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SELECTQUOTE, INC. – 10-Q – MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion and analysis of our financial condition and result of operations together with our condensed consolidated financial statements and footnotes included elsewhere in this Quarterly Report on Form 10-Q. In addition to historical information, this discussion and analysis contains forward-looking statements that involve risks, uncertainties, and assumptions. The forward-looking statements are not historical facts, but rather are based on current expectations, estimates, assumptions, and projections about our industry, business and future financial results. Please refer to a discussion of the Company's forward-looking statements and associated risks in "Cautionary Note Regarding Forward-Looking Statements" in our 2022 Annual Report. Our actual results may differ materially from those discussed below. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in the section titled "Risk Factors" in our 2022 Annual Report and in Part II, Item 1A hereof.
Correction of Previously Issued Condensed Consolidated Financial Statements
Subsequent to the issuance of the Company's financial statements as of and for the year endedJune 30, 2021 , the Company determined that the provision for first year commission revenue for certain final expense policies offered by certain of its insurance carrier partners should have been accrued based on a higher lapse rate. This misstatement was initially thought to be isolated to an error in the lapse rate for one of its insurance carrier partners, as disclosed in the Company's Quarterly Report on Form 10-Q for the quarter endedDecember 31, 2021 . However, during the three months endedJune 30, 2022 , it was determined that the lapse rate for other insurance carrier partners were also incorrect, resulting in an additional misstatement being identified. See Note 1 to the condensed consolidated financial statements for additional information related to the correction, including descriptions of the misstatements and the impacts to our condensed consolidated financial statements. In addition, we have corrected certain previously reported financial information for the three months endedSeptember 30, 2021 , in this Item 2, Management's Discussion and Analysis of Financial Condition and Results of Operations.
Company Overview
Our Business. We are a leading technology-enabled, direct-to-consumer ("DTC")
distribution platform for insurance products and healthcare services. Our
insurance distribution business, which has operated continuously for over 35
years, provides consumers with a transparent and convenient venue to shop for
complex senior health, life, and automobile and home insurance policies from a
curated panel of the nation's leading insurance carriers. As an insurance
distributor, we do not insure the consumer, but rather identify consumers
looking to acquire insurance products and place these consumers with insurance
carrier partners that provide these products. In return, we earn commissions
from our insurance carrier partners for the policies we sell on their behalf.
Our proprietary technology allows us to take a broad funnel approach to
marketing by analyzing and identifying high-quality consumer leads sourced from
a wide variety of online and offline marketing channels including search
engines, radio, television, and third-party marketing partners. We monitor our
acquisition costs to dynamically allocate our marketing spend to the most
attractive channels, benefiting from over thirty years of data accumulated
through our proprietary, purpose-built technologies. Our advanced workflow
processing system scores each acquired lead in real time, matching it with a
sales agent whom we determine is best suited to meet the consumer's need. Our
platform then captures and utilizes our experience to further build upon the
millions of data points that feed our marketing algorithms, further enhancing
our ability to deploy subsequent marketing dollars efficiently and target more
high-quality consumer leads. We have built our business model to maximize
commissions collected over the life of an approved policy less
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the cost of acquiring the business, a metric we refer to as policyholder
lifetime value and which is a key component to our overall profitability.
Our unique platform has enabled us to expand our distribution business in recent years to include additional products beyond insurance policies. In interacting with thousands of consumers over the years, we identified a large opportunity to leverage our existing database and distribution model to improve access to healthcare services for our consumers. In addition to improving consumers' health outcomes, this service creates deeper relationships with our insurance carrier partners by increasing policy persistency and, in turn, reducing their overall costs. Additionally, we offer pharmacy services through our closed-door, long-term care pharmacy, which offers essential prescription medications, OTC medications, customized medication packaging, medication therapy management, and other consultative services.
We evaluate our business using the following four segments:
Senior was launched in 2010 and provides unbiased comparison shopping for
Medicare Advantage ("MA") and Medicare Supplement ("MS") insurance plans as well
as prescription drug and dental, vision, and hearing ("DVH") plans, and critical
illness products. We represent approximately 21 leading, nationally-recognized
insurance carrier partners, including UnitedHealthcare, Wellcare, and Humana. MA
and MS plans accounted for 85% and 77% of our approved Senior policies for the
three months ended September 30, 2022 and 2021, respectively, with other
ancillary type policies accounting for the remainder.
