MediaAlpha, Inc. Q3 FY2025 earnings call

• Steve Yi noted record third quarter results driven by P&C insurance vertical momentum, with carriers in a strong position to pursue policy growth and an increasing number turning focus to capturing market share. Health insurance vertical results impacted by under-65 reset but partnerships with leading Medicare Advantage carriers perform well. Believes in early stages of P&C multiyear soft market with strong industry fundamentals, deep partnerships, and platform efficiency. AI technology likely to reshape insurance discovery, evaluation, and purchase, and the ecosystem is expected to adapt well. - Pat Thompson walked through Q3 key drivers, take rate details, Q4 and 2026 guidance, balance sheet info including free cash flow, debt ratio, cash position, and share repurchase activity.

In the P&C insurance vertical, growth in the quarter was fueled by increased marketing investments from leading auto insurance carriers, with transaction value in the P&C vertical growing 41% year-over-year. In the health insurance vertical, results were impacted by the recent reset in under-65, with transaction value declining 40% year-over-year. Third quarter transaction value was $589 million, up 30% year-over-year. Adjusted EBITDA for the quarter was $29.1 million, an increase of 11% year-over-year. Excluding under-65 Health, core business transaction value and adjusted EBITDA grew 38% and 31% year-over-year respectively.

• Q4 transaction value expected between $620 million and $645 million, up 27% at midpoint year-over-year. - Revenue expected between $280 million and $300 million, down 4% at midpoint year-over-year. - Adjusted EBITDA expected between $27.5 million and $29.5 million, down 22% at midpoint year-over-year, including impact from under-65 contribution decline. - Excluding under-65 Health, adjusted EBITDA roughly flat year-over-year. - Q4 P&C transaction value expected to grow approximately 45% year-over-year. - Health vertical transaction value expected to decline approximately 45% year-over-year. - 2025 under-65 transaction value expected $95 million to $100 million and contribution about $10 million to $11 million.

Q: This is Maria Ripps. It seems like a lot of investors are focused on carrier profitability sort of peak margins currently. And as you know, one of the largest carriers recently recorded a sizable credit expense to reflect excess profits. Can you maybe talk about sort of your view on how sustainable current profitability levels are and what that might mean for customer acquisition spend overall?

A: Maria, I appreciate that question. Yes, as you're alluding to, I mean, we've been getting that question a lot as well. And so it's good to be able to clear things up with what people are doing with regards to like inflating peak profitability for carriers with either peak of the soft market cycle or peak of advertising spend. And so the short answer to that is conflating those things, they couldn't be further from the truth because -- and to understand this, I think you really need to take a step back and like think about hard markets and soft markets and how they work. And so we just emerged from, what, a 2.5-, 3-year hard market cycle. Hard markets are -- get kicked off when there is reduced profitability because higher-than-expected loss ratios. And so what ends up happening is carriers start to get tighter underwriting restrictions. As they raise rates, they pull back on marketing spend. And so what happens during a hard market is actually you have a baseline where you start from low margins and then you see margin expansion as the hard market progresses. Now it starts to tip over into a soft market. And when those margins sort of start to peak and get to adequate levels, carriers then start to get more competitive. They get looser with their underwriting guidelines, start to reduce pricing and then invest in customer acquisition. And so all of that has the impact of actually compressing margins during the course of a soft market cycle. So when we hear things about carriers being at peak profitability, in a lot of ways, what that tells us is that we're just kicking off the meat of -- or the heart of the soft market cycle. And what you can see from our marketplace is that demand remains very, very top heavy. On one hand, we have 13 carriers who spend more than $1 million a month this quarter. That's the greatest number that we've had in history. And so we're seeing a lot of nascent broadening of demand. But again, we're as top heavy as ever with some of the leading carriers who are early to take rate, stepping on the gas in terms of marketing spend that continue to dominate our marketplace. And so with rates starting to come down, right, with profitability starting to come down as well, I think what you're going to start to see are a lot more carriers really stepping on the gas in 2026 and beyond, right, as we really enter into the meat of the soft market cycle and a broadening of demand that I think will continue and be a tailwind for us for the years to come. I do think it's worth pointing out that soft market cycles tend to last a lot longer than hard market cycles. Hard market cycles tend to be in about 2- to 3-year increments, and soft market cycles historically have been 2 to 3x that, so about 5 to 7 years on average. And so what we're expecting is several years of tailwind in terms of carrier advertising spend growth. We also expect to see the next level of growth in advertising spend really being from a broader set of top carriers in the top 25 with a lot of that spend, as Pat mentioned, coming through the open exchange, again, as demand broadens out. And so I hope that explains sort of our position and what we're hearing in the marketplace about peak carrier profitability. Certainly, that doesn't concern us at all. And if anything, that gets us excited that really the heart of the soft market is just beginning.

