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MEDIAALPHA, INC. – 10-Q – Management's discussion and analysis of financial condition and results of operations
The following discussion and analysis of our financial condition and results of operations should be read together with our unaudited consolidated financial statements and related notes included in Part I, Item 1 of this Quarterly Report on Form 10-Q. This discussion, particularly information with respect to our future results of operations or financial condition, business strategy and plans, and objectives of management for future operations, includes forward-looking statements that involve risks and uncertainties as described under the heading "Cautionary Statement Regarding Forward-Looking Statements" in this Quarterly Report on Form 10-Q. You should review the disclosure under the heading "Risk Factors" in Part II, Item 1A of this Quarterly Report on Form 10-Q for a discussion of important factors that could cause our actual results to differ materially from those anticipated in these forward-looking statements.
Management overview
Our mission is to help insurance carriers and distributors target and acquire
customers more efficiently and at greater scale through technology and data
science. Our technology platform brings together leading insurance carriers and
high-intent consumers through a real-time, transparent, and results-driven
ecosystem. We believe we are the largest online customer acquisition channel in
our core verticals of property & casualty ("P&C") insurance, health insurance,
and life insurance, supporting $762 million in Transaction Value across our
platform over the twelve-month period ended September 30, 2022 .
We have multi-faceted relationships with top-tier insurance carriers and
distributors. A buyer or a demand partner within our ecosystem is generally an
insurance carrier or distributor seeking to reach high-intent insurance
consumers. A seller or a supply partner is typically an insurance carrier
looking to maximize the value of non-converting or low LTV consumers, or an
insurance-focused research destination or other financial website looking to
monetize high-intent users on their websites. For the twelve-month period ended
September 30, 2022 , the websites of our diversified group of supply partners and
our proprietary websites drove an average of 7.8 million Consumer Referrals on
our platform each month.
We generate revenue by earning a fee for each Consumer Referral sold on our
platform. A transaction becomes payable upon a qualifying consumer action, such
as a click, call or lead, and is not contingent on the sale of a product to the
consumer.
We believe in the disruptive power of transparency. Traditionally, insurance
customer acquisition platforms operated in a black box. We recognized that a
consumer may be valued differently by one insurer versus another; therefore,
insurers should be able to determine pricing granularly based on the value that
a particular customer segment is expected to bring to their business. As a
result, we developed a technology platform that powers an ecosystem where buyers
and sellers can transact with full transparency, control, and confidence,
aligning the interests of the parties participating on our platform.
We believe our technology is a key differentiator and a powerful driver of our
performance. We maintain deep, custom integrations with partners representing
the majority of our Transaction Value, which enable automated, data-driven
processes that optimize our partners' customer acquisition spend and revenue.
Through our platform, our insurance carrier partners can target and price across
over 35 separate consumer attributes to manage customized acquisition
strategies.
Key factors affecting our business
Revenue
We believe that our future performance will depend on many factors, including those described below and in Part I, Item 1A "Risk Factors" in our 2021 Annual Report on Form 10-K.
Secular trends in the insurance industry
Our technology platform was created to serve and grow with our core insurance
end markets. We believe secular trends in the insurance industry are critical
drivers of our revenue and will continue to provide strong tailwinds for our
business over the long term. Customer acquisition spending by insurance carriers
is growing over time, and as more consumers shop for insurance online,
direct-to-consumer marketing, which fuels our revenue, has become the fastest
growing insurance distribution channel. As mass-market customer acquisition
becomes more costly, insurance carriers and distributors are increasingly
focusing on optimizing customer acquisition spend, which is at the core of the
service we deliver on our platform. As long as these secular trends persist, we
expect digital insurance customer acquisition spending to continue to grow over
time, and we believe we are well-positioned to benefit from this growth.
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Transaction Value
Transaction Value fromOpen Marketplace transactions is a direct driver of our revenue, while Transaction Value fromPrivate Marketplace transactions is an indirect driver of our revenue (see "Key business and operating metrics" below). Transaction Value on our platform declined to$146.7 million and$568.6 million for the three and nine months endedSeptember 30, 2022 , respectively, from$255.1 million and$774.1 million for the three and nine months endedSeptember 30, 2021 , respectively, due primarily to a decrease in customer acquisition spending by P&C insurance carriers in response to reductions in underwriting profitability. We have developed multi-faceted, deeply integrated partnerships with insurance carriers and distributors, who are often both buyers and sellers on our platform. We believe the versatility and breadth of our offerings, coupled with our focus on high-quality products, provide significant value to insurance carriers and distributors, leading many of them to use our platform as their central hub for broadly managing digital customer acquisition and monetization, and resulting in strong retention rates. For the three and nine months endedSeptember 30, 2022 , 90% and 96% of total insurance Transaction Value executed on our platform, respectively, came from demand partner relationships in existence during 2021.
Our demand and supply partners
We retain and attract demand partners by finding high-quality sources of Consumer Referrals to make available to our demand partners. We seek to develop, acquire and retain relationships with high-quality supply partners by developing flexible platforms to enable our supply partners to maximize their revenue, manage their demand side relationships in scalable and flexible ways and focus on long-term sustainable economics with respect to revenue share. Our relationships with our partners are deep and longstanding and involve most of the top-tier insurance carriers in the industry. In terms of buyers, during the nine months endedSeptember 30, 2022 , 15 of the top 20 largest auto insurance carriers by customer acquisition spend were on our platform.
Consumer Referrals
Our results depend in large part on the number of Consumer Referrals purchased on our platform. The aggregate number of consumer clicks, calls and leads purchased by insurance buyers on our platform declined to 21.1 million and 68.1 million for the three and nine months endedSeptember 30, 2022 , respectively, from 25.3 million and 72.7 million for the three and nine months endedSeptember 30, 2021 , respectively. We seek to increase the number and scale of our supply relationships and drive consumers to our proprietary properties through a variety of paid traffic acquisition sources. We are investing in diversifying our paid media sources to extend beyond search engine marketing, which has historically represented the bulk of our paid media spend, into other online media sources, including native, social, and display advertising.
Seasonality
Our results are subject to fluctuations as a result of seasonality. In particular, our property & casualty insurance vertical is typically characterized by seasonal strength in our quarters endingMarch 31 due to a greater supply of Consumer Referrals and higher customer acquisition budgets during the start of the year, and to seasonal weakness in our quarters endingDecember 31 due to a lower supply of Consumer Referrals available on a cost-effective basis and lower customer acquisition budgets from some buyers during those quarters. Our health insurance vertical is typically characterized by seasonal strength in our quarters endingDecember 31 due to open enrollment periods for health insurance and annual enrollment for Medicare during those quarters, with a material increase in consumer search volume for health products and a related increase in buyer customer acquisition budgets.
Cyclicality
Our results are also subject to fluctuations as a result of business cycles
experienced by companies in the insurance industry. These cycles in the auto
insurance industry are characterized by periods of "soft" market conditions,
when carriers are profitable and are focused on increasing capacity and building
market share, and "hard" market conditions, when carriers are experiencing lower
or even negative underwriting profits and are seeking to increase their premium
rates to improve their profitability. As our demand partners in these industries
go through these market cycles, they often increase their customer acquisition
spending during soft markets and reduce it during hard markets, causing their
relative demand for Consumer Referrals from our platform to increase and
decrease accordingly. We believe that the auto insurance industry is currently
in a "hard" market due to higher than expected underwriting losses, and that
many P&C insurance carriers are reducing their customer acquisition spending
until they can increase their premium rates, the timing of which is difficult to
predict.
