SelectQuote Inc. (SLQT) 2024 Q4 Earnings Call Summary

Optimistic Highlights

• Successful Fiscal 2024

SelectQuote had a highly successful fiscal 2024, outperforming internal expectations for the tenth consecutive quarter.

• Strong Performance in Senior Medicare Advantage

The Senior Medicare Advantage business performed well, with high margins and an 8% growth in overall MA policies.

• Growth in Healthcare Services

The Healthcare Services segment, particularly SelectRx, saw significant growth, with membership up 68% year-over-year.

• Improved Financial Metrics

Fiscal 2024 revenue outperformed initial expectations by 17%, and adjusted EBITDA exceeded targets by 26%.

• Positive EBITDA Margins

The Senior business generated strong EBITDA margins of 25%, and Healthcare Services turned profitable with $8 million in EBITDA.

Pessimistic Highlights

• Capital Structure Constraints

Growth in 2025 will be tempered due to delays in securitization and changes in commission structure with a major carrier.

• Increased Costs

Modestly higher expenses per policy were driven by new CMS marketing standards.

• Temporary Capital Constraints

A shift to a ratable commission structure by a large carrier partner will impact cash flows and policy count in fiscal 2025.

• Reduced Agent Hiring

Due to capital constraints, the company will hire a smaller agent class for the upcoming AEP season, leading to a 10%-15% decline in policy production.

• Auto & Home Business Rationalization

The company is pulling back on agent headcount and external lead sourcing in the Auto & Home business, which will no longer be a material contributor to earnings.

Company Outlook

• Positive Long-Term Outlook

Despite short-term capital constraints, the company remains optimistic about its long-term prospects, particularly in the Senior and Healthcare Services segments.

• Focus on Deleveraging

The company is prioritizing improving liquidity and deleveraging to capitalize on future opportunities.

• Continued Growth in Healthcare Services

SelectRx and broader Healthcare Services are expected to be increasingly self-funded and continue to grow.

• Stable Unit Economics

The company expects to maintain strong unit economics and EBITDA margins of 20%+ in the Senior business.

• Securitization Plans

The company plans to complete an initial $100 million securitization, which will extend term debt maturity to fall 2027 and improve the capital structure.

Q & A Highlights

• Q: Can you give us some idea of how you're thinking about the bridge and the current LOI to the fall 2027 maturity and kind of the prospects for ramping that securitization up over the next couple of years? (Ben Hendrix, RBC)

A: The $100 million securitization is a critical first step to unlocking further delevering of the balance sheet. It will extend term debt maturity to fall 2027 and reduce the cost of capital. Future securitizations and other options will be evaluated to continue deleveraging. (Tim Danker)

• Q: How do we think about margins for SelectRx in 2025 and where that could go over time? (Ben Hendrix, RBC)

A: Customer growth is expected to be 20%-25%, with revenue growth of 35%-45%. EBITDA margins are expected to be in the low to mid-single digits, improving as the year progresses. Long-term EBITDA margin potential is in the low to mid-teens. (Ryan Clement)

• Q: Is there any reason to believe that the lower growth and smaller new agent pool could derisk the growth that you do see this year? (Ben Hendrix, RBC)

A: The more tenured agent force is better equipped to handle complexity and drive policyholder retention, which should mitigate risks during the switching period. (Tim Danker, Bob Grant)

• Q: Can you talk about how much of the marketing standards pressure you might be able to mitigate going forward? (Ben Hendrix, RBC)

A: The company is well-equipped to handle CMS changes and does not expect additional pressure from new rules. The lead buy strategy will also help mitigate any impact. (Bill Grant)

• Q: Are you making any adjustments to your marketing strategy given the prospects for heightened shopping and disruptions in the upcoming AEP? (Patrick McCann, Noble Capital Markets)

A: The marketing strategy is built around targeting disruptive areas, which should maximize close rates and mitigate challenges from the election year. (Bill Grant)

• Q: Are there any other specific improvements or anything else to note about the new distribution facility outside of strictly capacity? (Patrick McCann, Noble Capital Markets)

A: The new facility will improve cost savings on shipments and operational efficiency, contributing to better margins. (Bob Grant)

• Q: Can you juxtapose the original commission structure and the new commission structure for the large carrier? (Patrick McCann, Noble Capital Markets)

A: The new structure is more back-end loaded, impacting near-term cash flows but providing more revenue in subsequent years. The company is confident in managing this transition. (Ryan Clement, Tim Danker)