Healthcare Services, launched in 2021, includes SelectRx and Population Health ,
and was previously included under the Senior segment (refer to Note 13 to the
condensed consolidated financial statements for further information on the
change in segments). Through SelectRx, we provide simple solutions for
prescription drug management and support with a personalized approach to
streamline the process of managing multiple medications for seniors with chronic
conditions. SelectRx has developed a pill pack solution that is customized to
the unique needs of each patient, focusing on individual multi-dosages by day
and time. SelectRx uses a high-touch, technology-driven approach to provide
superior customer service and achieve improved medication adherence. Population
Health contracts with insurance carriers to perform health risk assessments
("HRA") on potential new members to determine how Population Health's
value-based care ("VBC") partners can help members improve health outcomes.
Consumers receive one-on-one assistance from our customer success agents who
help patients understand the benefits available under their health plans and
connect them with additional healthcare related resources. We believe that
offering these services through SelectRx and Population Health to our existing
MA consumers helps drive customer satisfaction and increase policy persistency,
which, in turn, reduces costs for our insurance carrier partners.
Life is one of the country's largest and most established DTC insurance
distributors for term life insurance, having sold over 2.1 million policies
nationwide since our founding in 1985. Our platform provides unbiased comparison
shopping for life insurance products such as term life, final expense, and other
ancillary products like critical illness, accidental death, and juvenile
insurance. We represent approximately 22 leading, nationally-recognized
insurance carrier partners, with many of these relationships exceeding 15 years.
Term life policies accounted for 40% and 31% of new premium within Life for the
three months ended September 30, 2022 and 2021, respectively, with final expense
policies accounting for 60% and 69% for the three months ended September 30,
2022 and 2021, respectively.
Auto & Home was launched in 2011 as an unbiased comparison shopping platform for
auto, home, and specialty insurance lines. Our platform provides unbiased
comparison shopping for insurance products such as homeowners, auto, dwelling
fire, and other ancillary insurance products underwritten by approximately 22
leading, nationally-recognized insurance carrier partners. Homeowners and
12-month auto products accounted for 75% and 77% of new premium within Auto &
Home for the three months ended September 30, 2022 and 2021, respectively, with
six-month auto, dwelling fire, and other products accounting for a majority of
the remainder.
The three months ended September 30 referenced throughout the commentary below
refers to the first quarter and fiscal year-to-date performance of our fiscal
years ending on June 30, 2023 and 2022.
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Key Business and Operating Metrics by Segment
In addition to traditional financial metrics, we rely upon certain business and operating metrics to estimate and recognize revenue, evaluate our business performance, and facilitate our operations. In Senior, our primary product, Medicare Advantage, pays us flat commission rates based on the number of policies we sell on behalf of our insurance carrier partners. Therefore, we have determined that units and unit metrics are the most appropriate measures to evaluate the performance of Senior. For Healthcare Services, our primary source of revenue is pharmacy revenue from SelectRx, so the total number of SelectRx members is the most appropriate measure used to evaluate the performance of Healthcare Services. In Life and Auto & Home, we are typically paid a commission that is a percent of the premium that we generate for our insurance carrier partners. Therefore, we have determined that premium-based metrics are the most relevant measures to evaluate the performance of these segments. Below are the most relevant business and operating metrics for each segment:
Senior
Submitted Policies
Submitted policies are counted when an individual completes an application with
our licensed agent and provides authorization to them to submit it to the
insurance carrier partner. The applicant may have additional actions to take
before the application will be reviewed by the insurance carrier.
The following table shows the number of submitted policies for the periods
presented:
Three Months Ended September 30,
2022 2021
Medicare Advantage 90,028 95,789
Medicare Supplement 665 1,812
Dental, Vision, and Hearing 16,334 28,604
Prescription Drug Plan 364 873
Other 2,026 3,562
Total 109,417 130,640
Total submitted policies for all products decreased 16% for the three months
ended September 30, 2022 , compared to the three months ended September 30, 2021 ,
in line with our updated operating strategy to reduce the Senior distribution
business and focus resources on Healthcare Services. The number of average
productive agents decreased 7% during the three months ended September 30, 2022 ,
compared to the three months ended September 30, 2021 , but was partially offset
by a 14% increase in overall close rates due to an increased focus on agent
training and development.