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Regulations
Our revenue and earnings may fluctuate from time to time as a result of federal, state, international and industry-based laws, directives and regulations and developing standards with respect to the enforcement of those regulations. Our business is affected directly because we operate websites, conduct telemarketing and email marketing and collect, process, store, share, disclose, transfer and use consumer information and other data. Our business is affected indirectly as our clients adjust their operations as a result of regulatory changes and enforcement activity within their industries. For example, theCalifornia Consumer Privacy Act ("CCPA"), became effective onJanuary 1, 2020 and will be amended by the California Privacy Rights Act ("CPRA"), which becomes effectiveJanuary 1, 2023 , and number of other states, includingColorado ,Connecticut ,Utah , andVirginia , have enacted or are considering similar laws, all of which may affect our business. While it is unclear how this new legislation may be modified or how certain provisions will be interpreted, the effects of this legislation are potentially significant, and may require us to modify our data processing practices and policies and incur substantial compliance-related costs and expenses. In addition, we are licensed as an insurance broker in all 50 states and theDistrict of Columbia , making us subject to certain insurance laws and regulations. For a description of laws and regulations to which we are generally subject, see Item 1 "Business" and Item 1A "Risk Factors." in our 2021 Annual Report on Form 10-K. In addition, we are impacted by the regulation of the insurance carriers with whom we do business. In most states, insurance carriers are required to obtain approval of their premium rates from the regulatory authority in such states. The timing of such approval process, as well as the willingness of insurance regulators to approve rate increases, can impact the profitability of new policies and the level of customer acquisition spending by carriers in a given period, which in turn can cause fluctuations in our revenue and earnings.
COVID-19
While the COVID-19 pandemic has changed the physical working environment of the substantial majority of our workforce to working primarily from home, it has otherwise caused only minor disruptions to our business operations with a limited impact on our operating results. Our Travel vertical is largely driven by consumer spending on airfare, hotels, rentals and other travel products. As a result of COVID-19, we have experienced a dramatic decline in revenue from the Travel vertical and expect this trend to continue for the foreseeable future. For the three and nine months endedSeptember 30, 2022 , revenue from the Travel vertical comprised approximately 4.5% and 3.5%,respectively, of our total revenue as compared with pre-pandemic revenue of 11.1% and 12.3% for the three and nine months endedSeptember 30, 2019 , respectively, of our total revenue for 2019. While we have sought to maintain our commercial relationships in the Travel vertical and remain positioned to capitalize on transactions in the Travel vertical when travel activity resumes, we do not expect that revenue from the Travel vertical will match our historical results or have any material impact on our overall revenue or profitability for the foreseeable future. In addition, supply chain disruptions and cost increases caused by the pandemic, global inflationary pressures, and geopolitical conditions have contributed to higher-than-expected property and casualty insurance claims costs, which has led many carriers to continue to reduce their customer acquisition spending to preserve their profitability. These reductions continue to impact revenue from our P&C insurance vertical, and the duration and extent of this impact are difficult to estimate beyond the fourth quarter of 2022.
Key components of our results of operations
Revenue
We operate primarily in the P&C insurance, health insurance and life insurance
verticals and generate revenue through the purchase and sale of Consumer
Referrals.
The price and amount of Consumer Referrals purchased and sold on our platform vary based on a number of market conditions and consumer attributes, including (i) geographic location of consumers, (ii) demographic attributes of consumers, (iii) the source of Consumer Referrals and quality of conversion by source, (iv) buyer bids and (v) buyer demand and budget. In ourOpen Marketplace transactions, we have control over the Consumer Referrals that are sold to our demand partners. In these arrangements, we have separate agreements with suppliers and demand partners. Suppliers are not a party to the contractual arrangements with our demand partners, nor are the suppliers the beneficiaries of our demand partner agreements. We generate revenue from the sale of consumer referrals from our demand partners and separately pay (i) a revenue share to suppliers and (ii) a fee to internet search companies to drive consumers to our proprietary websites. We are the principal in theOpen Marketplace transactions. As a result, the fees paid by demand partners for Consumer Referrals are recognized as revenue and the fees paid to suppliers are included in cost of revenue. 26
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With respect to ourPrivate Marketplace transactions, buyers and suppliers contract with one another directly and leverage our platform to facilitate transparent, real-time transactions utilizing the reporting and analytical tools available to them from use of our platform. We charge the supplier a platform fee on the Consumer Referrals transacted. We act as an agent in thePrivate Marketplace transactions and recognize revenue for the platform fee received, which is a negotiated percentage of the Transaction Value of such transactions. There are no other payments made by us to suppliers in ourPrivate Marketplace .
Costs and operating expenses
Costs and operating expenses consist primarily of cost of revenue, sales and
marketing expenses, product expenses and general and administrative expenses.
Cost of revenue
Our cost of revenue is comprised primarily of revenue share payments to
suppliers and traffic acquisition costs paid to top tier search engines and
social media platforms, as well as telephony infrastructure costs, internet and
hosting costs, and merchant fees, and include salaries, wages and benefits,
including non-cash equity-based compensation, and other expenses including
allocated portion of rent and facilities expenses.
Sales and marketing
Sales and marketing expenses consist primarily of an allocation of personnel expenses for employees engaged in demand side and supply side business development, marketing and media acquisition activities, and include salaries, wages and benefits, including non-cash equity-based compensation. Sales and marketing expenses also include costs related to attracting partners to our platform, including marketing and promotions, tradeshows and related travel and entertainment expenses. Sales and marketing expenses also include an allocated portion of rent and facilities expenses and depreciation and amortization expense.
Product development
Product development expenses consist primarily of an allocation of personnel
expenses for employees engaged in technology, engineering and product
development and include salaries, wages and benefits, including non-cash
equity-based compensation. Product development expenses also include an
allocated portion of rent and facilities expenses and depreciation and
amortization expense.
General and administrative
General and administrative expenses consist primarily of an allocation of personnel expenses for executive, finance, legal, human resources, and business analytics employees, and include salaries, wages and benefits, including non-cash equity-based compensation. General and administrative expenses also include professional services and an allocated portion of rent and facilities expenses and depreciation and amortization expense and any change in fair value of contingent consideration.
Interest expense
Interest expense consists primarily of interest expense associated with
outstanding borrowings under our loan and security agreements and the
amortization of deferred financing costs associated with these arrangements.
Provision for income taxes
MediaAlpha, Inc. is taxed as a corporation and pays corporate federal, state and local taxes on income allocated to it from QLH based uponMediaAlpha, Inc.'s economic interest held in QLH. QLH is treated as a pass-through partnership for income tax reporting purposes and is not subject to federal income tax. Instead, QLH's taxable income or loss is passed through to its members, includingMediaAlpha, Inc , pro-rata to their ownership interest in QLH. Accordingly, as our ownership interest in QLH increases, our share of the taxable income (loss) of QLH also increases. As ofSeptember 30, 2022 , our ownership interest in QLH was 69.1%. Net income (loss) attributable to Non-controlling interest Net income (loss) is attributed to non-controlling interests in accordance with QLH's limited liability company agreement. We allocate a share of the net income (loss) incurred subsequent to the Reorganization Transactions to the non- 27 -------------------------------------------------------------------------------- Tabl e of Contents controlling interest holders pro-rata to their ownership interest in QLH. The non-controlling interests balance represents the Class B-1 units, substantially all of which are held by Insignia and the Senior Executives.
