SelectQuote, Inc. Form 10-Q Summary
Reporting period: Fiscal quarter and nine months ended March 31, 2021, compared with the periods ended March 31, 2020. The request identifies “2020 Q3,” but the filing is for fiscal third quarter 2021. SelectQuote is a technology-enabled insurance distributor serving Senior, Life, and Auto & Home markets.
Financial performance
| Metric | Q3 FY2021 | Q3 FY2020 | 9M FY2021 | 9M FY2020 |
|---|---|---|---|---|
| Revenue | $266.9 million | $148.6 million | $749.4 million | $390.1 million |
| Income from operations | $54.7 million | $40.4 million | $186.1 million | $96.5 million |
| Operating margin | 20.5% | 27.2% | 24.8% | 24.7% |
| Net income | $36.5 million | $23.7 million | $127.7 million | $61.1 million |
| Net margin | 13.7% | 16.0% | 17.0% | 15.7% |
| Adjusted EBITDA | $65.2 million | $44.1 million | $206.8 million | $113.9 million |
| Diluted EPS | $0.22 | $0.17 | $0.77 | $(0.38) |
Commission revenue increased 72% in the quarter and 88% year to date. Production bonus and other revenue increased 170% in the quarter and 135% year to date. Growth was concentrated in Senior, supplemented by Life’s final expense business and advertising revenue from InsideResponse.
- Senior: Q3 revenue increased 101% to $215.6 million; nine-month revenue increased 121% to $604.3 million. Senior Adjusted EBITDA was $75.5 million in Q3 and $218.9 million year to date.
- Life: Q3 revenue increased 50% to $46.4 million; nine-month revenue increased 43% to $125.6 million, primarily from final expense policies.
- Auto & Home: Q3 revenue declined 33% to $7.0 million; nine-month revenue declined 18% to $23.8 million, reflecting the shift of agents to Senior and Life.
Cash flow, balance sheet, debt, and liquidity
- Cash used in operating activities was $60.9 million for the nine months, compared with $42.0 million used in the prior-year period. The outflow primarily reflected a $251.2 million increase in commissions receivable and a $52.9 million increase in accounts receivable as policy volumes expanded.
- Cash used in investing activities was $36.2 million, including $6.5 million for property and equipment, $5.8 million for software and capitalized development, and approximately $24.0 million for the lead distribution company acquisition.
- Cash provided by financing activities was $97.3 million, including $228.8 million of net term-loan proceeds, offset by term-loan repayments, the $32.3 million InsideResponse earnout payment, and $10.0 million of employee award tax withholdings.
- Cash and cash equivalents were $369.0 million at March 31, 2021, versus total cash, cash equivalents, and restricted cash of $368.9 million at June 30, 2020. Restricted cash was zero at March 31, 2021.
- Debt was $460.6 million net of issuance costs and discount, compared with $311.8 million at June 30, 2020. Term-loan principal outstanding was $471.9 million.
- The amended credit facility provides a $145.0 million delayed-draw term-loan facility and a $75.0 million revolving facility; neither was drawn at March 31, 2021. Term loans mature November 5, 2024, with scheduled amortization beginning March 31, 2022.
- Management stated that existing cash and available credit are expected to fund projected operating and debt-service requirements for at least the next 18 months. The company was in compliance with its debt covenants at March 31, 2021.
Material changes versus the prior comparable period
- Total revenue grew 80% in Q3 and 92% for the nine months, while total operating costs grew 96% and 92%, respectively. Marketing and advertising increased 111% in Q3 and 126% year to date.
- Operating margin declined in Q3 to 20.5% from 27.2%, primarily because marketing, agent compensation, and other growth investments increased faster than revenue. Year-to-date operating margin was broadly stable.
- Senior submitted policies increased 107% in Q3 and 109% year to date; approved policies increased 110% and 116%, respectively. Average productive Senior agents increased approximately 75% in both comparison periods.
- Senior rolling twelve-month Adjusted EBITDA per MA/MS approved policy decreased to $543 from $614, and the Adjusted EBITDA margin per policy declined to 36% from 41%. Revenue-to-CAC declined to 3.1x from 3.6x.
- The company entered into a February 2021 credit-facility amendment, increasing term debt and changing pricing, covenants, and available borrowing capacity. A $3.3 million loss on debt extinguishment was recognized.
- The February 2021 acquisition of a lead distribution company added $2.6 million of Senior lead-generation revenue through March 31, 2021. Its potential earnout is up to $3.5 million, but no earnout liability had been accrued at quarter end.
- The company completed a 10.6 million-share secondary offering in March 2021. Existing shareholders sold the shares; SelectQuote received no proceeds and issued no additional shares.
Outlook, commentary, risks, and unusual items
- No specific quantitative revenue, EBITDA, or earnings guidance is provided in the filing. Management expects current liquidity to cover at least the next 18 months but notes that additional financing could be required if liquidity becomes insufficient.
- Results are seasonal: Senior commission revenue is highest during the October–December annual enrollment period and remains elevated during the January–March open enrollment period. This timing increases working-capital needs because marketing costs are paid upfront while commissions are collected over time.
- Management reported no material adverse impact from COVID-19 to date but continues to monitor the pandemic and its potential effects.
- Revenue estimates depend partly on expected policy renewals and persistency. Lower Senior persistency and carrier-mix changes reduced Medicare Advantage lifetime value per approved policy by 1% and Medicare Supplement lifetime value by 9% in Q3.
- Three Senior carrier customers represented 25%, 20%, and 15% of Q3 revenue, indicating meaningful customer concentration.
- Unusual or non-recurring Q3 items included $3.3 million of debt-extinguishment loss, $4.7 million of non-recurring expenses, $0.3 million of contingent earnout fair-value adjustments, and costs associated with the debt amendment, acquisition, hedge redesignation, and secondary offering.
- The company early adopted lease accounting on July 1, 2020, recording $41.3 million of lease liabilities and $29.7 million of right-of-use assets.
- Management reported no material litigation, no off-balance-sheet arrangements, no material changes to previously disclosed risk factors, and effective disclosure controls as of March 31, 2021.
- After quarter end, on April 30, 2021, the company acquired Express Med Pharmaceutical Inc. for up to $24.0 million, including $17.5 million paid in cash at closing, a $2.5 million holdback, and a potential $4.0 million earnout.
Important facts for investors to verify
- Whether Senior policy growth and agent expansion can continue without further deterioration in lifetime value, CAC efficiency, or operating margins.
- The collectability and timing of the $684.6 million long-term commissions receivable and $79.6 million current commissions receivable.
- Debt-service capacity, interest-rate exposure, covenant compliance, and refinancing requirements before the November 2024 maturity.
- The sustainability of production bonuses, marketing development funds, and InsideResponse advertising revenue.
- Exposure to concentrated insurance-carrier relationships and changes in carrier commission rates, persistency, and product mix.
- The financial contribution and contingent consideration associated with the February and April 2021 acquisitions.
- Reconciliation and limitations of Adjusted EBITDA, which is a non-GAAP measure and excludes interest, taxes, depreciation and amortization, share-based compensation, and other items.