Approved Policies
Approved policies represents the number of submitted policies that were approved
by our insurance carrier partners for the identified product during the
indicated period. Not all approved policies will go in force.
The following table shows the number of approved policies for the periods
presented:
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Three Months Ended September 30,
2022 2021
Medicare Advantage 83,173 84,116
Medicare Supplement 500 1,398
Dental, Vision and Hearing 12,275 22,223
Prescription Drug Plan 390 868
Other 1,662 2,880
Total 98,000 111,485
In general, the relationship between submitted policies and approved policies
has been steady over time. Therefore, factors impacting the number of submitted
policies also impact the number of approved policies.
Total approved policies for all products decreased 12% for the three months
ended September 30, 2022 , compared to the three months ended September 30, 2021 ,
in line with our updated operating strategy to reduce the Senior distribution
business and focus resources on Healthcare Services. Fluctuations in approved
policies are normally in direct correlation to submitted policies; however, due
to our increased focus on agent training and development, we experienced a 5%
increase in the submitted-to-approved conversion rate for the three months ended
September 30, 2022 , compared to the three months ended September 30, 2021 .
Lifetime Value of Commissions per Approved Policy
The lifetime value of commissions (the "LTV") per approved policy represents
commissions estimated to be collected over the estimated life of an approved
policy based on multiple factors, including but not limited to, contracted
commission rates, carrier mix, and expected policy persistency with applied
constraints. The LTV per approved policy is equal to the sum of the commission
revenue due upon the initial sale of a policy, and when applicable, an estimate
of future renewal commissions. The estimate of the future renewal commissions is
determined using contracted renewal commission rates constrained by a
persistency-adjusted 10-year renewal period based on a combination of our
historical experience and available insurance carrier historical experience to
estimate renewal revenue only to the extent probable that a material reversal in
revenue would not be expected to occur. These factors may result in varying
values from period to period. The LTV per approved policy represents commissions
only from policies sold during the period; it does not include any updated
estimates of prior period variable consideration based on actual policy renewals
in the current period.
The following table shows the LTV per approved policy for the periods presented:
Three Months Ended September 30,
2022 2021
Medicare Advantage $ 780 $ 978
Medicare Supplement 1,132 1,439
Dental, Vision and Hearing 68 152
Prescription Drug Plan 233 310
Other 74 111
The LTV per MA approved policy decreased 20% for the three months ended
September 30, 2022 , compared to the three months ended September 30, 2021 . The
MA LTV was negatively impacted by lower persistency rates, which includes an
increase in constraint and higher provision for renewal year lapse rates; higher
provision for first year lapse rates; and carrier mix, somewhat offset by higher
commission rates.
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Healthcare Services
The total number of SelectRx members represents the amount of active customers
to which an order has been shipped, as this is the primary key driver of revenue
for Healthcare Services.
The following table shows the total number of SelectRx members for the periods
presented:
Three Months Ended September 30,
2022 2021
Total SelectRx Members 32,596 5,006
The total number of SelectRx members increased 551% for the three months ended
September 30, 2022 , compared to the three months ended September 30, 2021 , due
to our increased focus on the growth of Healthcare Services.
Combined Senior and Healthcare Services - Consumer Per Unit Economics
The opportunity to leverage our existing database and distribution model to
improve access to healthcare services for our consumers has created a need for
us to review our key metrics related to our per unit economics. As we think
about the revenue and expenses for Healthcare Services, we note that they are
derived from the marketing acquisition costs associated with the sale of an MA
or MS policy, some of which costs are allocated directly to Healthcare Services,
and therefore determined that our per unit economics measure should include
components from both Senior and Healthcare Services. See details of revenue and
expense items included in the calculation below.
Combined Senior and Healthcare Services consumer per unit economics represents
total MA and MS commissions; other product commissions; other revenues,
including revenues from Healthcare Services; and operating expenses associated
with Senior and Healthcare Services, each shown per number of approved MA and MS
policies over a given time period. Management assesses the business on a
per-unit basis to help ensure that the revenue opportunity associated with a
successful policy sale is attractive relative to the marketing acquisition cost.
Because not all acquired leads result in a successful policy sale, all
per-policy metrics are based on approved policies, which is the measure that
triggers revenue recognition.
