SelectQuote, Inc. Form 10-Q Summary
Reporting period: Fiscal third quarter and nine months ended March 31, 2023, filed May 10, 2023. The supplied metadata identifies “2022 Q3,” but the filing covers fiscal 2023 Q3. SelectQuote operates insurance distribution and healthcare-services businesses through Senior, Healthcare Services, Life, and Auto & Home.
Key Financial Metrics
| Metric | Three months ended March 31, 2023 | Year-over-year change | Nine months ended March 31, 2023 | Year-over-year change |
|---|---|---|---|---|
| Total revenue | $299.4 million | Up 9% | $781.1 million | Up 25% |
| Operating income (loss) | $33.7 million | Compared with $2.3 million | $47.2 million | Compared with $(227.3) million |
| Net income (loss) | $9.3 million | Compared with $(7.0) million | $(10.7) million | Compared with $(192.8) million |
| Adjusted EBITDA | $44.0 million | Compared with $12.2 million | $80.1 million | Compared with $(199.7) million |
| Net cash used in operating activities | Not separately provided | — | $(12.8) million | Compared with $(284.4) million |
Third-quarter operating margin was approximately 11.3%, net margin was approximately 3.1%, and Adjusted EBITDA margin was approximately 14.7%. Nine-month operating margin was approximately 6.0%, net margin was approximately negative 1.4%, and Adjusted EBITDA margin was approximately 10.3%.
Revenue and Segment Performance
- Commission revenue: $197.3 million in the quarter, down 11%; $533.6 million year to date, up 8%. Senior commission revenue declined in the quarter as approved policies fell, while the year-to-date comparison benefited from a $145.0 million cohort adjustment recorded in the prior-year period.
- Pharmacy revenue: $66.9 million in the quarter, up 262%; $159.6 million year to date, up 403%. SelectRx members increased 165% year over year to 44,993 as of March 31, 2023.
- Senior: Quarterly revenue was $185.2 million, down 12%, while Adjusted EBITDA increased to $59.2 million from $40.0 million. Submitted policies declined 24% and approved policies declined 22%, consistent with management’s strategy to reduce Senior distribution activity.
- Healthcare Services: Quarterly revenue was $70.7 million, up 206%; Adjusted EBITDA improved to $(3.4) million from $(7.8) million, but remained negative. Nine-month Adjusted EBITDA was $(24.5) million.
- Life: Quarterly revenue declined 4% to $37.0 million, while Adjusted EBITDA improved to $5.3 million from $(2.7) million. Final-expense premiums declined while term premiums increased.
- Auto & Home: Quarterly revenue increased 15% to $8.2 million and Adjusted EBITDA increased to $2.6 million.
Cash Flow, Liquidity, Debt, and Capital Structure
- Cash and cash equivalents were $92.0 million at March 31, 2023, down from $141.0 million at June 30, 2022.
- Nine-month cash flow included $12.8 million used in operating activities, $6.9 million used in investing activities, and $29.3 million used in financing activities.
- Total debt was $692.7 million net of issuance costs and discounts, including $703.9 million of Term Loans. Net debt was approximately $600.7 million based on reported cash and debt.
- The $100.0 million revolving credit facility was undrawn and fully available at March 31, 2023. The Senior Secured Credit Facility matures November 5, 2024.
- Term Loans carried an effective interest rate of 13.3% at March 31, 2023. Interest expense increased 73% in the quarter and 88% year to date, to $21.1 million and $58.9 million, respectively.
- Mandatory annual Term Loan amortization increases to 4.75% of the applicable outstanding principal beginning July 1, 2023. The company was in compliance with its debt covenants at March 31, 2023.
- A $325.0 million notional interest-rate swap hedges part of the Term Loans and had a fair value of $17.0 million at March 31, 2023.
Material Changes Versus the Prior Comparable Period
- Revenue growth was driven primarily by the expansion of SelectRx, while the company reduced Senior marketing, agent headcount, and policy volume.
- Marketing and advertising expense declined 28% in the quarter and 42% year to date, reflecting lower lead purchases and the revised operating strategy.
- Cost of revenue declined 18% in the quarter and 26% year to date, while pharmacy cost of goods sold increased sharply with SelectRx growth.
- The company shifted from a substantial prior-year loss to quarterly profitability and positive Adjusted EBITDA, although it remained loss-making for the nine-month period.
- Interest expense rose materially because of higher borrowing costs, financing amendments, and additional debt-related amortization.
- The company changed from three to four reportable segments effective July 1, 2022, separating Healthcare Services from Senior; prior periods were restated for presentation.
Outlook, Risks, Contingencies, and Unusual Items
- Management stated that available cash and borrowing capacity are expected to be sufficient for projected operating and debt-service needs for at least the next 12 months, but acknowledged that additional financing may be required if liquidity becomes insufficient.
- No specific revenue, earnings, or Adjusted EBITDA guidance is provided in the filing.
- Medicare enrollment seasonality materially affects results, with Senior commission revenue generally highest in the second quarter and, to a lesser extent, the third quarter.
- CMS regulatory changes finalized in April 2023 could increase compliance costs, require additional disclosures, and potentially impose a waiting period before Medicare enrollment. These changes could impair marketing effectiveness or delay sales activity.
- The company corrected previously issued financial statements for errors in final-expense policy lapse-rate estimates. The correction reduced prior-year nine-month 2022 revenue by $3.0 million and net income by $2.2 million.
- Management reported that a previously identified material weakness in internal control over financial reporting was remediated as of the prior quarterly filing. The underlying weakness involved the completeness and accuracy of third-party carrier lapse information used in commission estimates.
- Consolidated securities class actions and a related derivative action remain pending. The company has not accrued a liability because it has not concluded that a loss is probable, but adverse outcomes could be costly and disruptive.
- Three customers accounted for 63% of quarterly revenue and 62% of year-to-date revenue, creating significant customer-concentration exposure.
- The company paid $4.0 million of Express Med earnouts and $2.3 million of remaining acquisition holdback during the nine months ended March 31, 2023.
- On May 5, 2023, after quarter-end, the company entered into a Fifth Amendment that reduced the minimum asset coverage ratio required as of March 31, 2024.
Facts Investors Should Verify
- Whether SelectRx can continue rapid member and revenue growth while reaching positive Adjusted EBITDA and operating cash flow.
- The company’s ability to refinance or repay approximately $704 million of Term Loans before the November 2024 maturity.
- The effect of higher cash and paid-in-kind interest rates beginning October 1, 2023, and higher mandatory amortization beginning July 1, 2023.
- Whether Senior policy-volume reductions and lower Medicare LTV and persistency assumptions will affect future commission revenue and cash collections.
- The final impact of CMS marketing and enrollment regulations on customer acquisition costs, conversion rates, and policy volumes.
- The status and potential financial exposure of the securities class action and derivative litigation.
- The continued effectiveness of remediated controls over commission estimates and carrier lapse data.