Good day, and thank you for standing by. Welcome to the SelectQuote Fiscal First Quarter 2022 Earnings Conference Call. [Operator Instructions] Without further ado, I would like to welcome your first speaker for today, Matt Gunter, SelectQuote Investor Relations. Sir, the floor is yours.

Thank you, and good afternoon, everyone. Welcome to SelectQuote's fiscal first quarter earnings call. Before we begin our call, I would like to mention that on our website, we have provided a slide presentation to help guide our discussion this afternoon. After today's call, a replay will also be available on our website. Joining me from the company, I have our Chief Executive Officer, Tim Danker; and our Chief Financial Officer, Raff Sadun. Following Tim and Raff's comments today, we will have a question-and-answer session. [Operator Instructions] As referenced on Slide 2, during this call, we will be discussing some non-GAAP financial measures. The most directly comparable GAAP financial measures and a reconciliation of the differences between the GAAP and non-GAAP financial measures are available in our earnings release and investor presentation on our website. And finally, a reminder that certain statements made today may be forward-looking statements. These statements are made based upon management's current expectations and beliefs concerning future events impacting the company and, therefore, involve a number of uncertainties and risks, including, but not limited to, those described in our earnings release, annual report on Form 10-K and other filings with the SEC. Therefore, the actual results of operations or financial condition of the company could differ materially from those expressed or implied in our forward-looking statements. And with that, I'd like to turn the call over to our Chief Executive Officer, Tim Danker. Tim?

Thanks, Matt, and thank you to everyone joining on the call. Today, we'll review our strong fiscal first quarter results. We'll also give a quick update on our preparation for the ongoing AEP season for our senior Medicare business. And lastly, we'll provide some color on our Population Health initiatives and SelectRx specifically. Then as usual, we'll wrap up with Raff's overview of our financial results. So let's begin on Slide 3, and I'll start with 5 key takeaways as we see them. First, our results in the first quarter were strong and ahead of internal expectations. Consolidated revenues of $160 million were up 29% year-over-year, driven primarily by higher MA-approved policies and growth in final expense premium. Our adjusted EBITDA loss of $44 million was driven primarily by the seasonal investment to onboard flex agents and accompanying support roles in anticipation of AEP and OEP. Second, our full year fiscal '22 outlook ranges remain unchanged at $1.25 billion to $1.4 billion in revenue and adjusted EBITDA of $255 million to $285 million, which also includes an unchanged $65 million placeholder for potential sale adjustments. While our first quarter results were ahead of our internal expectations, the pacing of our revenue and EBITDA for the year has moved given the timing of hiring coming into this AEP season. Both Raff and I will speak to this during the call. Additionally, it is important to reiterate that over 70% of our annual production will come over the next 2 quarters. And as a result, we plan to provide updates to our outlook as we get further through the season. Third, while the timing was delayed, our strategic staffing is in place for the ongoing AEP season. And we believe we are well positioned for another year of strong growth despite the…

Thanks, Tim. Turning to Slide 6 in our Senior division. We grew total revenue 45% to $106 million and generated an adjusted EBITDA loss of $33 million. As I'll discuss in a minute, the increase in revenue was driven by an increase in the number of MA-approved policies, somewhat offset by lower MA LTV per policy. Revenue also increased as a result of revenue generated from our Population Health activities, specifically SelectRx, where we made good progress scaling the business this quarter. In terms of expenses, we did ramp-up our marketing expenses during the quarter to test and secure marketing channels and vendors in anticipation for AEP and OEP. While this drags on margins during the quarter, we felt like it made sense to secure the availability of those leads and the quality of those lead forces going into our busiest quarters of the year. We also incurred incremental costs to hire our flex agents and enrollers and to ramp up our activity in SelectRx. Moving on to Senior KPIs on Slide 7. We grew our total approved policies 60% and our MA-approved policy 98%. This growth was driven by a 35% increase in average productive agents and a 30% increase in agent productivity. Agent productivity was driven by an increase in overall marketing costs and an increase in lead consumption. With a big increase in the number of flex agents, we continue to expect that agent productivity will be down year-over-year during AEP and OEP and for the full year. With respect to MA LTVs as discussed on our last call, we anticipated MA LTVs would be down for the full year by around 8%, driven by the switch to policy level persistency, lower overall persistency and higher provision rates for first year and renewal years, somewhat offset by…