The MA and MS commission per MA/MS policy represents the LTV for policies sold
in the period. Other commission per MA/MS policy represents the LTV for other
products sold in the period, including DVH prescription drug plan, and other
products, which management views as additional commission revenue on our agents'
core function of MA/MS policy sales. Pharmacy and other revenue per MA/MS policy
represents revenue from Healthcare Services, production bonuses, marketing
development funds, lead generation revenue, and adjustments from the Company's
reassessment of its cohorts' transaction prices. Total operating expenses per
MA/MS policy represents all of the operating expenses within Senior and
Healthcare Services. The revenue to customer acquisition cost ("CAC") multiple
represents total revenue per MA/MS policy as a multiple of total marketing
acquisition cost, which represents the direct costs of acquiring leads. These
costs are included in marketing and advertising expense within the total
operating expenses per MA/MS policy.
The following table shows combined Senior and Healthcare Services consumer per
unit economics for the periods presented. Based on the seasonality of Senior and
the fluctuations between quarters, we believe that the most relevant view of per
unit economics is on a rolling 12-month basis. All per MA/MS policy metrics
below are based on the sum of approved MA/MS policies, as both products have
similar commission profiles.
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Twelve Months Ended September 30,
(dollars per approved policy): 2022 2021
Medicare Advantage and Medicare Supplement approved 665,358 526,212
policies
Medicare Advantage and Medicare Supplement commission
per MA/MS policy
$ 902 $ 1,223 Other commission per MA/MS policy 22 37 Pharmacy and other revenue per MA/MS policy (4) 189 Total revenue per MA/MS policy 920 1,449 Total operating expenses per MA/MS policy (1,185) (1,065) Adjusted EBITDA per MA/MS policy (1) $ (265) $ 384 Adjusted EBITDA Margin per MA/MS policy (1) (29) % 27 % Revenue/CAC multiple 1.8X 2.8X (1) These financial measures are not calculated in accordance with GAAP. See "Management's Discussion and Analysis of Financial Condition and Results of Operations-Non-GAAP Financial Measures" for information regarding our use of these non-GAAP financial measures and a reconciliation of such measures to their nearest comparable financial measures calculated and presented in accordance with GAAP. Total revenue per MA/MS policy decreased 37% for the twelve months endedSeptember 30, 2022 , compared to the twelve months endedSeptember 30, 2021 , with the decrease due to the lower Senior LTV and the downward Senior revenue adjustments from a change in estimate of MA cohort transaction prices discussed in our Annual Report. Total cost per policy increased 11% for the twelve months endedSeptember 30, 2022 , compared to the twelve months endedSeptember 30, 2021 , driven by an increase in the operating expenses from Healthcare Services due to the growth of the business over the last twelve months, offset by a decrease in our marketing and advertising costs over the last three quarters.
Life
Life premium represents the total premium value for all policies that were
approved by the relevant insurance carrier partner and for which the policy
document was sent to the policyholder and payment information was received by
the relevant insurance carrier partner during the indicated period. Because our
commissions are earned based on a percentage of total premium, total premium
volume for a given period is the key driver of revenue for Life.
The following table shows term and final expense premiums for the periods
presented:
Three Months Ended September 30,
(in thousands): 2022 2021
Term Premiums $ 15,098 $ 15,510
Final Expense Premiums 22,364 34,052
Total $ 37,462 $ 49,562
Total term premiums decreased 3% for the three months ended September 30, 2022 ,
compared to the three months ended September 30, 2021 , in line with our updated
operating strategy to stabilize Life volume and focus resources on Healthcare
Services. The number of policies sold declined 11% driven by a lower average
agent headcount, which was somewhat offset by a 9% increase in the average
premium per policy sold. Final expense premiums decreased 34% for the three
months ended September 30, 2022 , compared to the three months ended September
30, 2021 , driven by a lower average agent headcount.
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Auto & Home
Auto & Home premium represents the total premium value of all new policies that
were approved by our insurance carrier partners during the indicated period.
Because our commissions are earned based on a percentage of total premium, total
premium volume for a given period is the key driver of revenue for Auto & Home.
