SelectQuote, Inc. Fiscal 2020 Form 10-K Summary
Reporting period: Year ended June 30, 2020. The requested “2019 Q4” period does not match this filing; the filing is the fiscal 2020 annual report and includes quarterly data for the fourth quarter ended June 30, 2020.
Business context
SelectQuote operates a technology-enabled, direct-to-consumer insurance distribution platform. It earns commissions, production bonuses and marketing development funds from insurance carriers for distributing Senior, Life and Auto & Home policies. The company does not underwrite insurance risk. Senior was the largest segment and represented 68% of total revenue in fiscal 2020, compared with 57% in fiscal 2019.
The company completed its IPO on May 26, 2020, and its common stock began trading on the NYSE on May 21, 2020 under the symbol SLQT. It also acquired InsideResponse on May 1, 2020.
Financial performance
| Metric | FY2020 | FY2019 | Change |
|---|---|---|---|
| Total revenue | $531.5 million | $337.5 million | Up 58% |
| Commission revenue | $476.6 million | $296.0 million | Up 61% |
| Production bonus and other revenue | $54.9 million | $41.5 million | Up 32% |
| Income from operations | $132.3 million | $96.3 million | Up 37% |
| Operating margin | 24.9% | 28.5% | Down 3.6 points |
| Net income | $81.1 million | $72.6 million | Up 12% |
| Net margin | 15.3% | 21.5% | Down 6.2 points |
| Adjusted EBITDA | $154.0 million | $105.3 million | Up 46% |
| Adjusted EBITDA margin | 29.0% | 31.2% | Down 2.2 points |
Reported basic and diluted loss per share were each $0.16 in fiscal 2020, compared with basic earnings per share of $0.70 and diluted earnings per share of $0.55 in fiscal 2019. The fiscal 2020 per-share results were affected by preferred-stock dividends and other capital structure changes before the IPO.
Segment and operating metrics
- Senior: Revenue increased 88% to $361.7 million; Adjusted EBITDA increased 62% to $145.7 million. Approved policies increased 88% to 316,725, including a 109% increase in Medicare Advantage approvals.
- Life: Revenue increased 18% to $130.0 million; Adjusted EBITDA increased 8% to $27.8 million. Core premium was essentially flat, while ancillary premium increased 161% to $37.3 million.
- Auto & Home: Revenue increased 18% to $41.2 million; Adjusted EBITDA increased 11% to $8.7 million. Premium increased 24% to $70.1 million.
- Senior submitted policies increased 91% to 378,052. Average productive agents increased 64% and productivity per productive agent increased 24%, partly because flex agents sold during both the annual and open enrollment periods.
Cash flow, liquidity and debt
- Cash flow from operations was negative $61.8 million, compared with positive $0.1 million in fiscal 2019. The decline primarily reflected a $197.4 million increase in commissions receivable and a $15.6 million increase in accounts receivable as revenue and policy volumes expanded.
- Cash used in investing activities was $51.4 million, including $35.8 million for InsideResponse, $9.4 million for property and equipment, and $6.1 million for software and capitalized development.
- Cash provided by financing activities was $481.4 million, driven by the IPO, preferred-stock issuance and term-loan proceeds, partially offset by debt repayment and a $275.0 million shareholder distribution.
- Cash, cash equivalents and restricted cash totaled $368.9 million at June 30, 2020, including $47.8 million of restricted cash designated for term-loan interest payments.
- Debt consisted principally of $325.0 million of term-loan principal, reported net of discounts and issuance costs at $311.8 million. There were no borrowings under the $75.0 million revolving facility at year-end.
- The company repaid $29.3 million under its receivables financing agreement and recorded a $1.2 million debt-extinguishment loss. It entered into a $325.0 million interest-rate swap covering most of the term loan.
- Management stated that existing liquidity and available credit were expected to fund operating and debt-service requirements for at least the next 24 months, while noting uncertainty related to COVID-19 and future capital needs.
Material changes and unusual items
- InsideResponse was acquired for total consideration of up to $65.0 million; the preliminary recorded purchase consideration was $67.2 million, including a $30.4 million fair-value earnout liability. The acquisition added $4.6 million of revenue during the two months owned and generated $41.2 million of goodwill.
- The IPO generated approximately $333.1 million of net proceeds to the company. A portion was used to repay $100.0 million of term debt and $29.3 million of receivables financing.
- Fiscal 2020 included a $275.0 million distribution to shareholders and option holders, including $9.2 million of incremental share-based compensation related to the option-holder payment.
- Marketing and advertising expense increased 67% to $184.2 million, while cost of revenue increased 60% to $167.4 million. General and administrative expense increased 94% to $35.3 million, partly due to the distribution and higher public-company costs.
- Interest expense increased to $25.8 million from $1.7 million because of the new term loan. The company also recorded $9.5 million of share-based compensation and $3.7 million of non-recurring expenses.
- COVID-19 had no material reported effect on fiscal 2020 results through June 30, 2020. The company moved employees to remote work and stated that its technology and existing remote-agent capabilities supported the transition, but it warned that prolonged disruption could affect operations, carriers, vendors and demand.
Outlook and principal risks
No formal financial revenue or earnings guidance is provided in the filing. Management emphasizes continued growth through Senior enrollment, agent expansion, cross-selling, carrier relationships, technology and new products. Results are highly seasonal: 33% of fiscal 2020 revenue was generated in the second quarter, and 38% of Senior revenue was generated in that quarter.
- Dependence on a limited number of carriers: UnitedHealthcare-, Humana- and Aetna-owned carriers represented 26%, 18% and 11% of fiscal 2020 revenue, respectively. Carrier contracts are generally non-exclusive and may be terminable on short notice.
- Concentration in Senior and Medicare regulation, including changing CMS requirements and the risk of failing to enroll consumers during AEP or OEP.
- Revenue-recognition risk from estimates of policy persistency, renewal commissions, carrier mix and constrained lifetime value. Higher-than-expected lapse rates could require future write-offs.
- Working-capital pressure from upfront marketing costs and commissions receivable that are collected over time. Operating cash flow was negative despite strong reported net income.
- Leverage and interest-rate exposure, including $325.0 million of term debt, variable-rate provisions, restrictive covenants and LIBOR transition risk.
- Competition from carriers, traditional agents, government exchanges and online distributors; dependence on cost-effective leads, search-engine marketing and telephone contact with consumers.
- Cybersecurity, privacy, HIPAA, TCPA and other regulatory risks, as well as potential technology, vendor and remote-work disruptions.
- Goodwill increased to $46.6 million following the InsideResponse acquisition and remains subject to impairment testing.
Important facts for investors to verify
- Reconcile reported net income with operating cash flow and assess whether the growth in commissions receivable is converting into cash as expected.
- Review the term-loan covenants, maturity, interest-rate swap terms and required debt repayments through November 2024.
- Evaluate Senior segment concentration, carrier termination rights, commission-rate changes and CMS compliance requirements.
- Track policy persistency, renewal collections, approved-to-submitted conversion and the assumptions underlying lifetime commission value.
- Assess whether marketing spending and agent growth can sustain revenue growth without further margin compression.
- Review the InsideResponse earnout, acquisition accounting, related-party lead purchases and the preliminary valuation of acquired intangible assets and goodwill.
- Confirm the effect of IPO-related dilution, preferred-stock conversion, stock-based compensation and the absence of anticipated cash dividends.