Q: I was hoping you could drill down a bit more into what you're seeing in the discussions you're having with carriers. I think, Steve, last time we talked, carriers kind of hit the pause button a little bit just given the tariff uncertainty started to ramp in 3Q, and now you're guiding to accelerating growth in 4Q. So maybe just talk about some of the dynamics you saw intra-quarter? And then also, how much visibility do you have into year-end budgets at this point in the cycle?

A: Sure, Cory. Yes, so I think that when carriers hit pause, it was related to the uncertainties around tariffs. I think that paused -- I guess that pause was relatively short-lived. And I think the carriers who were spending aggressively prior to Q3, I think, resumed their levels of spend. And we're continuing to see them grow their spend right now, as you can see from our estimates and our forecast. I think in terms of visibility into Q4, I mean, obviously, we're sharing that with the guidance that we have. We -- there has been a tendency in these types of markets for there to be excess budget being kind of made available to us as the quarter starts to wind down. And again, because we're a very efficient source and very tractable source, that excess budget does tend to accrue to us. But it's not something that we're planning on right now. And so our Q4 estimates really have our best estimate to what the carrier budgets are going to be for the remainder of the year. We are starting to have some early discussions about 2026 budget. And those discussions have been highly encouraging. And again, they really support the narrative that up to this point, really the recovery of the ad spend market coming out of the hard market has been very narrow and robustly driven by a narrow set of carriers. Really, what we're doing is having discussions with everyone else and starting to see that there really will be a meaningful broadening of demand in 2026. The timing of that, I think, is going to be hard to gauge. Certainly, those carriers that we're talking about who have an early lead have taken a sizable lead. So it will take a bit of time and a few quarters for the expansion or the broadening of demand to really start to have a positive impact on our take rates. But certainly, we've been very encouraged by the early discussions that we've had with a lot of the major carriers, again, outside the top couple. And really do anticipate that '26 is going to be a year where we see meaningful broadening of demand within our P&C marketplace.

Q: A couple of questions on your comments around the take rate. Can you remind us, is there seasonality in 4Q? And then I just want to confirm that you're expecting both those quarters, the fourth quarter and then the start of 2026 to be 7% take rate. And then just your expectation about increasing the take rate over time, is that a function of a broader array of demand partners or supply partners or both?

A: Perfect. And Tommy, I can get started on that question, and then Steve and I can potentially tag team the last one. So on seasonality, historically, we had a good bit of seasonality in our business on take rate. And that was when P&C was a smaller percentage of the total mix and our Health vertical was significantly larger. Now we're in a spot in Q4 with under-65 having stepped down pretty meaningfully, where there is a lot less take rate seasonality in the business because the Medicare portion of that looks pretty similar to P&C overall. And to tackle the second part of the question, yes, our guidance for Q4 is for around a 7% take rate. As a reminder, for us, take rate is contribution divided by transaction value. And our view is that, that 7% plus or minus is kind of the right benchmark for the next couple of quarters. And kind of moving to the over time and the opportunity to drive take rate from -- to drive take rate over time, a broadening of demand would be kind of the primary driver of that happening. Obviously, broadening supply could help as well, but we believe that the demand side is the bigger opportunity. As a reminder, the largest advertisers with us tend to be relatively more private, smaller advertisers tend to be either fully open or very, very heavily open. And so as we see more people come into the marketplace and more people start to spend 7 figures a month, we would expect to see the business start to shift more to open over time.

Q: First question is around open versus private. And as private becomes a bigger proportion, I think first 9 months, it's now 48%. Steve and Pat, how do you see that kind of playing out long term, maybe 3 years out, 5 years out? Like where does that mix kind of settle down if it ever settles down?