The following table shows premiums for the periods presented:
Three Months Ended September 30,
(in thousands): 2022 2021
Premiums $ 11,549 $ 13,258
Total premiums decreased 13% for the three months ended September 30, 2022 ,
compared to the three months ended September 30, 2021 , in line with our updated
operating strategy to stabilize Auto & Home volume and focus resources on
Healthcare Services. The number of policies sold declined 21% driven by a lower
average agent headcount, which was somewhat offset by a 10% increase in the
average premium per policy sold.
Non-GAAP Financial Measures
To supplement our financial statements presented in accordance with GAAP and to
provide investors with additional information regarding our GAAP financial
results, we have presented in this Quarterly Report on Form 10-Q Adjusted EBITDA
and Adjusted EBITDA Margin, which are non-GAAP financial measures. These
non-GAAP financial measures are not based on any standardized methodology
prescribed by GAAP and are not necessarily comparable to similarly titled
measures presented by other companies.
Adjusted EBITDA. We define Adjusted EBITDA as income (loss) before interest
expense, income tax expense (benefit), depreciation and amortization, and
certain add-backs for non-cash or non-recurring expenses, including
restructuring, share-based compensation expenses, and any impairment charges.
The most directly comparable GAAP measure is net income (loss). We monitor and
have presented in this Quarterly Report on Form 10-Q Adjusted EBITDA because it
is a key measure used by our management and Board of Directors to understand and
evaluate our operating performance, to establish budgets, and to develop
operational goals for managing our business. In particular, we believe that
excluding the impact of these expenses in calculating Adjusted EBITDA can
provide a useful measure for period-to-period comparisons of our core operating
performance.
We believe that this non-GAAP financial measure 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 this non-GAAP financial measure.
Accordingly, we believe that this financial measure 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.
Adjusted EBITDA is not prepared in accordance with GAAP and should not be
considered in isolation of, or as an alternative to, measures prepared in
accordance with GAAP. There are a number of limitations related to the use of
this non-GAAP financial measure rather than net income (loss), 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, depreciation and amortization expense, share-based
compensation expense, income tax expense (benefit), and other non-recurring
expenses that are one-time in nature. In addition, other companies may use other
measures to evaluate their performance, all of which could reduce the usefulness
of our non-GAAP financial measures as tools for comparison.
The following tables reconcile Adjusted EBITDA and net loss, the most directly
comparable financial measure calculated and presented in accordance with GAAP,
for the periods presented:
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-------------------------------------------------------------------------------- Table of Contents Three Months EndedSeptember 30, 2022 : Healthcare (in thousands) Senior Services Life Auto & Home Corp & Elims Consolidated Net loss$ (42,484) Share-based compensation 2,630 expense Transaction costs 2,126 Depreciation and 6,802 amortization Loss on disposal of 325 property, equipment, and software Interest expense, net 16,736 Income tax benefit (13,610) Adjusted EBITDA$ (3,853) $ (11,787) $ 5,225 $ 2,441 $ (19,501) $ (27,475)
(1) These expenses primarily consist of costs related to the Fourth Amendment to
the Senior Secured Credit Facility.
Three Months Ended
Healthcare
(in thousands) Senior Services Life Auto & Home Corp & Elims Consolidated
Net loss $ (48,232)
Share-based compensation
expense 2,215
Non-recurring expenses (1) 554
Depreciation and amortization 5,103
Loss on disposal of property,
equipment, and software 350
Interest expense, net 8,535
Income tax benefit (16,413)
Adjusted EBITDA $ (29,041) $ (3,930) $ 854 $ 1,374 $ (17,145) $ (47,888)
(1) These expenses primarily consist of costs related to the acquisitions of
Key Components of our Results of Operations
The following table sets forth our operating results and related percentage of
total revenues for the periods presented:
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Three Months Ended September 30,
(in thousands) 2022 2021
Revenue
Commission $ 106,335 65 % $ 130,807 84 %
Pharmacy 41,093 25 % 4,467 3 %
Other 15,056 10 % 20,805 13 %
Total revenue 162,484 100 % 156,079 100 %
Operating costs and expenses
Cost of revenue 65,164 40 % 86,791 56 %
Cost of goods sold-pharmacy revenue 42,354 26 % 4,871 3 %
Marketing and advertising 57,594 35 % 90,677 58 %
Selling, general, and administrative 30,706 19 % 23,895 15 %
Technical development 6,182 4 % 5,853 4 %
Total operating costs and expenses 202,000 124 % 212,087 136 %
Loss from operations (39,516) (24) % (56,008) (36) %
Interest expense, net (16,736) (10) % (8,535) (5) %
Other income (expense), net 158 - % (102) - %
Loss before income tax benefit (56,094) (34) % (64,645) (41) %
Income tax benefit (13,610) (7) % (16,413) (11) %
Net loss $ (42,484) (27) % $ (48,232) (30) %
Revenue
We earn revenue in the form of commission payments from our insurance carrier
customers, for the initial year the policy is in effect ("first year") and,
where applicable, for each subsequent year the policy renews ("renewal year"),
as presented in our condensed consolidated statements of comprehensive income as
commission revenue. We also receive certain volume-based bonuses from some
carriers on first year policies sold based on attaining various predetermined
target sales levels or other agreed upon objectives. These bonuses are referred
to as "production bonuses" or "marketing development funds" and are included in
other revenue in the condensed consolidated statements of comprehensive income.