Thank you. And before we turn to your questions, let me quickly summarize on Slide 9. First, we believe SelectQuote has significant competitive advantages within a compelling growth industry, driven by demographic and secular trends. We have built a differentiated model that delivers value to Medicare Advantage shoppers through significant technology capabilities paired with an agent-led experience. Second, our returns on invested capital are highly compelling as we've detailed on previous earnings calls. Better yet, we believe these types of attractive returns are achievable in both our core strategies as well as our newer Population Health growth initiatives. Third, as we detailed earlier, SelectRx is ramping quickly, and we are increasingly convinced that our unique value proposition for prescription drug management and distribution has tremendous potential. Lastly, similar to SelectRx, our Population Health initiatives represent our company's unique opportunity and ability to unlock value for patients, caregivers and carriers, which also benefits our shareholders. With that, let us turn to your questions. Operator?

[Operator Instructions] Our first question comes from the line of Jailendra Singh from Credit Suisse.

This is Jailendra Singh from Credit Suisse. Just wanted to follow up on this impact of delayed hiring process. Last quarter, when you guys reported in late August, you guys noted that you were on track with respect to your hiring plan. Just give us what happened in the last 2 months that it is impacting your kind of positioning for AEP with respect agents? Especially when this year, I believe you were starting the process much early in the year, so did you see any agents turn over? Like what exactly happened, like, which is impacting the last 2 months hiring process?

Yes, I'm happy to take that. I think what we talked about last quarter we felt good about where we are. We certainly noted that the labor market was quite different from last year, but we still had some additional hiring to do. I think the biggest difference that we learned this year from last year, we experienced quite a bit higher rate of verbal offers accepted to start dates. So basically, that's somebody who accepted our offer but didn't follow through entirely with the licensing process and just quite -- not quite as motivated basically year-over-year to start. So those rates really were the primary difference, meaning the verbal offers at the start. As a result of that fall off, really, it kind of started to push our classes back, especially when you look at that September class, which is the beginning of September class is going to be a large class for us. We had a large number of folks basically pushed back. So in kind of response to that, we did a later class. And really, it was that, I'd say, that final push in terms of getting them over the finish line which really caused the delay.

But given your flex agent flexibility and then given how important AEP is for your business model, why not take advantage of moving more agents to your Senior business like you did last year from Life business, Auto & Home business? I mean do you not have that much flexibility this year? Just curious like why not take advantage of that?

Bob, do you want to take that?

Yes, absolutely. We still have the same strategy, Jailendra. It's just relative to our hiring goals this year, we were hiring more from the outside to actually fill that funnel of AEP and then ultimately fill after AEP and our goals for Q3 and Q4. We actually -- we ended up hitting the hiring goals, to Bill's point. It's just delayed it because we had a little bit more falloff in those summer classes after our last call and then more folks kind of came in that September time frame. So we always rely on a lot of external hiring mixed with the shifting folks. We still shifted a lot of folks over and are seeing really good results from that. It's just the delayed hiring put pressure on because of the number of bodies we were talking about that ended up shifting.

And Jailendra, one thing that I would point out is while we -- there are verbal offers accepted to start date was down, one thing that we have learned here is the folks that are -- that have come on are actually -- were trading at a lower rate. So we feel the people that we are getting this year are very committed to the job. They're performing well, and we feel like it positions us. It's just -- there is a time that takes those folks to ramp. And as we push it back and push those classes later, we're a little earlier -- they're a little earlier in the process than we would like to be in terms of that ramp period. So that's really the primary difference. But again, feel good about where they are. They're sticking at a high rate. I feel like it puts in a good position moving forward.

