MediaAlpha, Inc. (NYSE: MAX) — Q3 2020 Form 10-Q
Reporting period: Quarter ended September 30, 2020. MediaAlpha, Inc. was formed in July 2020 and had only formation-related activity through quarter-end; the operating results below are for QL Holdings LLC (QLH), the predecessor business. The filing is unaudited. MediaAlpha completed its reorganization on October 27 and IPO on October 30, 2020.
Business context
MediaAlpha operates a technology platform that connects insurance carriers and distributors with high-intent consumers through purchased consumer referrals. Its principal verticals are property and casualty (P&C), health, and life insurance. Revenue is primarily recognized on open-platform referrals; private-platform revenue is generally a transaction fee.
Financial performance
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Revenue | $151.5 million | $110.4 million | $394.6 million | $281.9 million |
| Gross profit | $20.7 million | $17.7 million | $58.9 million | $44.7 million |
| Gross margin | 13.7% | 16.0% | 14.9% | 15.9% |
| Operating income | $8.4 million | $9.7 million | $30.7 million | $12.7 million |
| Net income | $4.8 million | $7.8 million | $23.8 million | $7.4 million |
| Adjusted EBITDA (non-GAAP) | $14.0 million | $11.7 million | $39.9 million | $29.0 million |
| Contribution (non-GAAP) | $21.7 million | $18.7 million | $61.8 million | $47.8 million |
| Contribution margin (non-GAAP) | 14.3% | 16.9% | 15.7% | 17.0% |
Q3 revenue increased 37.3%, while net income fell 37.8%; nine-month revenue increased 40.0% and net income rose 219.9%. The filing attributes Q3 net-income pressure in part to IPO-related professional fees and a $2.0 million debt-extinguishment loss. Adjusted EBITDA and Contribution are non-GAAP measures and should be considered alongside GAAP results.
- Revenue mix and growth: P&C revenue rose 73.2% in Q3 and 75.0% for the nine months; health rose 19.6% and 37.1%, respectively. Life declined 11.8% in Q3 and 4.9% for the nine months. “Other,” principally affected by travel, fell 79.8% in Q3 and 64.7% for the nine months.
- Margins: Cost of revenue grew faster than revenue, reducing gross margin. Management said lower Contribution Margin reflected growth from a supply partner on a zero-revenue-share basis; the revenue share began October 1, 2020.
- Cash flow: Nine-month operating cash flow was $39.3 million, investing cash flow was negative $10.2 million, and financing cash flow was negative $27.2 million. Operating cash flow benefited from increases in accounts payable and accrued expenses, partly offset by higher receivables and other assets.
- Liquidity and debt: At September 30, QLH had $12.0 million cash, $76.7 million current assets, and $80.7 million current liabilities. Long-term debt was $205.4 million net of issuance costs, under a $210 million term loan; its $5 million revolving facility was undrawn. The term loan matures in September 2023 and has variable-rate interest, quarterly principal payments, financial covenants, and collateral over substantially all assets.
Material changes, outlook, and risks
- IPO and debt repayment: The IPO raised $124.2 million net of underwriting discounts and commissions. Proceeds included $84.3 million to repurchase QLH units, $23.6 million to repay term-loan borrowings, and $16.3 million for offering costs and general corporate purposes. QL repaid a further $23.6 million of the term loan on December 1, 2020.
- Partnership and investment: QLH entered a 10-year exclusive click-monetization partnership beginning October 1, 2020, paid $5.0 million upfront, and invested $10.0 million for a 7% interest in the partner. The investment was subject to impairment review; none was recorded through September 30.
- COVID-19: Management reported a sharp decline in travel revenue and did not expect a recovery in the foreseeable future. Travel was 0.8% of Q3 2020 revenue versus 11.1% in Q3 2019. Management did not expect a material effect on liquidity or capital position, but the broader impact remained uncertain.
- Concentration and partner changes: One customer accounted for approximately 30% of Q3 revenue and 25% of receivables at quarter-end. Two suppliers represented 25% of Q3 purchases. A supply-partner relationship was terminated October 19; the filing gives differing revenue shares in separate passages (3.5% and 3.8% for Q3), which should be checked against the original filing.
- Tax receivables agreement: MediaAlpha agreed to pay specified holders 85% of certain realized or deemed tax savings. The filing estimates approximately $161.2 million of potential payments under a hypothetical assumption that all remaining QLH units were acquired in taxable transactions at the IPO price; actual amounts and timing may differ and could affect liquidity.
- Controls and contingencies: Disclosure controls were deemed ineffective because a material weakness in accounting for equity-based compensation remained unremediated. Management reported remediation efforts underway. The company reported no litigation reserves and did not expect existing legal matters to have a material adverse effect.
- Outlook: No numerical financial guidance is provided. Management cited digital insurance acquisition trends as potential growth drivers, while highlighting seasonality, partner dependence, competition, regulation, data/privacy and cybersecurity exposure, and variable-rate debt and covenant risks.
Investor verification priorities
- Confirm the post-IPO share count, ownership structure, potential Class B-1 unit exchanges, and equity-award dilution.
- Review debt terms, covenant headroom, variable-rate exposure, and the effect of the December 2020 prepayment.
- Assess customer and supplier concentration, the terminated partner’s actual revenue contribution, and the economics of the new exclusive partnership.
- Track remediation of the equity-compensation control weakness and any subsequent financial-reporting corrections.
- Evaluate the tax receivables agreement’s potential cash obligations against realized tax savings and available distributions.