Pharmacy revenue includes revenue from the sale of prescription and OTC
medications from SelectRx. Other revenue includes production bonuses and
marketing development funds noted above, revenue from Population Health for
performing HRAs and making transfers or appointments with VBC partners, and
external lead generation revenue from InsideResponse.
Our commission contracts with our insurance carrier partners contain a single
performance obligation satisfied at the point in time to which we allocate the
total transaction price. The transaction price is identified as the first year
commission due upon the initial sale of a policy as well as an estimate of
future renewal commissions and production bonus revenue when applicable. After a
policy is sold, we have no material additional or recurring obligations to the
policyholder or the insurance carrier partner. Therefore, we do not incur any
additional expense related to our receipt of future renewal commissions or
production bonus revenue. All of the costs associated with the sale of an
individual policy are incurred prior to or at the time of the initial sale of an
individual policy. Revenue is recognized at different milestones for Senior,
Life, and Auto & Home and is based on the contractual enforceable rights, our
historical experience, and established customer business practices. Lead
generation revenue is recognized when the generated lead is accepted by our
customers, which is the point of sale, and we have no performance obligation
after the delivery. Revenues generated from SelectRx are recognized upon
shipment. At the time of shipment, we have performed substantially all of our
performance obligations and do not experience a significant level of returns or
re-shipments. There are no future revenue streams associated as patients have
the option to cancel their service at any time with no further payments due.
Revenue from Population Health is recognized when the
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HRA has been performed or the agreed-upon task has been completed for a VBC
partner, the transaction price is known based on volume and contractual prices,
and we have no further performance obligation.
The following table presents our revenue for the periods presented and the
percentage changes from the prior year:
Three Months Ended September 30, Percent Change
(dollars in thousands) 2022 2021 2022 vs. 2021
Commission $ 106,335 $ 130,807 (19)%
Pharmacy 41,093 4,467 820%
Other 15,056 20,805 (28)%
Total revenue $ 162,484 $ 156,079 4%
Three Months Ended September 30, 2022 and 2021-Commission revenue decreased
$24.5 million , or 19%, for the three months ended September 30, 2022 , and
included decreases in Senior, Life, and Auto & Home commission revenue of $18.8
million , $6.6 million , and $0.3 million respectively. For Senior, this was
driven by a 12% decrease in approved policies and a 14% reduction in LTV's,
partially offset by higher commission rates. Life's revenue decline was
primarily driven by a $5.7 million decrease in final expense revenue. The
$36.6 million increase in pharmacy revenue was due to the increase in members
from the three months ended September 30, 2021 . The $5.7 million decrease in
other revenue was primarily driven by a $4.2 million decrease in external lead
generation revenue and a $2.6 million decrease in Life production bonus revenue,
offset by an increase in Population Health revenue of $0.5 million .
Operating Costs and Expenses
Cost of Revenue
Cost of revenue represents the direct costs associated with fulfilling our obligations to our customers in the Senior, Life, Auto & Home, andPopulation Health divisions, primarily compensation, benefits, and licensing for sales agents, customer success agents, fulfillment specialists, and others directly engaged in serving customers. It also includes allocations for facilities, telecommunications, and software maintenance costs, which are all based on headcount. Facilities costs include rent and utilities expenses and other costs to maintain our office locations. Telecommunications and software maintenance costs includes costs related to the internal phone systems and various software applications that our agents use to make sales. These costs directly correlate to the number of agents we have as we are primarily charged based on per person usage for the phone systems and software applications.