Just a quick follow-up beyond the agency dynamics. In general, anything you can share about AEP in terms of cost around lead generation, any change in the focus from health insurance partners, anything different from what you saw in the prior AEPs?

Yes. Jailendra, this is Tim. I'll make a quick comment and turn it over to Bob. I think Bill hit on the biggest thing with respect to the hiring and the ramp into production, I think on the operational front, we feel very well positioned with some enhancements we've made to our process. Enrollment, notably as well as other things that I think will drive a lot of quality and efficiency throughout AEP and OEP. Bob, do you want to comment just in general around plan design, general market environment as you see it?

Yes. One thing on plan design, the carriers have definitely come together a little bit more on how largely networks are, OTC benefits, other things that we were seeing were quite differentiated last year. So we do see a little bit more of a competitive environment from each of the carriers as far as not being quite as differentiated from each other. So that's definitely an interesting start just watching that and adjusting kind of messaging and then lead buys based on that. But I feel really good about that plan design and the carriers did a great job putting the things that have been very important to people, especially through COVID in those plans.

Our next question comes from the line of Elizabeth Anderson from Evercore.

I was just wondering if you could comment on the factors that impacted the LTV in the quarter, maybe differentiating some of the ones that might be a little bit transitory versus some of the longer-term trends.

Sure. This is Raff. I'll probably take that one. So I think on the call, we stated that the LTV was down -- for MA policies, was down 15% year-over-year. Roughly 1/3 of that was a function of the move to level persistency, which as a reminder, is net revenue neutral, has no impact on revenue because we effectively just approved 6% more policy. So 1/3 of it was that. And then 2/3 of it was really a combination of lower overall persistency based on the 3-year weighted average -- trailing 3-year weighted average and then increased provision rates both first year renewal year losses, offset by a little bit of commission rates. So those are kind of the primary drivers of the 15% decline.

Okay. That's super helpful. And is it possible to just talk about sort of how much specifically Population Health contributed in the quarter from a revenue perspective?

Yes. I think you'll see -- go ahead, Raff, if you want. Go ahead.

Well, [indiscernible] specific I think you'll see in the Q when we file that SelectRx specifically generated around $4 million of revenue for the quarter. And that was probably the biggest driver of that. All the initiatives that we're working on there are ramping quite nicely. And again, they're expected to continue to ramp during the course of the year.

Okay. So you would say that the general -- the Population Health is on track with your initial expectations for the year?

Absolutely.

Yes. Yes, absolutely. Maybe we can touch on that a little bit, Elizabeth, and ask Bob to chime in here. I mean I think as you've seen from the information we shared, we're very encouraged by the strength of the enrollment growth, just the overall consumer demand that we are seeing with our synergistic customer base. We feel very good about what we shared in the prior call and 25,000 members by the end of the fiscal year. Obviously, we made the acquisition with Simple Meds, which was a very cost-effective way for us to increase scale and some of the demand that we really see and some redundancy as well as picking up some great experts in medication management. Bob, what would you want to add to that?

Yes. I mean I think one thing different than the other businesses too, Elizabeth, is that we can't count the revenue when we sign up a customer, right? They have to actually start on filling their drugs and things like that. Or some of the other things that we've gotten into, it's really the time of service is fully fulfilled. Even as we get into -- I think we're doing other things, as Tim alluded to, within BrainCheck, within cognitive exams and that kind of follows the same path. A little shorter cycle, but we still have to finish the kind of overall consumer experience until we actually book revenue. So we feel really strong about consumer demand and the demand for Population Health. The membership has grown tremendously, and the consumer experience and consumer feedback has been great. That will be a little bit of a delayed revenue. I'll let Tim talked about on the medication side and others.

Your next question comes from the line of Jeff Garro of Piper Sandler.

Yes. I want to ask maybe a little bit more about marketing costs and leads. If you could just expand on cost trends you've seen for leads and what you're able to tell us further about the quality of those leads, whether it's through kind of conversion rates or any other factors?