Operating results for the three months ended
The following table sets forth our operating results in absolute dollars and as a percentage of revenue for the three months endedSeptember 30, 2022 and 2021: Three months ended September 30, (in thousands) 2022 2021 Revenue$ 89,017 100.0 %$ 152,749 100.0 % Costs and operating expenses Cost of revenue 76,343 85.8 % 128,081 83.9 % Sales and marketing 6,853 7.7 % 5,624 3.7 % Product development 5,291 5.9 % 3,757 2.5 % General and administrative 11,105 12.5 % 15,352 10.1 % Total costs and operating expenses 99,592 111.9 % 152,814 100.0 % (Loss) from operations (10,575) (11.9) % (65) 0.0 % Other expenses, net 8,602 9.7 % 316 0.2 % Interest expense 2,593 2.9 % 1,765 1.2 % Total other expense, net 11,195 12.6 % 2,081 1.4 % (Loss) before income taxes (21,770) (24.5) % (2,146) (1.4) % Income tax (benefit) expense (544) (0.6) % 2,125 1.4 % Net (loss)$ (21,226) (23.8) %$ (4,271) (2.8) % Net (loss) attributable to non-controlling interest (6,740) (7.6) % (737) (0.5) % Net (loss) attributable to MediaAlpha, Inc.$ (14,486) (16.3) %$ (3,534) (2.3) % Net (loss) per share of Class A common stock -Basic$ (0.34) $ (0.09) -Diluted$ (0.34) $ (0.10) Weighted average shares of Class A common stock outstanding -Basic 42,210,186 38,416,723 -Diluted 42,210,186 61,190,185 Revenue The following table presents our revenue, disaggregated by vertical, for the three months endedSeptember 30, 2022 and 2021, and the dollar and percentage changes between the two periods: Three Months Three Months Ended Ended September 30, September 30, (dollars in thousands) 2022 $ % 2021 Property & Casualty insurance$ 43,844 $ (61,260) (58.3) %$ 105,104 Percentage of total revenue 49.3 % 68.8 % Health insurance 33,393 (660) (1.9) %$ 34,053 Percentage of total revenue 37.5 % 22.3 % Life insurance 6,977 (512) (6.8) %$ 7,489 Percentage of total revenue 7.8 % 4.9 % Other 4,803 (1,300) (21.3) %$ 6,103 Percentage of total revenue 5.4 % 4.0 % Revenue$ 89,017 (63,732) (41.7) %$ 152,749 28
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The decrease in P&C insurance revenue for the three months endedSeptember 30, 2022 , compared with the three months endedSeptember 30, 2021 , was due to a decrease in customer acquisition spending by certain insurance carriers to address profitability concerns caused by higher-than-expected automobile repair and replacement costs and overall inflationary pressures and certain carriers and supply partners shifting their transactions with each other from ourOpen Marketplace to ourPrivate Marketplace due to lower platform fees for ourPrivate Marketplace , which are recognized on a net revenue basis. The auto insurance industry began to experience a cyclical downturn in the second half of 2021, with many P&C insurance carriers experiencing lower than expected underwriting profitability, leading them to reduce marketing budget allocations to our channel. We are currently unable to predict the duration of this cyclical downturn or its impact on our revenue from the P&C insurance vertical, or our profitability, beyond the fourth quarter of 2022. The decrease in health insurance revenue for the three months endedSeptember 30, 2022 , compared with the three months endedSeptember 30, 2021 , was driven by reduced customer acquisition spending in our marketplaces by Medicare insurance partners due to weakened demand, offset in part by additional revenue of$2.2 million during the three months endedSeptember 30, 2022 as a result of the CHT acquisition. In addition, revenue from this vertical during the three months endedSeptember 30, 2021 was positively impacted by a special extended enrollment period during such period, which did not repeat in the current quarter. The decrease in life insurance revenue for the three months endedSeptember 30, 2022 , compared with the three months endedSeptember 30, 2021 , was driven by a continued reduction in customer shopping for life insurance as concerns related to COVID-19 eased. The decrease in other revenue for the three months endedSeptember 30, 2022 , compared with the three months endedSeptember 30, 2021 , was driven primarily by lower revenue from our consumer finance vertical due to a reduction in mortgage and refinancing activity caused by rising interest rates. In addition, revenue from our education vertical decreased to$0.0 million during the three months endedSeptember 30, 2022 from$0.5 million during the three months endedSeptember 30, 2021 . Revenue from the education vertical is not material to our operations, and we have fully exited the vertical during the third quarter of 2022. Cost of revenue The following table presents our cost of revenue for the three months endedSeptember 30, 2022 and 2021, and the dollar and percentage changes between the two periods: Three Months Ended Three Months Ended (dollars in thousands) September 30, 2022 $ % September 30, 2021 Cost of revenue $ 76,343$ (51,738) (40.4) % $ 128,081 Percentage of revenue 85.8 % 83.9 % The decrease in cost of revenue for the three months endedSeptember 30, 2022 , compared with the three months endedSeptember 30, 2021 , was driven primarily by lower revenue share payments to suppliers due to the overall decrease in revenue, offset in part by an increase in equity-based compensation expense and an increase in personnel-related costs due to the employees added as a result of the CHT acquisition. Sales and marketing The following table presents our sales and marketing expenses for the three months endedSeptember 30, 2022 and 2021, and the dollar and percentage changes between the two periods: Three Months Ended Three Months Ended (dollars in thousands) September 30, 2022 $ % September 30, 2021 Sales and marketing $ 6,853$ 1,229 21.9 % $ 5,624 Percentage of revenue 7.7 % 3.7 %
The increase in sales and marketing expenses for the three months ended
due primarily to an increase in equity-based compensation expense of
million
intangible assets arising from our acquisition of CHT.
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Product development
The following table presents our product development expenses for the three months endedSeptember 30, 2022 and 2021, and the dollar and percentage changes between the two periods: Three Months Ended Three Months Ended (dollars in thousands) September 30, 2022 $ % September 30, 2021 Product development $ 5,291$ 1,534 40.8 % $ 3,757 Percentage of revenue 5.9 % 2.5 %
The increase in product development expenses for the three months ended
due primarily to an increase in equity-based compensation expense of
resulting from planned headcount additions to continue to enhance our
technology.
General and administrative
The following table presents our general and administrative expenses for the three months endedSeptember 30, 2022 and 2021, and the dollar and percentage changes between the two periods: Three Months Ended Three Months Ended (dollars in thousands) September 30, 2022 $ % September 30, 2021 General and administrative $ 11,105$ (4,247) (27.7) % $ 15,352 Percentage of revenue 12.5 % 10.1 % The decrease in general and administrative expenses for the three months endedSeptember 30, 2022 , compared with the three months endedSeptember 30, 2021 , was due primarily to a gain of$3.7 million recorded on remeasurement of the contingent consideration related to CHT in the three months endedSeptember 30, 2022 as the fair value declined due to lower projected revenue and gross profit targets for CHT, and to professional and accounting fees as we incurred higher costs during the three months endedSeptember 30, 2021 offset in part by an increase in equity-based compensation expense of$1.5 million .
Equity-based compensation
The following table presents our equity-based compensation expense that was included in costs and operating expenses for the three months endedSeptember 30, 2022 and 2021, and the dollar and percentage changes between the two periods: Three Months Ended Three Months Ended (dollars in thousands) September 30, 2022 $ % September 30, 2021 Cost of revenue $ 999$ 552 123.5 % $ 447 Sales and marketing 2,477 521 26.6 % 1,956 Product development 2,426 824 51.4 % 1,602 General and administrative 8,698 1,505 20.9 % 7,193 Total $ 14,600$ 3,402 30.4 % $ 11,198 The increase in equity-based compensation expense for the three months endedSeptember 30, 2022 , compared with the three months endedSeptember 30, 2021 , was driven primarily by expenses related to additional restricted stock units granted to employees as part of the annual incentive process and to restricted stock units granted to the employees added in connection with our acquisition of CHT. Amortization The following table presents our amortization of intangible asset expense that was included in costs and operating expenses for the three months endedSeptember 30, 2022 and 2021, and the dollar and percentage changes between the two periods: 30
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Three Months Ended Three Months Ended
(dollars in thousands) September 30, 2022 $ % September 30, 2021
Sales and Marketing $ 1,550 $ 804 107.8 % $ 746
General and administrative 154 154 100.0 % -
Total $ 1,704 $ 958 128.4 % $ 746
The increase in amortization expense for the three months ended September 30,
2022 , compared with the three months ended September 30, 2021 was driven by the
amortization of intangible assets arising from our acquisition of CHT.
