EverQuote, Inc. (EVER) Earnings Call Transcript

All right. Good morning, everyone. Cory Carpenter, Internet analyst at JPMorgan. Excited to have EverQuote with us, Jayme and Joseph, thanks for joining.

Thanks. Good to be here.

So for those newer to the story, I thought it'd be helpful to start with a high-level overview of the business and Ever fits in the broader insurance industry.

Sure. So EverQuote is a leading online insurance marketplace. We find consumers, whoever they are in the internet, with some intend to buy insurance. We gather the relevant underwriting data from them and then we do the work to match and connect them with the right subset of providers for them. So for the consumer, the value proposition is save time and money shopping for auto and home insurance. For the provider, we serve as a highly targeted customer acquisition channel at scale because we collect all the consumer's relevant underwriting information.

So the P&C industry has gone through some pretty radical times the past couple of years. Could you just rewind back perhaps to COVID and walk through the dynamics that have been impacting the industry?

Sure. So when COVID hit in 2020, almost overnight cars came off the roads, and as a result, the insurance carriers entered a period of windfall profitability because there were no accidents and they were continuing to collect premiums. So that was a very profitable period of the year of 2020. 2021 as things began to normalize, cars came back on the road, accident frequency returned to more normalized historical levels. That was more or less anticipated by the carriers. What they didn't anticipate was that the rampant inflationary environment would mean that the cost to repair and replace vehicles, it's known as severity in the industry, would be astronomically higher than it was pre-COVID. And so this period of healthy profitability swung to a period of somewhat horrible somewhat lack of profitability. And it has taken the industry, and we're still kind of in the later stages of it, but has taken the industry years to work through it. So 2022, 2023 were years in which carriers were really focused on increasing their rates, while losses stabilized. And during that period of time, they really had very little appetite for new customer acquisition because to acquire another customer was likely to acquire an unprofitable customer. We are in the business, effectively, of delivering customers to insurance carriers. And so during that period, we lost a lot of demand out of our marketplace, on the provider side. And it was kind of a challenging period that caused us to kind of refocus, streamline the business, get back to basics, and are now beginning to realize some of the benefits of those actions.

So where are we in the recovery, and how has it played out thus far relative to what you were expecting?

So we are -- we are well into the recovery at this point. We sort of anticipated that 2024 would be the year of recovery. The only thing that has surprised us so far this year was how quickly it has materialized, at least with a handful of carriers. So we expected it to build somewhat slowly over the course of the year. What has happened instead is that we saw a very big step up in the sort of first part of the year, and that led to really strong results relative to our expectations in the first quarter and continued strength into the second quarter of the year. So that was the main surprise. But by and large it is developing as expected this year, and we do expect it to kind of extend into next year as carriers continue to take rate, earn those rates in, and get back into customer acquisition mode.

So Joseph, for you, just in terms of how that translates to the financials, last quarter you mentioned the recovery may not be linear, seasonality could be obscured from prior years. How are you thinking about the key variables impacting revenue the next few quarters?