Raff, do you want to comment on first quarter and then I can comment on kind of the trends that we're seeing?

Sure. Sure. Yes. So first quarter, we did ramp-up some of the marketing spend really to make sure that we were testing certain lead providers both in terms of the quantity of leads that they could provide during AEP and OEP and also the quality of those leads. So that generated a little bit higher marketing spend during the course of the quarter, but I think sets us up nicely for the busiest part of the season here. Bill, do you want to talk about more generally marketing that we're seeing right now?

Yes, absolutely. So I'd say the biggest difference or the biggest factor marketing right now really isn't the marketing itself. It's who's consuming the marketing. Meaning, we mentioned that a little bit later start dates than we would have liked to on our class. Obviously, we achieved our goals, but there's a little bit of a ramp period. And the earlier we can get them trained and on the phone, the better that they convert. You see different close rates and conversion the classes that started, whether they started in July, August, September. The more we push back, the more pressure it can put on marketing. So I would say on an apples-to-apples basis, as you compare, we feel really good about the marketing. And -- but if look at the consumption of marketing, it's causing a little bit of pressure on close rates. With that said, still during AEP, very attractive returns on our investment. And we feel really good about the class in terms of how they'll ramp and the quality that we got. We also did take a bit of a challenge coming out of the gate with kind of an industry-wide issue with the carriers and some approved language in terms of some last minute kind of challenges where they didn't approve some language in ads that basically disrupted a little bit of our ramp there. Luckily, with kind of our wide-funnel approach. We're able to quickly pivot and get that back on track and subsequently did approve all the things, but that was really more of an industry-wide thing. So really, those are kind of the different, I'd say, primary [indiscernible] consuming. Other than that, we feel good about the volume we're delivering, all those things and think that we're on good track to a really strong finish to AEP and OEP.

Excellent. That really helps. Maybe following up a little bit there on the industry issue you mentioned. And just I guess more broadly, clearly, it's important to get people productive as fast as possible and some of that is within your control. So maybe if you could break down a little bit further what you're doing to accelerate the ramp of agents that's within your control? And then what are those things, whether they're carrier quality goals or other regulatory headwinds or tailwinds that are outside your control as we think about productivity and growth over the -- important in the next 4 or 5 months?

Yes. Bob, do you want to talk about?

Bob, do you want...

Sorry, go ahead, Tim.

Yes. I was going to say, Bob get the operational side, and I can cover some of the regulatory.

Perfect. Yes. On the operational side, it's a really good point. We are constantly focusing on tools to try to create a faster ramp to make the job easier and -- easier to understand for consumers get the benefits faster, so we can really focus a lot of our attention on education and facilitation and then create tools that kind of guide people on their workflow. We are continuing to make a ton of investments in that. And every year, the plan design changes a little bit. So we do make kind of evolutions throughout the process. And that's exactly what we're doing this year. As the carriers have come together a little bit more on plan design, there's been a little bit bigger emphasis on some ancillary benefits in there that are a little harder to find for people. So we are building a lot of our technology to make that easier for people to understand and consume and get that ramped quicker. So we feel like we're making a ton of progress there, but we're always kind of evaluating that. And thankfully, the platform that we're on and the flexibility of our technology allows us to do a lot of releases and very unique steps since we're on such modern technology that we've described before. So we feel really confident about that.

Yes. Jeff, this is Tim. So your second question, what Bill was alluding to and kind of the industry-wide change there, there was some late-breaking changes in the week proceeding to the launch of AEP, CMS, sending them out to carriers and distributors, essentially requesting that we file all of our various marketing materials that will be filed in the inventory with CMS, which we absolutely welcome and appreciate these efforts by CMS. We think this will provide additional transparency and consistency of marketing for the industry. We think it's a great important first step. It's in the long-term best interest. We've run a very highly compliant business. We have established marketing review processes. So we were able to kind of leverage our process to be able to meet this request on a very short time line. It did apply a little bit of short-term pressure on some select marketing channels as we work with third parties and all industry players kind of work to interpret the regulations. I think that's materially behind us. I think folks will decide what's the practical application of these new requirements that, again, we reiterate, we think this is a very good move by CMS. I think it's going to improve the consumer experience, and that will be good for the industry in the long term.