Other expenses, net
The following table presents our other expenses for the three months endedSeptember 30, 2022 and 2021, and the dollar and percentage changes between the two periods: Three Months Ended Three Months Ended (dollars in thousands) September 30, 2022 $ % September 30, 2021 Other expenses, net $ 8,602$ 8,286 2,622.2 % $ 316 Percentage of revenue 9.7 % 0.2 % The increase in other expenses for the three months endedSeptember 30, 2022 , compared with the three months endedSeptember 30, 2021 , was driven primarily by an impairment charge of$8.6 million during the three months endedSeptember 30, 2022 related to a cost method investment, offset in part by$0.8 million of expense incurred during the three months endedSeptember 30, 2021 to settle certain claims made by theAttorney General's Office of the State of Washington .
Interest expense
The following table presents our interest expense for the three months endedSeptember 30, 2022 and 2021, and the dollar and percentage changes between the two periods: Three Months Ended Three Months Ended (dollars in thousands) September 30, 2022 $ % September 30, 2021 Interest expense $ 2,593$ 828 46.9 % $ 1,765 Percentage of revenue 2.9 % 1.2 % The increase in interest expense for the three months endedSeptember 30, 2022 , compared with the three months endedSeptember 30, 2021 , was driven by an increase in the interest rate payable on amounts borrowed under the 2021 Credit Facility and the interest on amounts drawn on our 2021 Revolving Credit Facility to fund a portion of the consideration for our acquisition of CHT, offset in part by by the impact of a lower outstanding balance on the 2021 Term Loan Facility.
Income tax (benefit) expense
The following table presents our income tax (benefit) expense for the three months endedSeptember 30, 2022 and 2021, and the dollar and percentage changes between the two periods: Three Months Ended Three Months Ended September 30, (dollars in thousands) September 30, 2022 $ % 2021 Income tax (benefit) expense $ (544)$ (2,669) (125.6) %$ 2,125 Percentage of revenue (0.6) % 1.4 % 31
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For the three months endedSeptember 30, 2022 , we recorded an income tax benefit of$0.5 million resulting from our effective tax rate of 2.5%, which differed from theU.S. federal statutory rate of 21%, due primarily to nondeductible equity-based compensation, losses associated with non-controlling interests not taxable to us, state taxes, and other nondeductible permanent items. For the three months endedSeptember 30, 2021 , we recorded an income tax expense of$2.1 million resulting from our effective tax rate of (99.0)%, which differed from theU.S. federal statutory rate of 21%, due primarily to nondeductible equity-based compensation, state taxes, income not taxable to us associated with the non-controlling interest, and the impact of tax benefits associated with equity-based awards.
Operating results for the nine months ended
The following table sets forth our operating results in absolute dollars and as a percentage of revenue for the nine months endedSeptember 30, 2022 and 2021: Nine Months Ended September 30, (in thousands) 2022 2021 Revenue$ 335,065 100.0 %$ 483,690 100.0 % Costs and operating expenses Cost of revenue 285,149 85.1 % 407,566 84.3 % Sales and marketing 22,034 6.6 % 16,739 3.5 % Product development 16,168 4.8 % 10,917 2.3 % General and administrative 40,569 12.1 % 44,686 9.2 % Total costs and operating expenses 363,920 108.6 % 479,908 99.2 % (Loss) income from operations (28,855) (8.6) % 3,782 0.8 % Other expenses, net 8,123 2.4 % 337 0.1 % Interest expense 5,908 1.8 % 6,303 1.3 % Total other expense, net 14,031 4.2 % 6,640 1.4 % (Loss) before income taxes (42,886) (12.8) % (2,858) (0.6) % Income tax expense 1,210 0.4 % 1,636 0.3 % Net (loss)$ (44,096) (13.2) %$ (4,494) (0.9) % Net (loss) attributable to non-controlling interest (13,395) (4.0) % (1,038) (0.2) % Net (loss) attributable to MediaAlpha, Inc.$ (30,701) (9.2) %$ (3,456) (0.7) % Net (loss) per share of Class A common stock -Basic and diluted$ (0.74) $ (0.09) Weighted average shares of Class A common stock outstanding -Basic and diluted 41,592,783 36,426,270 32
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Revenue
The following table presents our revenue, disaggregated by vertical, for the nine months endedSeptember 30, 2022 and 2021, and the dollar and percentage changes between the two periods: Nine months ended Nine months ended (dollars in thousands) September 30, 2022 $ % September 30, 2021 Property & Casualty insurance$ 188,869 $ (151,112) (44.4) %$ 339,981 Percentage of total revenue 56.4 % 70.3 % Health insurance 108,665 5,028 4.9 %$ 103,637 Percentage of total revenue 32.4 % 21.4 % Life insurance 21,049 (1,872) (8.2) %$ 22,921 Percentage of total revenue 6.3 % 4.7 % Other 16,482 (669) (3.9) %$ 17,151 Percentage of total revenue 4.9 % 3.5 % Revenue$ 335,065 (148,625) (30.7) %$ 483,690 The decrease in P&C insurance revenue for the nine months endedSeptember 30, 2022 , compared with the nine months endedSeptember 30, 2021 , was due to a decrease in customer acquisition spending by certain insurance carriers to address profitability concerns caused by higher-than-expected automobile repair and replacement costs and overall inflationary pressures and certain carriers and supply partners shifting their transactions with each other from ourOpen Marketplace to ourPrivate Marketplace due to lower platform fees for ourPrivate Marketplace , which are recognized on a net revenue basis. The auto insurance industry began to experience a cyclical downturn in the second half of 2021, with many P&C insurance carriers experiencing lower than expected underwriting profitability, leading them to reduce marketing budget allocations to our channel. We are currently unable to predict the duration of this cyclical downturn or its impact on our revenue from the P&C insurance vertical, or our profitability, beyond the fourth quarter of 2022. The increase in health insurance revenue for the nine months endedSeptember 30, 2022 , compared with the nine months endedSeptember 30, 2021 , was driven by increased customer acquisition spending in our marketplaces by health insurance carriers and brokers, and an increased supply of customer referrals to our marketplaces by our supply partners and our proprietary websites due to the increased demand including increased revenue from our health insurance vertical during the first quarter of 2022 due to extended Open and Annual Enrollment periods for fiscal 2021, which typically end byDecember 15th , were extended untilJanuary 15, 2022 , as well as by the addition of$3.8 million of revenue during the nine months endedSeptember 30, 2022 as a result of the CHT acquisition. These increases were offset in part by reduced customer acquisition spending in our marketplaces by Medicare insurance partners in the second and third quarters of 2022. The decrease in life insurance revenue for the nine months endedSeptember 30, 2022 , compared with the nine months endedSeptember 30, 2021 , was driven by a decrease in customers shopping for life insurance as concerns related to COVID-19 eased. The decrease in other revenue for the nine months endedSeptember 30, 2022 , compared with the nine months endedSeptember 30, 2021 , was driven primarily by our exit of the education vertical during the third quarter of 2022 as well as a decline in revenue from our consumer finance vertical due to a reduction in mortgage and refinancing activity caused by rising interest rates. These declines were offset in part by an increase in our travel vertical, due to the easing of concerns related to COVID-19, and to the addition of revenue generated from the credit vertical of CHT, which the Company exited during the second quarter of 2022. Revenue from our education vertical decreased to$0.9 million during the nine months endedSeptember 30, 2022 from$1.5 million during the nine months endedSeptember 30, 2021 . Revenue from the education vertical is not material to our operations, and we have fully exited the vertical during the third quarter of 2022. 33
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Cost of revenue
The following table presents our cost of revenue for the nine months endedSeptember 30, 2022 and 2021, and the dollar and percentage changes between the two periods: Nine months ended Nine months ended (dollars in thousands) September 30, 2022 $ % September 30, 2021 Cost of revenue$ 285,149 $ (122,417) (30.0) %$ 407,566 Percentage of revenue 85.1 % 84.3 % The decrease in cost of revenue for the nine months endedSeptember 30, 2022 , compared with the nine months endedSeptember 30, 2021 , was driven by lower revenue share payments to suppliers due to the overall decrease in revenue and a higher proportion of transactions in ourPrivate Marketplace , which are recorded on a net revenue basis, offset in part by an increase in equity-based compensation expense and an increase in personnel-related costs due to the employees added as a result of the CHT acquisition.