Sure. So thanks for the question. Maybe to give some context, we started this year, we gave our guide in February, and we had a really strong March, stronger than we expected. And so when we started to -- when we looked at the strength of Q1 and what we're projecting in Q2, the midpoint of our guide, we see a really front-loaded recovery this year, and maybe just a little bit of context on sort of what's going on. In the February call, a lot of folks were, we did not give an annual guide, and a lot of analysts and investors were saying, how do we think about the rest of the year? And so a lot of folks sort of looked at seasonal patterns, and we described in the February call in seasonal patterns is, the seasonal patterns over the past 5 years of being a public company have varied wildly, but in general they had a pattern of, start the year, you go down a bit in Q2, up in Q3, down in Q4. If you look at what's happening between what we've said in Q -- what happened in Q1 and what the guide is for Q2, you actually have a 13% up from Q2 over Q1, so you're already breaking the seasonal pattern. And so one of the -- the comment we had is, when we look at recovery right now, it's hard to see the seasonal pattern applying just given that guide. So what we see for the second part of the year is something as follows, which is, we are not seeing a seasonal increase from Q3 over Q2, we don't have the visibility to see that. And the way to think about it right now is, what are we seeing right now in the business, right? So we had 1 really large carrier start the year very strong, and that is continuing to Q2. We have another group of carriers, which I would say are sort of enthusiastic about recovery, but a bit of fits in starts, right? We can see them coming back into the marketplace. I've given a few examples in our earnings call where the carriers are coming back into the market, enthusiastic about getting back to growth mode, but they're sort of figuring it out. And the analogy I'd give you is, or the, maybe the explanation I'd give you is, think if you're the CMO of one of these carriers. You're not the largest -- the CMO of the largest carrier, you're one of the others, and you're being told on one side, grow, grow, grow by your CEO and your CFO is saying, let's make sure we do this carefully. And so as you go about doing that, none of these carriers will have a playbook for how to come out of not doing growth for 3 years. So as they think about that, you're seeing a bit of fits in starts. And a few examples we gave, I hope to make it real for folks, is we had one of our top 10 carriers in April, they actually were down from March. In and of itself, not unusual, but it was actually their lowest month for the first part of the year, first 4 months of the year. We had another carrier who started aggressively going into states before other carriers were there and started to pull back as they saw increasing competition for customer acquisition. And all of that, when we see those things, we say, geez, let's figure out, let's see the change there, so let's reach out and figure out what's going on. And what we had realize in talking to carriers, okay, we're working it through, and we see that and we continue to do that. But what that means for us as we think about the second half of the year, couple of pieces, that, that group of carriers, unpredictable, I'd say is the way to describe it is, especially in the near term, the focus on growth is clearly there over the next several quarters, but seeing how it's going to play out is an open question. And then for our largest carrier, the comments we've given are, they've said they've opened a number of states and they have more states opening through Q2 that are implied in our guide or included in our guide. If you look ahead for what other states could open, there's some large states, but unclear that -- with heavy regulatory environment, unlikely they'll open in the second half of the year in a meaningful way, so you see those more in 2025. And that's also vacant to our guide. So when you put that all together, you say, second half of the year, hard to see that seasonality going up from Q2 to Q3. Then you also have a dynamic where, the clear visibility to what's the next bump is a little unclear.

So also your 2Q guide, I mean, basically has auto revenue back to prior highs. Could you talk about the dynamic, like auto policy prices are up at least, I think 50% plus from 3 years ago. We can all feel that. How does that impact carrier customer acquisition budgets? Is it as simple as a policy prices are 50% higher, carrier spend goes up 50%, or how do you think about that?

So first, let me hit your point, which is in our Q2 guide, what we've said is the midpoint of that guide not only is seasonally up from 13% from Q1, but also is, would be at or near peak levels for auto. So thank you for reminding me of that, which we last saw in Q1 of 2023. If you look at the increase in spend, the carriers have had up to 50% increase in rates, depending on which carrier and which state. Generally speaking and as things normalize for carriers, what you see is they spend 10% to 15% of their premium dollars on marketing costs, right? That's a historical pattern for carriers. And so as you see a 50% increase, we're not saying that every carrier is going to have a 50% increase in their marketing spend, but certainly it's a strong tailwind for us as it develops. And we'll see exactly what percentage it falls, but we certainly are encouraged by it. And to put that into context, going into the auto downturn in 2021, we were early in insurance going online. The rest of the world has shifted more online in this period. So insurance is probably even more of a lag when you see this additional benefit for us of large rate increases. So I think that puts a nice combination of tailwinds behind us.

So a lot of the discussion has been focused on kind of the direct carrier channel, given they've led the recovery. You also have an agency channel within auto. So could you talk about your agency presence? How big is that channel relative to your carrier business?

Yes, I can take this one. So we have, I mean, 2 primary distribution channels. We have the direct carriers. So these are carriers that largely want to acquire customers through a direct-to-consumer channel. These are progressive GEICOs of the world. Then we also have a large agency channel and the majority of insurance is actually distributed through local agents. Most of our business is with little captive agents. So that's like State Farm, Farmers, Allstate, where if you want to get product from one of those insurance carriers, you've got to go through one of their local agents. And we provide that sort of mechanism to connect the online insurance shopper with that local agent. As it relates to where are they in the cycle? The agent channel tends to move more slowly than the carrier channel. When the carriers need to cut back on advertising spend, the first thing they can do, and the thing with the least sort of cascading effects is to just pull back on their direct spend. And so that's where we saw it hit first. And then they're a bit more methodical in any changes they make to the agent channel because they don't like to disrupt their primary point of distribution, which is these agents who actually have emotions, unlike the campaigns that are running in Google or with EverQuote. So that was slower to develop, but beginning in early 2023, we saw carriers start to actually restrict underwriting, pull back economic support for agents in terms of their customer acquisition dollars. And now as we turn the corner in 2024, we're starting to see that loosen up a bit, but our expectation is as they were sort of slower to enter the effects of the hard market cycle, they'll be slower to exit. And so we would expect that agent demand to continue to build over the course of this year and into next year.