Just one quick one there. Anything that's differentiated about SelectQuote's lead resources, preferred channels and then how you verify them? And what you do with them from there that's differentiated from the rest of the industry.

Bill, do you want to cover that?

Yes, happy to. I mean I think that the nice thing for us was, I think, was differentiated is that doing the things that actually kind of came out in terms of we were filing, we were going through. So really, it was just a rework of things. So I'd say what I believe was differentiated is the fact that this wasn't anything new, and it actually just reaffirmed that we were doing the right things. It just was the timing of things. So I'd say that's something that's a differentiator in itself. There was really no change, just a little bit of a timing challenge. But it took a few days to get it to get everything. Actually, it kind of shows how quickly we can adapt to a few things a little bit to both refile and be able to kind of turn the dials to make sure we're getting the volume that we need. So -- but all that's kind of on track and feel good about where we are and actually really, as Tim mentioned, embraced those, the changes, to clarify to make sure that everyone's playing by the same set of guidelines.

Your next question comes from the line of Daniel Grosslight from Citi.

Going back to the labor issue and again people ramped a little slower than initially expected, what incentivized people to really come onboard? And I guess that you've got a lot of good verbal in early September and then they kind of rolled off. Did you have to increase wages or incentives? Is there some cost pressure in that line item that we should be building into our model?

Yes, nothing that we feel like in terms of significance on what we had to do to get them on. But we did offer some incentives to make sure that we would -- they would come on in terms of pushing that licensing through. I believe, though, on a per-unit basis that it will kind of come out in the wash as we look at, okay, well, what did we do to adjust later. So really, I think we thought that our offer was attractive in terms of what we did to, which we mentioned on earlier calls to change kind of our base ways. And our top end of funnel was extremely strong. Like we had no worry. I mean in terms of when you look at the number of verbal offers accepted, the interest level we were getting, I think really it was just the motivation, it seems, like in the market to ultimately go through the number of steps that are required to do this job. So it was some learning. We did provide something, I would say, kind of softer bonuses to push it across. But I think certainly -- so anyway, I guess I feel like that really know in terms of the full load that we offered in terms of having any major effects. But Raff, do you want to comment on that?

Yes. I think we talked about it on our last earnings call, just the mix of some of the compensation, I think we restructured it a little bit to make it a little bit more appealing, especially [so much] going on board to begin with before they start earning commissions. Having said that, I don't think there's anything that you need to do relative to the model to change expectations for sales calls. I think we for the last time that it would also be work within the range that we've had before.

Okay. That makes sense. And can you -- in Medicare Advantage, can you remind us what your current recapture rate is and what you expect that to be for the full year?

Sure. Recapture standpoint, it's into the mid- to high 20s. It is up year-over-year. It does fluctuate seasonally just in terms of when [indiscernible] happening and when some of that recast activity does occur. But that's kind of where it is now. I don't know that we would expect it to be dramatically different than that. We've continued to have good improvement on the year-over-year. And that's kind of where we are now.

Okay. And one last one for me. I don't know if you track a stat like this, but with regards to SelectRx, is there any way to quantify of the seniors you're calling on that would be a good candidate for this product? What percent are actually choosing to switch their meds to SelectRx?

Yes, absolutely. So as far as percentage that are really ideal for this, it is not a massive percentage of our book, but big enough that we're making a really big impact, and then you kind of see the number of enrollments. As far as success of getting those members kind of, that say yes to it, it's about a little north of 50%.

Your next question comes from the line of Frank Morgan of RBC Capital Markets.

