SelectQuote, Inc. Form 10-Q Summary
Business context and reporting period
SelectQuote is a technology-enabled, direct-to-consumer distributor of senior health, life, auto and home insurance, and healthcare services. The filing covers the three and six months ended December 31, 2022, representing fiscal 2023 second-quarter and year-to-date results. Effective July 1, 2022, Healthcare Services, including SelectRx and Population Health, became a separate reportable segment from Senior.
Key financial metrics
| Metric | Three months ended Dec. 31, 2022 | Six months ended Dec. 31, 2022 |
|---|---|---|
| Revenue | $319.2 million, up 64% | $481.7 million, up 38% |
| Operating income (loss) | $53.0 million; 16.6% margin | $13.5 million; 2.8% margin |
| Net income (loss) | $22.5 million; 7.1% margin | $(20.0) million; (4.1)% margin |
| Adjusted EBITDA | $63.6 million; 19.9% of revenue | $36.1 million; 7.5% of revenue |
| Net cash used in operating activities | Not separately provided | $(75.6) million |
Quarterly revenue consisted of $230.0 million of commission revenue, $51.6 million of pharmacy revenue, and $37.6 million of other revenue. Year-to-date revenue consisted of $336.4 million of commission revenue, $92.7 million of pharmacy revenue, and $52.6 million of other revenue.
- Senior revenue was $223.8 million in the quarter and $301.3 million year to date. Senior adjusted EBITDA was $83.6 million and $79.8 million, respectively.
- Healthcare Services revenue was $55.5 million in the quarter and $98.5 million year to date, driven by SelectRx growth. Segment adjusted EBITDA remained negative at $(9.3) million and $(21.1) million.
- Life revenue was $34.0 million in the quarter and $70.8 million year to date; Auto & Home revenue was $7.8 million and $14.9 million, respectively.
- SelectRx members increased 411% year over year to 39,308 at December 31, 2022.
- Cash and cash equivalents declined to $36.1 million from $141.0 million at June 30, 2022. Total debt was $691.5 million, including $704.9 million of Term Loans before unamortized issuance costs and discounts; the effective interest rate was 13.3%.
- The company had no borrowings under its $100.0 million revolving facility at December 31, 2022, and reported all revolving capacity as available.
Material changes versus the prior comparable period
- Revenue growth was primarily driven by the expansion of SelectRx and a favorable comparison with the prior year, which included a significant Senior cohort adjustment. Excluding the $145.0 million Senior cohort adjustment recorded in the prior-year comparable periods, Senior commission revenue declined because approved policies and estimated lifetime value per policy decreased.
- Senior submitted policies declined 31% in the quarter and 28% year to date; approved policies declined 24% and 21%, respectively. Management attributed the reductions to its strategy of reducing Senior distribution activity and reallocating resources toward Healthcare Services.
- Marketing and advertising expense declined 53% in the quarter and 48% year to date, while cost of revenue declined 33% and 30%, respectively, primarily because of lower lead volumes, agent headcount, compensation, licensing, and facility-related costs.
- Pharmacy cost of goods sold increased 392% in the quarter and 515% year to date, broadly tracking the growth of SelectRx medication and fulfillment activity.
- Interest expense nearly doubled year over year to $21.0 million in the quarter and increased to $37.8 million year to date, reflecting debt amendments, higher borrowings, and financing-cost amortization.
- Operating cash use improved from $(305.7) million to $(75.6) million year to date, but commissions receivable increased by $114.7 million and remained a significant working-capital use.
Guidance, outlook, risks, contingencies, and unusual items
- No quantitative full-year revenue or earnings guidance is provided. Management stated that available liquidity under the Senior Secured Credit Facility is expected to fund operating and debt-service requirements for at least the next 12 months, subject to business performance and covenant compliance.
- The Senior Secured Credit Facility matures November 5, 2024. Term Loans require scheduled amortization, increasing to an annualized 4.75% of the applicable outstanding principal beginning July 1, 2023, with the remaining balance due at maturity. The company was in compliance with its covenants at December 31, 2022.
- Interest-rate exposure is partially hedged through a $325.0 million SOFR-based interest-rate swap terminating November 5, 2024. The swap had a $20.6 million fair value, and approximately $12.4 million was expected to be reclassified into interest expense over the following 12 months.
- The company corrected previously issued comparative financial statements for commission-revenue and lapse-rate errors related to final-expense policies. The six months ended December 31, 2021 were reduced by $2.2 million of revenue and $1.6 million of net income. Management concluded the prior-period errors were not material, but the cumulative correction was significant to certain interim periods.
- Management reported remediation of the previously disclosed material weakness in internal control over financial reporting as of December 31, 2022. Continued operating effectiveness of the remediated controls remains a risk.
- Consolidated results remain exposed to policy persistency and lapse-rate estimates, carrier payment timing, customer concentration, Senior seasonality, interest rates, high leverage, SelectRx execution and profitability, and the need to fund commission receivables and upfront marketing costs.
- The company is defending consolidated securities class-action litigation and a stayed stockholder derivative action. It has not accrued a liability because it has not concluded that a loss is probable; an unfavorable resolution could nevertheless be costly and materially adverse.
Most important facts for investors to verify
- Whether SelectRx can convert rapid revenue and membership growth into positive segment adjusted EBITDA and operating cash flow.
- Liquidity runway, cash collections on approximately $953.3 million of commissions receivable, and compliance with minimum liquidity and asset-coverage covenants.
- Ability to refinance or repay the approximately $704.9 million Term Loan principal due at or before the November 2024 maturity.
- Sustainability of Senior policy volumes, lifetime-value estimates, persistency assumptions, and the reduced marketing-spend strategy.
- Whether the corrected lapse-rate controls remain effective and whether further revenue or receivable adjustments arise.
- Potential financial and governance consequences of the pending securities and derivative litigation.