused on product innovation there. And we're very happy with some of the test results that we've had from product innovations that we've been putting out to the marketplace. I will say that one of the things that we are seeing more of, right, because we're engaged in discussions with these agent-based carriers about how best to start working with their agents and help them with their marketing efforts, is that we are seeing an increasing trend toward these carriers starting to centralize some of the agent marketing support. What people refer to sometimes co-op dollars or allowances to manage some agents, which is essentially marketing dollars that they're giving to agents. Typically, the way the Allstates of the world have worked with these insurance agents is to give some of their agents, notably their top agents, some co-marketing dollars that they can use to then buy leads, buy calls, or do other marketing efforts. What we're starting to see in this – in that marketplace is that these carriers are starting to centralize a lot of that support that they're offering. And to put it simply; starting to centralize the lead buying and the call buying and then distributing those consumer opportunities to their agents. And there's some real benefits from centralizing this, right, because you can use technology like ours based on data science, based on programmatic technologies to buy more intelligently. You can solve the feedback loop problem at the carrier end or on a centralized basis, which has really been one of the intractable issues with media being purchased by agents, is that you never know exactly what's working and what doesn't. And if you've heard our calls and us talking about it, you know…

Got it. Appreciate the color. Thanks, guys.

Sure.

Your next question comes from the line of Michael Graham with Canaccord. Go ahead.

Yes. Thanks. Two questions, please, guys. One is you mentioned in the shareholder letter something that I think we're all pretty aware of, which is that the insurance industry only spends a little over 20% of its ads on digital channels versus 65% overall. Can you just comment on like do you see this evolving to kind of getting up to parity with the overall advertising market in kind of a straight line? Or do you see like natural areas where there could be an inflection point? And then the other question I wanted to ask is just if you could please give us a little color on some of the GAAP charges this quarter. It looks like there were some impacts to GAAP EPS. Just wondered if you could talk us through that?

Hey, Michael, so I think great question. Yes, in terms of whether that 21% is going to become 65%, I think it's more likely than that. It gets pretty close, right? And one of the reasons I say that is that when you see a lot of the insurtech companies which are natively digital-native technology companies, and you see the allocation of their marketing spend and their customer acquisition spend. I mean, you see it closer to those levels, if not higher than the industry normal levels. They're certainly not anywhere close to 21%. And so that's one sign that five years from now, six years from now, there'll be more carriers allocating those levels of spend to digital marketing. Now, in terms of like how smooth that transition will be. Within the P&C space, I would say that it might be a little lumpy in the sense that there are large advertisers within the P&C space. And so as they start to turn on and really start to increase their investments in direct-to-consumer, you might see some spikes as some of these carriers then really start to invest in force in that area. And so that could be one reason where the increases are a little bit lumpy. But otherwise, I don't have any information that would tell me that it wouldn't be more of a steady growth year over year.

Thanks. And then any comments on the charges to GAAP EPS?

Yes. Thanks, Michael. So in the quarter, as you all know, we completed our first follow-on offering. There were roughly $2.8 million of expenses really related to professional services and executing that offering. And taking the net income number for the quarter of $0.2 million, adding that back gets us to roughly $3 million of net income or EPS of $0.05. And so it's primarily driven by those one-time charges related to the execution of that offering in Q1.

That's helpful. Thank you both very much.

Thanks, Michael.

And that concludes our questions for today's call. And that concludes today's conference call. Thank you for your participation. You may now disconnect.