Sales and marketing
The following table presents our sales and marketing expenses for the nine months endedSeptember 30, 2022 and 2021, and the dollar and percentage changes between the two periods: Nine months ended Nine months ended (dollars in thousands) September 30, 2022 $ % September 30, 2021 Sales and marketing$ 22,034 $ 5,295 31.6 %$ 16,739 Percentage of revenue 6.6 % 3.5 % The increase in sales and marketing expenses for the nine months endedSeptember 30, 2022 , compared with the nine months endedSeptember 30, 2021 , was due primarily to an increase in equity-based compensation expense of$2.3 million , an increase in personnel-related costs of$1.5 million resulting from planned headcount additions, and an increase in amortization expense of$1.5 million related to the amortization of intangible assets arising from our acquisition of CHT. Product development The following table presents our product development expenses for the nine months endedSeptember 30, 2022 and 2021, and the dollar and percentage changes between the two periods: Nine months ended Nine months ended (dollars in thousands) September 30, 2022 $ % September 30, 2021 Product development$ 16,168 $ 5,251 48.1 %$ 10,917 Percentage of revenue 4.8 % 2.3 % The increase in product development expenses for the nine months endedSeptember 30, 2022 , compared with the nine months endedSeptember 30, 2021 , was due primarily to an increase in equity-based compensation expense of$2.7 million and an increase in personnel-related costs of$2.1 million resulting from planned headcount additions to continue to enhance our technology.
General and administrative
The following table presents our general and administrative expenses for the nine months endedSeptember 30, 2022 and 2021, and the dollar and percentage changes between the two periods: Nine months ended Nine months ended (dollars in thousands) September 30, 2022 $ % September 30, 2021 General and administrative$ 40,569 $ (4,117) (9.2) %$ 44,686 Percentage of revenue 12.1 % 9.2 % 34
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The decrease in general and administrative expenses for the nine months endedSeptember 30, 2022 , compared with the nine months endedSeptember 30, 2021 , was due primarily to gain of$6.6 million recorded on remeasurement of the contingent consideration related to CHT as the fair value declined due to lower projected revenue and gross profit targets for CHT and to legal, professional and accounting fees as we incurred higher costs during the nine months endedSeptember 30, 2021 , offset in part by an increase in equity-based compensation expense of$4.5 million and an increase in personnel-related costs of$1.0 million resulting from planned headcount additions.
Equity-based compensation
The following table presents our equity-based compensation expense that was included in costs and operating expenses for the nine months endedSeptember 30, 2022 and 2021, and the dollar and percentage changes between the two periods: Nine months Nine months ended September ended September (dollars in thousands) 30, 2022 $ % 30, 2021 Cost of revenue$ 2,637 $ 1,348 104.6 %$ 1,289 Sales and marketing 7,951 2,312 41.0 % 5,639 Product development 7,321 2,722 59.2 % 4,599 General and administrative 26,307 4,513 20.7 % 21,794 Total$ 44,216 $ 10,895 32.7 %$ 33,321 The increase in equity-based compensation expense for the nine months endedSeptember 30, 2022 , compared with the nine months endedSeptember 30, 2021 , was driven primarily by expenses related to additional restricted stock units granted to employees as part of the annual incentive process and restricted stock units granted to the employees added in connection with our acquisition of CHT. Amortization The following table presents our amortization of intangible asset expense that was included in costs and operating expenses for the nine months endedSeptember 30, 2022 and 2021, and the dollar and percentage changes between the two periods: Nine months ended Nine months ended September 30, September 30, (dollars in thousands) 2022 $ % 2021 Sales and Marketing$ 3,758 $ 1,520 67.9 %$ 2,238 General and administrative 306 306 100.0 % - Total$ 4,064 $ 1,826 81.6 %$ 2,238 The increase in amortization expense for the nine months endedSeptember 30, 2022 , compared with the nine months endedSeptember 30, 2021 , was related to intangible assets arising from our acquisition of CHT.
Other expenses, net
The following table presents our other expenses for the nine months endedSeptember 30, 2022 and 2021, and the dollar and percentage changes between the two periods: Nine months ended Nine months ended (dollars in thousands) September 30, 2022 $ % September 30, 2021 Other expenses, net$ 8,123 $ 7,786 2,310.4 % $ 337 Percentage of revenue 2.4 % 0.1 % The increase in other expenses, net for the nine months endedSeptember 30, 2022 , compared with the nine months endedSeptember 30, 2021 , was driven primarily by an impairment charge of$8.6 million during the nine months endedSeptember 30, 2022 related to a cost method investment, offset in part by$0.8 million of expense incurred during the nine months endedSeptember 30, 2021 to settle certain claims made by theAttorney General's Office of the State of Washington . 35
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Interest expense
The following table presents our interest expense for the nine months endedSeptember 30, 2022 and 2021, and the dollar and percentage changes between the two periods: Nine months ended Nine months ended (dollars in thousands) September 30, 2022 $ % September 30, 2021 Interest expense$ 5,908 $ (395) (6.3) %$ 6,303 Percentage of revenue 1.8 % 1.3 % The decrease in interest expense for the nine months endedSeptember 30, 2022 , compared with the nine months endedSeptember 30, 2021 , was driven by a lower interest rate on the 2021 Credit Facility resulting from the refinancing of our 2020 Credit Facilities offset by the interest on amounts drawn on our 2021 Revolving Credit Facility to fund a portion of the consideration for our acquisition of CHT.
Income tax expense
The following table presents our income tax expense for the nine months endedSeptember 30, 2022 and 2021, and the dollar and percentage changes between the two periods: Nine months ended Nine months ended (dollars in thousands) September 30, 2022 $ % September 30, 2021 Income tax expense$ 1,210 $ (426) (26.0) %$ 1,636 Percentage of revenue 0.4 % 0.3 % For the nine months endedSeptember 30, 2022 , we recorded an income tax expense of$1.2 million resulting from our effective tax rate of (2.8)%, which differed from theU.S. federal statutory rate of 21%, due primarily to nondeductible equity-based compensation, losses associated with non-controlling interests not taxable to us, state taxes, and other nondeductible permanent items. For the nine months endedSeptember 30, 2021 , we recorded an income tax expense of$1.6 million resulting from our effective tax rate of (57.2)% which differed from theU.S. federal statutory rate of 21%, due primarily to nondeductible equity-based compensation, state taxes, income not taxable to us associated with the non-controlling interest, nondeductible transaction costs associated with the Secondary Offering and the impact of tax benefits associated with equity-based awards.
