SelectQuote, Inc. Form 10-Q Summary
Reporting period: Fiscal third quarter and nine months ended March 31, 2024, compared with the corresponding periods ended March 31, 2023. The filing is for fiscal 2024 Q3, despite the request metadata referencing 2023 Q3.
Business context
SelectQuote operates a technology-enabled, direct-to-consumer distribution platform for insurance and healthcare services. Reportable segments are Senior, Healthcare Services, Life, and Auto & Home. Senior results are seasonal, with the Medicare annual and open enrollment periods concentrated in the second and third fiscal quarters. Healthcare Services primarily includes SelectRx pharmacy operations and Population Health.
Key financial metrics
| Metric | Three months ended March 31, 2024 | Three months ended March 31, 2023 | Nine months ended March 31, 2024 | Nine months ended March 31, 2023 |
|---|---|---|---|---|
| Revenue | $376.4 million | $299.4 million | $1,014.6 million | $781.1 million |
| Income from operations | $33.1 million | $33.7 million | $65.9 million | $47.2 million |
| Net income (loss) | $8.6 million | $9.3 million | $(3.1) million | $(10.7) million |
| Adjusted EBITDA | $46.6 million | $44.0 million | $102.6 million | $80.1 million |
| Operating cash flow | Not separately provided | Not separately provided | $(4.8) million | $(12.8) million |
| Net interest expense | $24.3 million | $21.1 million | $70.1 million | $58.9 million |
Margins: Third-quarter operating margin was approximately 8.8%, compared with 11.3% in the prior-year quarter. Net margin was approximately 2.3%, compared with 3.1%. Nine-month operating margin was approximately 6.5%, compared with 6.0%; the nine-month net margin remained negative.
Commission revenue increased 17% to $230.8 million in the quarter and 15% to $611.7 million year to date. Pharmacy revenue increased 80% to $120.3 million in the quarter and 103% to $323.9 million year to date. Other revenue declined 28% in the quarter and 10% year to date.
As of March 31, 2024, cash and cash equivalents were $37.8 million, down from $83.2 million at June 30, 2023. Total assets were $1.245 billion and shareholders’ equity was $346.8 million. Accounts receivable were $253.1 million and commissions receivable, current and long term, totaled $833.1 million.
Total debt was $686.0 million, consisting primarily of $691.4 million of Term Loans net of issuance costs and discounts. The Term Loans had a stated effective interest rate of 14.8%. The company had $37.7 million of current debt and $648.3 million of long-term debt. The $73.0 million revolving facility was undrawn and fully available at March 31, 2024.
Material changes versus the prior comparable period
- Total revenue grew 26% in the quarter and 30% year to date, principally because of SelectRx growth and higher Senior commission revenue.
- SelectRx members increased 67% year over year to 75,074 at March 31, 2024. Prescriptions per day increased to 20,216 from 11,737 in the quarter.
- Senior revenue increased 10% in the quarter and 11% year to date. Approved Senior policies increased 9% in the quarter and 8% year to date; Medicare Advantage lifetime value per approved policy increased 3% in the quarter and 4% year to date.
- Healthcare Services Adjusted EBITDA improved to $1.6 million from a $3.4 million loss in the quarter and to $6.9 million from a $24.5 million loss year to date, although pharmacy cost of goods sold rose 70% in the quarter and 84% year to date.
- Senior Adjusted EBITDA increased modestly in the quarter to $61.5 million but was essentially flat year to date at $138.9 million, as higher revenue was offset by marketing and compensation costs.
- Life Adjusted EBITDA declined 41% in the quarter and 21% year to date. Auto & Home Adjusted EBITDA increased 39% in the quarter and 59% year to date.
- Marketing and advertising expense increased 21% in both the quarter and year to date. Interest expense increased 15% in the quarter and 19% year to date because of higher interest rates.
- Cash used in operating activities improved from $12.8 million to $4.8 million year to date, but the company continued to consume cash. Accounts receivable increased $98.5 million during the nine months.
Guidance, outlook, risks, contingencies, and unusual items
Management stated that available cash and borrowing capacity are expected to meet projected operating and debt-service requirements for at least the next 12 months and that the company expects to remain in compliance with its debt covenants over that period. No quantitative revenue or earnings guidance was provided.
The company stated that it does not expect to generate sufficient operating cash flow to repay all outstanding amounts under the Senior Secured Credit Facility at its May 15, 2025 maturity. It may need refinancing, additional financing, asset sales, or significant reductions in operations. Failure to refinance or comply with covenants could result in default and materially impair liquidity.
After quarter-end, on May 8, 2024, the company entered into a Ninth Amendment extending the maturity of $683.8 million of extended Term Loans to May 15, 2025, adding future asset-coverage and minimum-liquidity requirements, and requiring $0.7 million of lender fees.
The company uses a $325.0 million interest-rate swap that terminates November 5, 2024. It reported no covenant violations as of March 31, 2024. The company identified customer concentration: three customers represented 65% of quarterly revenue and 63% of nine-month revenue.
Pending securities class-action litigation was dismissed on March 28, 2024, with leave to amend; plaintiffs’ deadline for a second amended complaint was May 31, 2024. A related derivative action remains stayed. The company has not accrued a liability because it has not concluded that a loss is probable.
Other notable items include $7.6 million of year-to-date transaction costs, $10.5 million of share-based compensation expense, and a $1.7 million net favorable commission revenue adjustment from changes in estimates, including a $1.8 million unfavorable Senior adjustment.
Investor verification points
- Verify the company’s refinancing or repayment plan for approximately $683.8 million of extended Term Loans maturing May 15, 2025.
- Monitor minimum liquidity and asset-coverage covenant compliance following the Ninth Amendment.
- Assess whether SelectRx growth can continue while maintaining pharmacy margins, given the rapid increase in medication and fulfillment costs.
- Evaluate cash conversion and working-capital needs, particularly the growth in accounts receivable and the large commissions-receivable balance.
- Review the impact of higher interest rates and the November 2024 expiration of the interest-rate swap.
- Track customer concentration, carrier mix, policy persistency, submitted-to-approved conversion rates, and commission-estimate changes.
- Follow the securities litigation and related derivative action for potential costs, management distraction, or adverse developments.