And then let me give you a little size on that context and its percentage of revenues. So historically, the agents' channel was sort of mid to high 30s prior to the downturn was sort of a good way to think about it. During the downturn, it hit peaks where it got, it did hit 50 plus percent because the denominator of carriers on the direct side went down. So we'll see that -- we'll see it normalize over time as we get back to -- we'd expect it to normalize back into that sort of high 30s range as we get recovery. But we'll see exactly how it plays out.

And could you talk about the different kind of margin dynamics between those 2 channels?

Sure. So generally speaking, the VMM margin of the agent channel is somewhat higher than the direct channel. Not always, not with every traffic channel, but generally speaking. So one of the impacts where that manifests itself, if you look at our Q2 guide, for example, our VMM margin is just under 31%. We had signaled this when we did our February call. But when you think about what drove that down to 31%, it was certainly the increase in advertising costs, but the other piece is just the mix. When you have a mix towards direct channel, it tends to bring it down. As you get agency recovering, you'd expect to get some benefit of that over time.

So could you talk about the primary channels where you acquire customers, any rough splits around like search, social, et cetera? And then when you sell leads, how does that break down between clicks, calls, data, et cetera?

Sure. So we don't break out by channels or traffic acquisition, but what we can say is it's a fairly well-diversified portfolio of traffic. We try and find consumers wherever they are on the internet so intend to buy insurance. That includes display channels, social channels, search, affiliate partnerships, and on down the line. And we continue to sort of test into and expand into new channels as our monetization permits. Now as it relates to by referral type, something you asked like calls versus clicks versus leads, I think historically calls has probably been stable around 10% of the business. And then the balance between clicks and leads is pretty proportional to our direct carrier versus our agent segment because it tends to be the direct carriers who are buying clicks into their online workflows. Whereas the local agents need to get the consumer sort of transition from the online shopping process to the offline buying cycle. So they're buying leads predominantly.

I failed to mention at the beginning, but if you have questions, you can submit them online. We have an iPad that'll show it, or if you want to ask one in the audience, feel free to raise your hand. So during the downturn, the auto downturn, you went through a restructuring, you sold your health business. Could you talk about some of the changes you made and just the thought process behind your decision to really double down on auto?

Sure. So I'll start, you can add on. So in June of 2023, we did a strategic realignment of the business. The result of that was we exited our health vertical. We had a 30% reduction in our workforce, 20% reduction in sort of operating expenses. And really, we came out of that really focused on P&C, P&C being the auto and home vertical. Auto is roughly 85% of the business, home is about 15% today. And we looked at where we could win long-term. We did a real review and we said, hello, P&C, we have data and tech and assets, that our data assets and technology are very valuable. We've built a real expertise in that area. You overlay the third-party agency business we built, which means a unique asset. It's been quite resilient in the downturn. We think it's really differentiated in distribution. And third is just the scale of the business we built in P&C. When you put those all together, we said, that's an area we can win long-term. And we said, let's go deeper and help our clients succeed. And part of that was a result of the feedback we got from our clients. In the first part of last year, we spent some time talking to agents, talking to carriers, saying, what can we do to help work with you better? And one of the key things was they want us to go deeper in working with them. And so we said, as opposed to being a mile wide, an inch deep, we're going to really focus and go deeper on P&C. And we think that's going to allow us to do things that help our carriers and agents be more successful, solve more complex pain points, which we think in turn will leverage our data in a way that helps them do that. And over time build a strong competitive moat. So that's what we've done. If you think about the results we've done coming out of that, from a financial viewpoint, we've now, adjusted EBITDA as a really good proxy for operating cash flow. We took business, which was a marketplace business when we went public. We did lots of expansion into not just health, but also having first party distribution, both health agents and P&C agents. We've exited the health business entirely, sold it off later in the summer. And we have a very small P&C agency business today. And all of that comes into, we're making an asset light model, going back to our roots, focusing on P&C. We think that's going to help us win better long-term. And in the near term, it's created really nice conversion from adjusted EBITDA to free cash flow. And the operating leverage that we built in the model really was manifested itself in Q1. We saw us actually get adjusted EBITDA at a record level, $7.5 million dollars, you also had net income, something that's historically have not talked about at EverQuote, of almost $2 million. So I think that really is representative of those changes, really paying dividends already.

Just given where you are in the cycle and the magnitude of sequential growth, you're seeing 100-ish percent in auto or carrier channel. How much incremental investment is needed to support top-line growth through the cycle of swing and are there any areas you're looking to make discretionary investments?