Key business and operating metrics
In addition to traditional financial metrics, we rely upon certain business and operating metrics that are not presented in accordance with GAAP to estimate the volume of spending on our platform, estimate and recognize revenue, evaluate our business performance and facilitate our operations. Such business and operating metrics should not be considered in isolation from, or as an alternative to, measures presented in accordance with GAAP and should be considered together with other operating and financial performance measures presented in accordance with GAAP. Also, such business and operating metrics may not necessarily be comparable to similarly titled measures presented by other companies.
Adjusted EBITDA
We define "Adjusted EBITDA" as net income excluding interest expense, income tax benefit (expense), depreciation expense on property and equipment, amortization of intangible assets, as well as equity-based compensation expense and certain other adjustments as listed in the table below. Adjusted EBITDA is a non-GAAP financial measure that we present to supplement the financial information we present on a GAAP basis. We monitor and present Adjusted EBITDA because it is a key measure used by our management to understand and evaluate our operating performance, to establish budgets and to develop operational goals for managing our business. We believe that Adjusted EBITDA helps identify underlying trends in our business that could otherwise be masked by the effect of the expenses that we exclude in the calculations of Adjusted EBITDA. Accordingly, we believe that Adjusted EBITDA provides useful information to investors and others in understanding and evaluating our operating results, enhancing the overall understanding of our past performance and future prospects. In addition, presenting Adjusted EBITDA provides investors with a metric to evaluate the capital efficiency of our business.
Adjusted EBITDA is not presented in accordance with GAAP and should not be
considered in isolation of, or as an alternative to, measures presented in
accordance with GAAP. There are a number of limitations related to the use of
Adjusted
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EBITDA rather than net income, which is the most directly comparable financial measure calculated and presented in accordance with GAAP. These limitations include the fact that Adjusted EBITDA excludes interest expense on debt, income tax benefit (expense), equity-based compensation expense, depreciation and amortization, and certain other adjustments that we consider useful information to investors and others in understanding and evaluating our operating results. In addition, other companies may use other measures to evaluate their performance, including different definitions of "Adjusted EBITDA," which could reduce the usefulness of our Adjusted EBITDA as a tool for comparison.
The following table reconciles Adjusted EBITDA with net (loss), the most
directly comparable financial measure calculated and presented in accordance
with GAAP, for the three and nine months ended
Three months ended Nine months ended
September 30, September 30,
(in thousands) 2022 2021 2022 2021
Net (loss) $ (21,226) $ (4,271) $ (44,096) $ (4,494)
Equity-based compensation expense 14,600 11,198 44,216 33,321
Interest expense 2,593 1,765 5,908 6,303
Income tax (benefit) expense (544) 2,125 1,210 1,636
Depreciation expense on property and
equipment 98 99 295 272
Amortization of intangible assets 1,704 746 4,064 2,238
Transaction expenses(1) 106 1,152 636 3,883
Employee-related costs(2) - 270 - 619
SOX implementation costs(3) - 348 110 797
Fair value adjustment to contingent
consideration(4) (3,746) - (6,591) -
Impairment of cost method investment 8,594 - 8,594 -
Settlement costs(5) - 800 - 800
Changes in TRA related liability(6) 13 (448) (577) (604)
Changes in Tax Indemnification
Receivable(7) (15) - (44) 147
Settlement of federal and state income tax
refunds(8) - - 92 -
Adjusted EBITDA $ 2,177 $ 13,784 $ 13,817 $ 44,918
(1)Transaction expenses consist of
accounting and other consulting fees incurred by us for the three and nine
months ended
acquisition of CHT. For the three and nine months ended
transaction expenses consist of
accounting, and other consulting fees in connection with the Secondary Offering
and other registration statements, and the refinancing of our 2020 Credit
Facilities, respectively.
(2)Employee-related costs include
incurred by us for the three and nine months ended
respectively, for amounts payable to recruiting firms in connection with the
hiring of certain executive officers to support our operation as a
publicly-reporting company.
(3)SOX implementation costs consist of$0 and$0.1 million of expenses incurred by us for the three and nine months endedSeptember 30, 2022 , respectively, and$0.3 million and$0.8 million of expenses for the three and nine months endedSeptember 30, 2021 , respectively, for third-party consultants to assist us with the development, implementation, and documentation of new and enhanced internal controls and processes for compliance with SOX Section 404(b) for 2021. (4)Fair value adjustment to contingent consideration consists of$3.7 million and$6.6 million of gain for the three and nine months endedSeptember 30, 2022 , respectively, in connection with the remeasurement of the contingent consideration for the acquisition of CHT as ofSeptember 30, 2022 .
(5)Settlement costs include
three and nine months ended
the
(6)Changes in TRA related liability consist of immaterial expenses and
respectively, and
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nine months ended
estimated future state tax benefits and other changes in the estimate resulting
in reductions of the TRA liability.
(7)Changes in Tax Indemnification Receivable consists of immaterial income incurred by us for the three and nine months endedSeptember 30, 2022 , and$0.1 million of expenses incurred by us for the nine months endedSeptember 30, 2021 , related to a reduction in the tax indemnification receivable recorded in connection with the Reorganization Transactions. The reduction also resulted in a benefit of the same amount which has been recorded within income tax (benefit) expense. (8)Settlement of federal and state tax refunds consist of$0 and$0.1 million of expense incurred by us for the three and nine months endedSeptember 30, 2022 , respectively, related to a payment toWhite Mountains for state tax refunds for the period prior to the Reorganization Transaction related to 2020 tax returns. The settlement also resulted in a benefit of the same amount which has been recorded within income tax (benefit) expense.
Contribution and Contribution Margin
We define "Contribution" as revenue less revenue share payments and online advertising costs, or, as reported in our consolidated statements of operations, revenue less cost of revenue (i.e., gross profit), as adjusted to exclude the following items from cost of revenue: equity-based compensation; salaries, wages, and related costs; internet and hosting costs; amortization; depreciation; other services; and merchant-related fees. We define "Contribution Margin" as Contribution expressed as a percentage of revenue for the same period. Contribution and Contribution Margin are non-GAAP financial measures that we present to supplement the financial information we present on a GAAP basis. We use Contribution and Contribution Margin to measure the return on our relationships with our supply partners (excluding certain fixed costs), the financial return on and efficacy of our online advertising costs to drive consumers to our proprietary websites, and our operating leverage. We do not use Contribution and Contribution Margin as measures of overall profitability. We present Contribution and Contribution Margin because they are used by our management and board of directors to manage our operating performance, including evaluating our operational performance against budget and assessing our overall operating efficiency and operating leverage. For example, if Contribution increases and our headcount costs and other operating expenses remain steady, our Adjusted EBITDA and operating leverage increase. If Contribution Margin decreases, we may choose to re-evaluate and re-negotiate our revenue share agreements with our supply partners, to make optimization and pricing changes with respect to our bids for keywords from primary traffic acquisition sources, or to change our overall cost structure with respect to headcount, fixed costs and other costs. Other companies may calculate Contribution and Contribution Margin differently than we do. Contribution and Contribution Margin have their limitations as analytical tools, and you should not consider them in isolation or as substitutes for analysis of our results presented in accordance with GAAP. The following table reconciles Contribution with gross profit, the most directly comparable financial measure calculated and presented in accordance with GAAP, for the three and nine months endedSeptember 30, 2022 and 2021: Three months ended Nine months ended September 30, September 30, (in thousands) 2022 2021 2022 2021 Revenue$ 89,017 $ 152,749 $ 335,065 $ 483,690 Less cost of revenue (76,343) (128,081) (285,149) (407,566) Gross profit 12,674 24,668 49,916 76,124 Adjusted to exclude the following (as related to cost of revenue): Equity-based compensation 999 447 2,637 1,289 Salaries, wages, and related 989 501 2,679 1,523 Internet and hosting 126 105 349 315 Other expenses 189 104 531 323 Depreciation 12 7 30 22 Other services 492 300 1,598 847 Merchant-related fees 40 56 99 286 Contribution 15,521 26,188 57,839 80,729 Gross margin 14.2 % 16.1 % 14.9 % 15.7 % Contribution Margin 17.4 % 17.1 % 17.3 % 16.7 % 38
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Transaction Value
We define "Transaction Value" as the total gross dollars transacted by our partners on our platform. Transaction Value is a driver of revenue, with differing revenue recognition based on the economic relationship we have with our partners. Our partners use our platform to transact via Open andPrivate Marketplace transactions. In ourOpen Marketplace model, Transaction Value is equal to revenue recognized and revenue share payments to our supply partners represent costs of revenue. In ourPrivate Marketplace model, revenue recognized represents a platform fee billed to the demand partner or supply partner based on an agreed-upon percentage of the Transaction Value for the Consumer Referrals transacted, and accordingly there are no associated costs of revenue. We utilize Transaction Value to assess revenue and to assess the overall level of transaction activity through our platform. We believe it is useful to investors to assess the overall level of activity on our platform and to better understand the sources of our revenue across our different transaction models and verticals.