I guess I want to go back to the comments you made about some of the plans becoming more generic, for lack of a better term, less variation in the benefits. I'm trying to figure out if that's a good thing or a bad thing. In one sense, maybe it would help. Since you're hiring people later and you're going to be behind the 8 ball on the productivity, does this maybe help selling easier? Or does this make it more difficult? Or on the flip side, is the fact that all these plans are more uniform now does that in some way diminish sort of the value add you can bring by helping these clients pick plans? So just curious about your thoughts, if that's good or bad.

That's a really good question. It makes the experience a little bit more nuanced. We're adjusting to some of our, I guess, just call it, top-of-funnel marketing and things like that to adjust to finding consumers that really need to make that change and then also adjusting our tools to really go into what is different about the plans this year. Because there's always big differences, Frank, they just may be in different places. So it makes us feel a little bit more nuanced. But again, we're tracking for exactly where we need to be or want to be and are building our tools around what we see in those plans.

Okay. Follow-up is on the CMS, the recent memo about providing for the advertising information. It seems like something is bothering CMS. I know they have made rumblings before this. But is it -- do you think they are in some way you're trying to push carriers to make plans more consistent because it seems like maybe they're sort of worried about this churn issue that's going on in the industry as well. So do you have any thoughts about what CMS' real endgame is here?

Yes. I'll make a few comments and maybe have Bob chime in. I mean I think there has been some discussion over the past couple of quarters just around kind of quality in general. And again, we feel very good about that, Frank. I mean quality has always been part of our DNA, part of every conversation we have with our carrier partners. We think, most importantly, it's exhibited every day on the sales floor. So it's a big differentiator for us. I think some of the share organizations have talked about the e-brokers are critical though to that education and awareness and growth of MA. So overall, if there's more -- they're shining more of a light on it. I think it's good for us. I think part of that is what we're seeing in the marketing certainly what you do once you get the marketing and the sales practices, we think, make a big impact. That's why we feel so good about our position. Bob?

Yes. I mean I think it's a good observation, Frank. And I think we sit in a really good position because we do have really low CPM rates, and we're partnered with our carriers to try to understand the market what leads to lower CPM rates, sales practices, marketing practices and I think CMS wants to understand the marketing materials that are out there, and we're very supportive of that. As Bill said, this wasn't a big change for us. I think it's a bigger change potentially for some others and things like that when we feel good about our positioning. And to your point, I think they just want to see the things that are out there more frequently so that they can understand if things are leading to churn due to marketing materials or anything like that, which again, we're very supportive of.

The next question comes from the line of Meyer Shields of KBW.

One, has there been any impact on longer-term employees in the context of what people are calling the great resignation?

I think on our end, Meyer, we are seeing very good employee retention across the board, especially with our top-level agents. There's been some modest attrition, but nothing of any significance. And more importantly, I think our career-based opportunity, the fact that we've always paid, I think, significantly better than the industry has kept very, very high retention rates. So I think we're well positioned there.

Okay. That's good to hear. And then second, I know last quarter, I think, Raff, you said some time differentiating between lapse rates of the most recent cohort years and some of the older years that were holding up better. And I was just hoping for an update on that.

Yes. So I think in our remarks, my remarks earlier, I should have stated that we've seen higher lapse rates both first year and renewal year relative to last year. Nothing has really changed during the last quarter on that, sort of either up or down. So they still remain elevated by about the same percent year-over-year. But that's kind of what we're seeing right now. I think we also talked about, I think you know this, as you get into this part of the year, just lapse rates in general, tail off, are much lower than they are in the first half of the year.

Okay. And by renewal, you mean something other than the stuff that we had new last year?

Correct. I think we see higher lapse rates both on first year policies that are in their first year as well as on renewal policies.

We have no further questions at this time. I will now turn the call over back to Mr. Tim Danker for closing remarks.

Thank you all again for your time and questions. We really do look forward to executing another successful Medicare Advantage season. I would also look forward to updating you on our progress on both SelectRx and Population Health. We want you all to have a great holiday season in the meantime, and we'll speak to you again in the new year. Have a good evening. Thank you.

Thank you again for participating. This concludes today's conference call. You may now disconnect.