The following table presents our cost of revenue for the periods presented and
the percentage change from the prior year:
Three Months Ended September 30, Percent Change
(dollars in thousands) 2022 2021 2022 vs. 2021
Cost of revenue $ 65,164 $ 86,791 (25)%
Three Months Ended September 30, 2022 and 2021-Cost of revenue decreased $21.6
million , or 25%, for the three months ended September 30, 2022 , primarily due to
a $15.8 million decrease in compensation costs and a $4.6 million decrease in
licensing costs due to the reduction in our agent headcount, in line with our
updated operating strategy to reduce commission revenue volume and focus
resources on Healthcare Services.
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Cost of Goods Sold-Pharmacy Revenue
Cost of goods sold-pharmacy revenue represents the direct costs associated with
fulfilling pharmacy patient orders for SelectRx. Such costs primarily consist of
medication costs and compensation and related benefit costs for licensed
pharmacists, pharmacy technicians, and other employees directly associated with
fulfilling orders such as packaging and shipping clerks. It also includes
shipping, supplies, other order fulfillment costs including part of the one-time
customer onboarding costs, and certain facilities overhead costs such as rent,
maintenance, and depreciation related to the pharmacy production process.
The following table presents our cost of goods sold-pharmacy revenue for the
periods presented and the percentage change from the prior year:
Three Months
Ended September
30, Percent Change
(dollars in thousands) 2022 2021 2022 vs. 2021
Cost of goods sold-pharmacy revenue $ 42,354 $ 4,871 770%
Three Months Ended September 30, 2022 and 2021-Cost of goods sold-pharmacy
revenue increased $37.5 million , or 770%, for the three months ended September
30, 2022 , due to a $27.1 million increase in medication costs, a $2.2 million
increase in shipping and fulfillment costs, and a $7.0 million increase in
compensation and benefits as the number of SelectRx members increased 551%
during the three months ended September 30, 2022 , compared to the three months
ended September 30, 2021 .
Marketing and Advertising
Marketing and advertising expenses consist primarily of the direct costs
associated with marketing and advertising of our services, such as television
and radio commercials and online advertising. These direct costs generally
represent the vast majority of our marketing and advertising expenses. Other
costs consist of compensation and other expenses related to marketing, business
development, partner management, public relations, carrier relations personnel
who support our offerings, and allocations for facilities, telecommunications,
and software maintenance costs. Our marketing and advertising costs increase
during AEP and OEP to generate more leads during these high-volume periods.
The following table presents our marketing and advertising expenses for the
periods presented and the percentage change from the prior year:
Three Months Ended September
30, Percent Change
(dollars in thousands) 2022 2021 2022 vs. 2021
Marketing and advertising $ 57,594 $ 90,677 (36)%
Three Months Ended September 30, 2022 and 2021-Marketing and advertising
expenses decreased $33.1 million , or 36%, for the three months ended September
30, 2022 , due to a $33.1 million decrease in lead costs due to the decrease in
volume associated with the Company's updated operating strategy. However, we've
seen an increase in marketing efficiency as our CAC per approved policy has
decreased due to improved agent close rates as a result of increased focus on
agent training and development.
Selling, General, and Administrative
Selling, general, and administrative expenses include compensation and benefits
costs for staff working in our executive, finance, accounting, recruiting, human
resources, administrative, business intelligence, data science, and part of the
SelectRx customer onboarding departments. These expenses also include fees paid
for outside
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professional services, including audit, tax and legal fees and allocations for
facilities, telecommunications, and software maintenance costs.
The following table presents our selling, general, and administrative expenses
for the periods presented and the percentage change from the prior year:
Three Months
Ended September
30, Percent Change
(dollars in thousands) 2022 2021 2022 vs. 2021
Selling, general, and administrative $ 30,706 $ 23,895 29%
Three Months Ended September 30, 2022 and 2021-Selling, general, and
administrative expenses increased $6.8 million , or 29%, for the three months
ended September 30, 2022 , primarily due to $5.2 million increase in compensation
costs related to onboarding patients for SelectRx and $1.4 million from costs
related to the Fourth Amendment to the Senior Secured Credit Facility.
