MediaAlpha, Inc. — Q3 2023 Form 10-Q
Reporting period: Three and nine months ended September 30, 2023. MediaAlpha operates a digital customer-acquisition platform connecting insurance buyers with high-intent consumers. Unless otherwise noted, financial amounts below are in millions of dollars.
Business context and operating performance
Performance was affected by lower customer-acquisition spending from property and casualty (P&C) insurers amid underwriting losses and claims-cost inflation. Health insurance grew, partly offsetting weakness in P&C, life, and other verticals. Q3 Consumer Referrals purchased increased to 23.2 million from 21.1 million, while Transaction Value declined.
Key financial results
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Revenue | $74.6 | $89.0 | $271.0 | $335.1 |
| Gross profit / margin | $12.3 / 16.5% | $12.7 / 14.2% | $44.4 / 16.4% | $49.9 / 14.9% |
| Operating loss | $(14.7) | $(10.6) | $(40.4) | $(28.9) |
| Net loss | $(18.7) | $(21.2) | $(53.3) | $(44.1) |
| Net loss attributable to MediaAlpha | $(13.5) | $(14.5) | $(38.1) | $(30.7) |
| Class A loss per share | $(0.29) | $(0.34) | $(0.84) | $(0.74) |
| Adjusted EBITDA (non-GAAP) | $3.6 | $2.2 | $14.4 | $13.8 |
| Operating cash flow | Not separately provided | Not separately provided | $14.9 | $35.0 |
Q3 Contribution Margin, a company-defined non-GAAP measure, was 20.2%, compared with 17.4%. For the nine months it was 19.6%, versus 17.3%. Revenue fell 16.2% in Q3 and 19.1% year to date; lower supplier revenue-share costs helped support gross and contribution margins. General and administrative expense rose 49.9% in Q3, including higher legal costs and the comparison against a prior-year contingent-consideration gain. Interest expense rose 52.2% in Q3 and 92.9% year to date, primarily reflecting higher borrowing rates.
Revenue mix and changes
- Q3 P&C revenue fell 27.2% to $31.9 million; health increased 1.7% to $34.0 million; life declined 23.4% to $5.3 million; and other revenue declined 30.5% to $3.3 million.
- Nine-month P&C revenue fell 33.0% to $126.5 million; health rose 6.0% to $115.2 million; life fell 13.0% to $18.3 million; and other fell 33.7% to $10.9 million.
- Q3 Transaction Value decreased 25.7% to $109.0 million; nine-month value fell 24.7% to $428.1 million. Open Marketplace transactions represented a greater share of Q3 activity, supporting reported revenue because they are recognized gross.
Cash, debt, and liquidity
- At September 30, cash was $15.2 million, versus $14.5 million at year-end 2022. Current assets were $51.0 million and current liabilities $60.3 million, a $9.2 million working-capital deficit.
- Debt principal outstanding was $178.4 million: $173.4 million under the term loan and $5.0 million drawn on the revolver. The balance-sheet debt carrying amount, net of issuance costs, was $176.5 million. Revolver capacity available was $45.0 million. The facilities mature in July 2026 and bear variable rates linked to SOFR or the base rate.
- Operating cash flow was $14.9 million for the first nine months, down from $35.0 million. Investing used $0.1 million; financing used $14.2 million. Cash interest paid was $10.1 million.
- The company reported compliance with all financial covenants at quarter-end and stated it expects available cash, operating cash flow, and revolver capacity to meet requirements and maintain covenant compliance for at least 12 months. It also warned that weaker-than-expected results could threaten covenant compliance.
Outlook, risks, and notable items
- Management expects P&C carrier acquisition spending to remain depressed in Q4 2023 and anticipates an increase beginning in Q1 2024, but said the recovery could be delayed or not occur. Its timing depends on carrier profitability, claims costs, catastrophic losses, and regulatory approval of premium increases. No specific financial guidance figures are provided.
- A major carrier partner materially reduced spending beginning in late March 2023, reducing expected near-term revenue, Adjusted EBITDA, and covenant cushion. Management cited cost reductions, including a Q2 workforce reduction, as supporting year-over-year Adjusted EBITDA growth.
- The FTC issued a civil investigative demand in February 2023 concerning healthcare-product marketing, consumer data practices, telemarketing, and privacy/security. MediaAlpha is cooperating; it said the outcome and significance cannot currently be predicted. Related legal fees were $3.0 million year to date; the filing also identifies legal costs associated with an unrelated settlement.
- A cost-method investment was written down by $1.4 million during the first nine months; its carrying value was zero at quarter-end. CHT acquisition contingent consideration was also valued at zero, although the undiscounted amount potentially payable was stated as up to $15.0 million.
- The company recorded a full valuation allowance against deferred tax assets. TRA liabilities were remeasured to zero; the filing says a liability of approximately $88 million would have been recorded if payment and realization of related tax benefits had been considered probable. TRA payments totaled $2.8 million year to date.
- Other disclosed risks include variable-rate debt, reliance on partners and internet search traffic, seasonality, regulation and privacy requirements, and customer/supplier concentration. One supplier represented 14% of Q3 purchases; one customer represented 15% of receivables at quarter-end.
Important facts for investors to verify
- Whether P&C carrier spending recovers as expected and whether the largest carrier partner resumes or further reduces spending.
- Debt covenant definitions, headroom and compliance trajectory if revenue or Adjusted EBITDA weakens; also the effect of variable rates on interest costs.
- Developments in the FTC inquiry, related compliance costs, and any potential business or financial impact.
- Cash conversion and working-capital trends, including collection of concentrated receivables and supplier concentration.
- Potential CHT contingent consideration and the assumptions underlying the zero valuation; also the status of deferred tax assets and possible future TRA obligations.