The following table presents Transaction Value by platform model for the three
and nine months ended
Three months ended Nine months ended
September 30, September 30,
(dollars in thousands) 2022 2021 2022 2021
Open Marketplace transactions $ 86,279 $ 147,800 $ 324,008 $ 469,670
Percentage of total Transaction Value 58.8 % 57.9 % 57.0 % 60.7 %
Private Marketplace transactions 60,438 107,290 244,592 304,410
Percentage of total Transaction Value 41.2 % 42.1 % 43.0 % 39.3 %
Total Transaction Value $ 146,717 $ 255,090 $ 568,600 $ 774,080
The following table presents Transaction Value by vertical for the three and
nine months ended
Three months ended Nine months ended
September 30, September 30,
(dollars in thousands) 2022 2021 2022 2021
Property & Casualty insurance $ 83,165 $ 175,375 $ 343,179 $ 535,448
Percentage of total Transaction Value 56.7 % 68.8 % 60.4 % 69.2 %
Health insurance 46,190 48,692 152,839 146,275
Percentage of total Transaction Value 31.5 % 19.1 % 26.9 % 18.9 %
Life insurance 11,580 13,361 36,438 41,736
Percentage of total Transaction Value 7.9 % 5.2 % 6.4 % 5.4 %
Other 5,782 17,662 36,144 50,621
Percentage of total Transaction Value 3.9 % 6.9 % 6.4 % 6.5 %
Total Transaction Value $ 146,717 $ 255,090 $ 568,600 $ 774,080
Consumer Referrals
We define "Consumer Referral" as any consumer click, call or lead purchased by a
buyer on our platform. Click revenue is recognized on a pay-per-click basis and
revenue is earned and recognized when a consumer clicks on a listed buyer's
advertisement that is presented subsequent to the consumer's search (e.g., auto
insurance quote search or health insurance quote search). Call revenue is earned
and recognized when a consumer transfers to a buyer and remains engaged for a
requisite duration of time, as specified by each buyer. Lead revenue is
recognized when we deliver data leads to buyers. Data leads are generated either
through insurance carriers, insurance-focused research destination websites or
other financial websites that make the data leads available for purchase through
our platform, or when consumers complete a full quote request on our proprietary
websites. Delivery occurs at the time of lead transfer. The data we generate
from each Consumer Referral feeds into our analytics model to generate
conversion probabilities for each unique consumer, enabling discovery of
predicted return and cost per sale across the platform and helping us to improve
our platform technology. We monitor the number of Consumer Referrals on our
platform in order to measure Transaction Value, revenue and overall business
performance across our verticals and platform models.
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The following table presents the percentages of total Transaction Value
generated from clicks, calls and leads for the three and nine months ended
Three months ended Nine months ended
September 30, September 30,
2022 2021 2022 2021
Clicks 76.7 % 80.1 % 77.9 % 81.4 %
Calls 15.1 % 8.4 % 12.7 % 7.7 %
Leads 8.2 % 11.6 % 9.4 % 10.9 %
Segment information
We operate in the United States and in a single operating segment. Operating
segments are defined as components of an enterprise about which separate
financial information is available that is evaluated regularly by the chief
operating decision maker, or decision-making group, in deciding how to allocate
resources and in assessing performance. Our chief operating decision maker is
our chief executive officer, who reviews financial information presented on a
consolidated basis for purposes of allocating resources and evaluating financial
performance. No expense or operating income is evaluated at a segment level. Our
acquisition of CHT did not create any additional segments as our chief executive
officer continues to review financial information and allocate resources on a
consolidated basis. Since we operate in one operating segment and reportable
segment, all required financial segment information can be found in the
consolidated financial statements.
Liquidity and capital resources
Overview
Our principal sources of liquidity are our cash flows generated from operations. Our principal uses of cash include funding of our operations, interest payments, and mandatory principal payments on our long-term debt. As ofSeptember 30, 2022 andDecember 31, 2021 , our cash and cash equivalents totaled$30.2 million and$50.6 million , respectively. We believe that our current sources of liquidity, which include cash flow generated from operations, cash and funds available under the 2021 Credit Facilities, will be sufficient to meet our projected operating and debt service requirements, and to continue to comply with our financial covenants under the 2021 Credit Facilities, for at least the next 12 months. To the extent that our current liquidity is insufficient to fund future activities or we do not remain in compliance with our financial covenants under the 2021 Credit Facilities, we may need to negotiate amendments to or waivers of the terms of such credit facilities, refinance our debt, or raise additional capital. Our business is seasonal and cyclical in nature and these trends, if continued for a long period of time, could impact the cash flows generated from operations, requiring us to draw on our available borrowing capacity under the 2021 Revolving Credit Facility or raise additional funds in the short term. During the second half of 2021, the auto insurance industry began to experience a cyclical downturn, as supply chain disruptions and cost increases caused by the pandemic and overall inflationary pressures contributed to higher-than-expected P&C insurance claims costs, which led many carriers to reduce their customer acquisition spending to preserve their profitability. These reductions continue to impact revenue from our P&C insurance vertical and we are currently unable to estimate their impact beyond the fourth quarter of 2022. We have historically not used funds available under our credit facilities to fund our operations and payments under the credit facilities. OnApril 1, 2022 , we closed the acquisition of substantially all of the assets ofCustomer Helper Team, LLC ("CHT") for cash consideration of$49.7 million at closing, plus contingent consideration of up to$20.0 million based on CHT's achievement of revenue and profitability targets for the two successive 12-month periods following the closing. We funded the transaction in part by drawing$25.0 million under the 2021 Revolving Credit Facility and the balance from cash on hand as of the closing. We expect to be able to pay the contingent consideration, if any, from our cash balances. During the three months endedSeptember 30, 2022 we repaid$15.0 million under the 2021 Revolving Credit Facility. OnMarch 14, 2022 , our Board of Directors approved the repurchase of shares of our Class A common stock having an aggregate value of up to$5.0 million from time to time in open market transactions at prevailing market prices or by other means in accordance with federal securities laws. The Company completed the repurchase program during the three months endedSeptember 30, 2022 . The repurchases were financed from our cash balances. During the three and nine months endedSeptember 30, 2022 , we repurchased 134,147 shares and 455,297 shares of Class A common stock for aggregate consideration of$1.6 million and$5.0 million , respectively. 40
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We may in the future engage in additional merger and acquisition or other activities, including share repurchases, that could require us to draw on our existing credit facilities or may need to raise additional capital through the sale of equity securities or through debt financing arrangements. If we raise additional funds by issuing equity securities, the ownership of our existing stockholders will be diluted. The incurrence of additional debt financing would result in debt service obligations, and any future instruments governing such debt could provide for operating and financing covenants that could restrict our operations. Our material cash requirements include our long-term debt, operating lease obligations, liabilities under the TRA, and any contingent consideration payable in connection with our acquisition of CHT.