Technical development expenses consist primarily of compensation and benefits costs for internal and external personnel associated with developing, maintaining and enhancing our applications, infrastructure and other IT-related functions as well as allocations for facilities, telecommunications and software maintenance costs.
The following table presents our technical development expenses for the periods
presented and the percentage change from the prior year:
Three Months Ended September
30, Percent Change
(dollars in thousands) 2022 2021 2022 vs. 2021
Technical development $ 6,182 $ 5,853 6%
Three Months Ended September 30, 2022 and 2021-Technical development expenses
increased $0.3 million , or 6%, for the three months ended September 30, 2022 ,
primarily due to $0.4 million increase in compensation costs for internal
personnel and external consultants as our mix of technology personnel shifted
and our internal software development capitalization rate decreased.
Interest Expense, Net
The following table presents our interest expense, net for the periods presented
and the percentage changes from the prior year:
Three Months Ended September
30, Percent Change
(dollars in thousands) 2022 2021 2022 vs. 2021
Interest expense, net $ 16,736 $ 8,535 96%
Three Months Ended September 30, 2022 and 2021-Interest expense increased $8.2
million , or 96%, primarily as a result of interest incurred on the Term Loans
due to additional principal outstanding and changes under the Fourth Amendment,
as well as the amortization and write-off of additional deferred financing costs
associated with the amendments to the Senior Secured Credit Facility, all of
which was partially offset by interest income received under the interest rate
swap.
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Income Taxes
The following table presents our provision for income taxes for the periods
presented and the percentage change from the prior year:
Three Months Ended September 30, Percent Change
(dollars in thousands) 2022 2021 2022 vs. 2021
Income tax benefit $ (13,610) $ (16,413) (17)%
Effective tax rate 24.3 % 25.4 %
Three Months Ended September 30, 2022 and 2021-For the three months ended
September 30, 2022 and 2021, we recognized income tax benefit of $13.6 million
and $16.4 million , respectively, representing effective tax rates of 24.3% and
25.4%, respectively. The differences from our federal statutory tax rate to the
effective tax rate for the three months ended September 30, 2022 , were primarily
related to state income taxes. The differences from our federal statutory tax
rate to the effective tax rate for the three months ended September 30, 2021 ,
were related to state income taxes, partially offset by state tax credits such
as HPIP.
Segment Information
Prior to the first quarter of fiscal 2023, we reported financial results under
three reportable segments: i) Senior, ii) Life, and iii) Auto & Home. Effective
July 1, 2022 , we realigned our reportable segments as a result of the change in
strategic direction established for fiscal year 2023. This realignment separated
the Healthcare Services business, which includes SelectRx and Population Health ,
out of the Senior reportable segment and into its own operating and reportable
segment. Our chief operating decision maker ("CODM") reviews discrete financial
information for Healthcare Services, separate from Senior, to make operational
and financial decisions and allocate resources, consistent with this
realignment. As a result, the Company now reflects four reportable segments: i)
Senior, ii) Healthcare Services, iii) Life, and iv) Auto & Home, and all prior
periods have been restated to reflect the new presentation. In addition, we
account for non-operating activity, share-based compensation expense, certain
intersegment eliminations, and the costs of providing corporate and other
administrative services in our administrative division, Corporate &
Eliminations. These services are not directly identifiable with our reportable
segments and are shown in the tables below to reconcile the reportable segments
to the condensed consolidated financial statements. We have not aggregated any
operating segments together to represent a reportable segment.
Costs of revenue, cost of goods sold-pharmacy revenue, marketing and
advertising, selling, general, and administrative, and technical development
operating expenses that are directly attributable to a segment are reported
within the applicable segment. Indirect costs of revenue, marketing and
advertising, selling, general, and administrative, and technical development
operating expenses are allocated to each segment based on varying metrics such
as headcount. Adjusted EBITDA is calculated as total revenue for the applicable
segment less direct and allocated costs of revenue, cost of goods sold,
marketing and advertising, technical development, and selling, general, and
administrative operating costs and expenses, excluding depreciation and
amortization expense; gain or loss on disposal of property, equipment, and
software; share-based compensation expense; and non-recurring expenses such as
severance payments and transaction costs. Our CODM does not separately evaluate
assets by segment; therefore, assets by segment are not presented.
The following tables present information about the reportable segments for the
periods presented:
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P&C Insurance Software Market Size, Growth, Sales Value and Forecast 2021-2031
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