SelectQuote, Inc. — Form 10-Q Summary
Business context and reporting period
SelectQuote operates a technology-enabled, direct-to-consumer insurance distribution platform across Senior, Life, and Auto & Home segments. It earns commissions and production bonuses from insurance carriers and has expanded into lead generation and prescription services through InsideResponse and SelectRx. The filing covers the three months ended September 30, 2021, the first quarter of fiscal 2022, compared with the three months ended September 30, 2020.
Results are seasonal: Senior activity and related marketing costs generally increase ahead of the Medicare annual enrollment period, while commission revenue is typically strongest in the second and third fiscal quarters.
Key financial metrics
| Metric | Q1 FY2022 | Q1 FY2021 | Change |
|---|---|---|---|
| Total revenue | $159.9 million | $124.2 million | +29% |
| Commission revenue | $134.7 million | $106.5 million | +26% |
| Production bonus and other revenue | $25.3 million | $17.6 million | +43% |
| Operating income (loss) | $(52.2) million | $7.3 million | Declined |
| Operating margin | (32.6%) | 5.9% | Down 38.5 percentage points |
| Net income (loss) | $(45.4) million | $0.8 million | Declined |
| Net margin | (28.4%) | 0.7% | Down 29.1 percentage points |
| Adjusted EBITDA | $(44.0) million | $12.1 million | Declined |
| Adjusted EBITDA margin | (27.5%) | 9.7% | Down 37.2 percentage points |
| Net cash used in operating activities | $(87.1) million | $(9.3) million | Higher use |
| Cash and cash equivalents | $183.6 million | Not directly comparable in the balance sheet | Down from $286.5 million at June 30, 2021 |
Operating expenses increased to $212.1 million from $116.9 million. Cost of revenue rose 81% to $92.2 million, marketing and advertising rose 82% to $90.7 million, general and administrative expense rose 92% to $23.4 million, and technical development expense rose 52% to $5.9 million.
At September 30, 2021, commissions receivable totaled $903.7 million, including current and long-term amounts. Total assets were $1.39 billion and shareholders’ equity was $633.8 million.
Debt and liquidity
- Term loan principal outstanding was $471.9 million; reported total debt, net of issuance costs and discounts, was $462.2 million.
- The senior secured credit facility matured on November 5, 2024, with mandatory term-loan amortization beginning March 31, 2022. The company was in compliance with its covenants at September 30, 2021.
- No amounts had been drawn under the $75.0 million revolving facility or the $145.0 million delayed-draw term loan facility at September 30, 2021.
- Management stated that available cash and financing resources were expected to meet projected operating and debt-service needs for at least the next 12 months, while noting that additional funding could be required if liquidity becomes insufficient.
- Cash used in investing activities was $17.8 million, including $7.8 million of property and equipment purchases, $3.0 million of software investment, and $6.9 million paid for the Simple Meds acquisition.
Material changes versus the prior comparable period
- Senior revenue increased 45% to $106.3 million, primarily from a 64% increase in Medicare Advantage commission revenue, SelectRx revenue, and higher marketing development funds.
- Life revenue increased 16% to $49.8 million, driven by a 51% increase in final expense revenue, partly offset by an 18% decline in term revenue.
- Auto & Home revenue decreased 22% to $7.5 million as management reduced growth in that division.
- Senior submitted policies increased 64% to 130,640 and approved policies increased 60% to 111,485. Medicare Advantage approved policies nearly doubled, while Medicare Supplement approved policies declined sharply.
- Senior Adjusted EBITDA declined to $(33.0) million from $8.9 million, primarily because marketing, personnel, and fulfillment costs were incurred ahead of the annual enrollment period.
- Life Adjusted EBITDA declined 55% to $4.7 million, and Auto & Home Adjusted EBITDA declined 62% to $1.4 million.
- The company’s revenue growth was more than offset by higher lead-generation spending, agent compensation, infrastructure costs, and SelectRx medication costs.
Guidance, outlook, risks, contingencies, and unusual items
- The filing does not provide quantitative earnings or revenue guidance. Management expects seasonal activity related to Medicare enrollment and believes current liquidity is sufficient for at least the next 12 months.
- On November 2, 2021, after quarter-end, the credit facility was amended to increase revolving capacity to $100.0 million and delayed-draw capacity to $345.0 million, subject to conditions. At least $100.0 million of the additional delayed-draw capacity was required to be drawn by January 31, 2022 after the existing delayed-draw capacity was used.
- The company acquired Simple Meds on August 31, 2021 for total purchase consideration of $7.4 million, including $5.7 million of goodwill. Simple Meds generated $1.0 million of revenue during the post-acquisition period through September 30, 2021.
- Unamortized fiscal 2022 marketing development funds of $17.0 million were recorded as other current liabilities.
- Cash flow was negatively affected by the timing difference between upfront marketing expenditures and collection of commissions over the policy life; commissions receivable increased by $57.8 million during the quarter.
- Two putative securities class actions were filed in August and October 2021. The company believes the claims are without merit, has not accrued a liability because a loss is not considered probable, and states that the matters could nevertheless be costly and divert management resources.
- COVID-19 had not materially adversely affected consolidated operations as of the filing, but management continued to monitor potential disruptions.
- Key risks include lower policy persistency and lifetime commission value, marketing-cost volatility, dependence on insurance carriers, seasonal cash requirements, high leverage and interest-rate exposure, execution of acquisitions, and potential litigation or regulatory matters.
Important facts for investors to verify
- Whether the sharp increase in Senior policy volume converts into sustainable revenue and cash collections without further deterioration in lifetime value per policy.
- Whether marketing, agent, and fulfillment costs normalize after the annual enrollment period and whether Senior Adjusted EBITDA returns to positive levels.
- The collection, aging, and recoverability of the $903.7 million commissions receivable balance.
- Liquidity after operating cash use of $87.1 million and the scheduled commencement of term-loan amortization in March 2022.
- Future borrowing under the expanded delayed-draw facility and the resulting interest expense and leverage.
- Performance of SelectRx, Simple Meds, and other acquired businesses, including potential earnouts and integration costs.
- Developments and potential financial impact of the securities litigation and any related regulatory or sales-practice matters.
- The assumptions supporting deferred tax asset realization and estimated renewal commissions, including policy persistency and lapse rates.