Cash Flows
The following table presents a summary of our cash flows for the nine months endedSeptember 30, 2022 and 2021, and the dollar and percentage changes between the periods: Nine months Nine months ended ended September September 30, (dollars in thousands) 30, 2022 $ % 2021
Net cash provided by operating activities
420.3 %$ 6,676
Net cash (used in) investing activities
8,662.3 % $ (568)
Net cash (used in) financing activities
1,374.8 % $ (361)
Operating activities
Cash flows provided by operating activities were$34.7 million for the nine months endedSeptember 30, 2022 , compared with$6.7 million for the nine months endedSeptember 30, 2021 . The increase resulted from lower working capital usage due primarily to the timing of our payables and higher working capital usage in 2020 and 2021 driven primarily by growth in our business and non-recurring transactions, offset in part by the higher net loss during the nine months endedSeptember 30, 2022 . Investing activities Cash flows used in investing activities were$49.8 million for the nine months endedSeptember 30, 2022 , compared with$0.6 million for the nine months endedSeptember 30, 2021 . The increase resulted primarily from the payment of cash consideration for our acquisition of CHT, which closed onApril 1, 2022 .
Financing activities
Cash flows used in financing activities were$5.3 million for the nine months endedSeptember 30, 2022 , compared with$0.4 million for the nine months endedSeptember 30, 2021 . The increase was due to principal payments on the 2021 Term Loan Facility and payments made under the share repurchase program, offset in part by the net amounts drawn on the 2021 Revolving Credit Facility to fund a portion of the consideration for the CHT acquisition.
Senior secured credit facilities
2021 Credit Facilities
OnJuly 29, 2021 , we entered into an amendment (the "First Amendment") to the 2020 Credit Agreement (as amended by the First Amendment, the "Amended Credit Agreement"). The Amended Credit Agreement provides for a new senior secured term loan facility in an aggregate principal amount of$190.0 million (the "2021 Term Loan Facility"), the proceeds of which were used to refinance all of the$186.4 million of the existing 2020 Term Loan Facility outstanding and the unpaid interest thereof as of the date of the First Amendment, to pay fees related to these transactions, and to provide cash for general corporate purposes, and a new senior secured revolving credit facility with commitments in an aggregate amount of$50.0 million (the "2021 Revolving Credit Facility" and, together with the 2021 Term Loan Facility, the "2021 Credit Facilities"), which replaced the 2020 Revolving Credit Facility. Our obligations under the 2021 Credit Facilities are guaranteed by QLH and secured by substantially all assets ofQLH and QuoteLab, LLC . Borrowings under the 2021 Credit Facilities bear interest at a rate equal to, at our option, the London Interbank Offered Rate plus an applicable margin, with a floor of 0.00%, or base rate plus an applicable margin. The applicable margins will be based on our consolidated total net leverage ratio as calculated under the terms of the Amended Credit Agreement (the 41
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"Leverage Ratio") for the prior fiscal quarter and range from 2.00% to 2.75% with respect to theLondon interbank offered rate and from 1.00% to 1.75% with respect to the base rate. Loans under the 2021 Credit Facilities will mature onJuly 29, 2026 . Loans under the 2021 Term Loan Facility will amortize quarterly, beginning with the first business day afterDecember 31, 2021 and ending withJune 30, 2026 , by an amount equal to 1.25% of the aggregate outstanding principal amount of the term loans initially made. The 2021 Revolving Credit Facility does not require amortization of principal and will mature onJuly 29, 2026 . As ofSeptember 30, 2022 , we had$180.3 million of outstanding borrowings, net of deferred debt issuance costs of$2.6 million , and$10.0 million under the 2021 Term Loan Facility and 2021 Revolving Credit Facility, respectively.
Tax receivables agreement
Our purchases (through Intermediate Holdco) of Class B-1 units from certain
unitholders in connection with the IPO, as well as exchanges of Class B-1 units
subsequent to the IPO (together with an equal number of shares of our Class B
common stock) for shares of our Class A common stock (or, at our election, cash
of an equivalent value) ("Exchange"), and the Pre-IPO Leveraged Distribution and
other actual or deemed distributions by QLH to its members pursuant to the
Exchange Agreement, have resulted and are expected to continue to result in
increases in our allocable tax basis in the assets of QLH. These increases in
tax basis are expected to increase (for tax purposes) depreciation and
amortization deductions allocable to us and, therefore, reduce the amount of tax
that we otherwise would be required to pay in the future. This increase in tax
basis may also decrease gain (or increase loss) on future dispositions of
certain assets to the extent tax basis is allocated to those assets.
In connection with the IPO, we entered into the TRA with Insignia, the Senior
Executives, and White Mountains related to the tax basis step-up of the assets
of QLH and certain net operating losses of Intermediate Holdco. The agreement
requires us to pay Insignia and the Senior Executives or any assignees 85% of
the cash savings, if any, in U.S. federal, state and local income tax we realize
(or are deemed to realize) as a result of (i) any increases in tax basis of
assets of QLH resulting from any Exchange, and (ii) certain other tax benefits
related to making our payments under the TRA. The TRA also requires us to pay
White Mountains 85% of the amount of the cash savings, if any, in U.S. federal,
state and local income tax that we realize (or are deemed to realize) as a
result of the utilization of the net operating losses of Intermediate Holdco
attributable to periods prior to the IPO and the deduction of any imputed
interest attributable to our payment obligations under the TRA.
In addition to tax expenses, we will also make payments under the TRA, which we
expect to be significant. We account for the income tax effects and
corresponding TRA effects resulting from any Exchange by recognizing an increase
in our deferred tax assets, based on enacted tax rates at the date of the
Exchange. Further, we evaluate the likelihood that we will realize the benefit
represented by the deferred tax asset and, to the extent that we estimate that
it is more likely than not that we will not realize the benefit, we will reduce
the carrying amount of the deferred tax asset with a valuation allowance. The
amounts to be recorded for both the deferred tax assets and the liability for
our obligations under the TRA are estimated at the time of any purchase or
exchange as a reduction to stockholders' equity, and the effects of changes in
any of our estimates after this date will be included in net income (loss).
Similarly, the effect of subsequent changes in the enacted tax rates will be
included in net income (loss). Judgment is required in assessing the future tax
consequences of events that have been recognized in our consolidated financial
statements. A change in our assessment of such consequences, such as realization
of deferred tax assets, changes in blended tax rates, changes in tax laws or
interpretations thereof could materially impact our results.
Recent accounting pronouncements
For a discussion of new accounting pronouncements recently adopted and not yet adopted, see Note 1 to the consolidated financial statements appearing in Part I, Item 1 of this Quarterly Report on Form 10-Q.
Critical accounting policies and estimates
Our critical accounting policies and estimates are included in our 2021 Annual Report on Form 10-K and did not materially change during the nine months endedSeptember 30, 2022 .
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QUINSTREET, INC – 10-Q – MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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