A: Yes. I think it's a good question. I think we're at unusually high levels favoring the private marketplace right now. And again, I think that's really a nature of how the market has recovered on the heels of this generationally difficult hard market cycle. What we had was a couple of leading carriers who are early to take rate, right, step on the gas a full 1.5 years or so ahead of everyone else. And these are carriers who are very sophisticated in direct-to-consumer advertising, very sophisticated and well experienced in our marketplace. And the private marketplace product was designed to support advertisers like this and their relationships with some of our biggest publishers. And so I think the way that the market has recovered has really lent itself to us being over-indexed on the private side. And I think as the long term plays out, again, as the industry and the recovery and the demand starts to broaden out, not just because carriers who are later to take rate and get to rate adequacy start to spend in advertising and growth again, but because the whole secular trend towards direct-to-consumer advertising, which means online advertising and greater budgets allocated to measurable sources like us, as that's starting to really take foot again, right, or take hold again, what we expect are just more and more of the top 25 carriers allocating a greater percentage of their overall customer acquisition spend and converting in effect, right, a lot of commissions that they're paying to agents into advertising dollars that they spend with us as they prioritize their direct channels. And again, this growth based on the support that they'll need, right, and being relatively new to this channel, the services and the platform support that they're going to require to be successful in our channel, we believe that is predominantly going to flow through the open exchange. And so I think what you're going to see over time is the shift back to the open exchange. And again, we don't have any views as to exactly what that level should be. But certainly, I think internally, what we think is that the private open mix is kind of at a high watermark because of the unusual nature of the heaviness of demand right now, which is really a byproduct of how this market recovered after the most recent hard market cycle.

Q: Congrats on the strong results. It looks like normalizing for the under-65 segment, adjusted EBITDA grew 31%. But then looking at your guidance, you expect EBITDA to be flat on transaction value growth of 38%, excluding the under-65 segment. So is there a level of conservatism baked in there? Any color on the puts and takes would be helpful.

A: Yes, I do. The way I see it is that is that I think there is a growing trend with payers to actually start to acquire customers directly and rely less on brokers and telebrokers. And so again, it's unfortunate that these types of things happen, right? Certainly, I think one of the reliance on telebrokers of this industry is that a lot of the carriers within the Medicare space are relatively new direct-to-consumer and certainly new to online customer acquisition. So I think as that industry gets more well versed in that area, I think there will be a shift from reliance almost entirely on brokers and telebrokers and e-brokers to sell policies and, again, a greater shift to carriers selling policies directly. And that's something that you saw in the auto insurance industry in the early days, and we expect that trend to take hold within the Medicare Advantage space over time.

Q: This is Michael Murray on for Ben. Congrats on the strong results. It looks like normalizing for the under-65 segment, adjusted EBITDA grew 31%. But then looking at your guidance, you expect EBITDA to be flat on transaction value growth of 38%, excluding the under-65 segment. So is there a level of conservatism baked in there? Any color on the puts and takes would be helpful.

A: Yes. And Michael, this is Pat. I would say that our philosophy from a guidance standpoint is we guide to kind of based on what we know as of today and what we have a high degree of confidence in. And I think the -- our track record against guidance has been pretty good over time, and we're guiding based on 28 days of actuals we've seen in this quarter and our view on how things are going to play out. So I think our goal is always to deliver the best numbers that we can, and we're going to be looking to do that this quarter. And I think we'll have more to report when we come out with earnings in February, but we try to be realistic and put out numbers that we believe we can achieve.

Q: A large MA payer recently indicated that they would be suspending their relationship with a large telebroker, which had high complaints to Medicare and also the least engaged members. Do you see any opportunity to gain share here just given payers' increased focus on quality leads?

A: Yes, I do. The way我 see it is that is that I think there is a growing trend with payers to actually start to acquire customers directly and rely less on brokers and telebrokers. And so again, it's unfortunate that these types of things happen, right? Certainly, I think one of the reliance on telebrokers of this industry is that a lot of the carriers within the Medicare space are relatively new direct-to-consumer and certainly new to online customer acquisition. So I think as that industry gets more well versed in that area, I think there will be a shift from reliance almost entirely on brokers and telebrokers and e-brokers to sell policies and, again, a greater shift to carriers selling policies directly. And that's something that you saw in the auto insurance industry in the early days, and we expect that trend to take hold within the Medicare Advantage space over time.