SelectQuote, Inc. — Form 10-Q Summary
Business context and reporting period
SelectQuote operates a technology-enabled, direct-to-consumer distribution platform for senior health, life, and auto and home insurance, together with Healthcare Services businesses including SelectRx pharmacy and Population Health. The filing covers the three months ended September 30, 2022, the first quarter of fiscal 2023, with comparative results for the three months ended September 30, 2021. Results are seasonal, with Senior commission revenue generally highest during the Medicare enrollment periods.
Effective July 1, 2022, the Company began reporting four segments: Senior, Healthcare Services, Life, and Auto & Home. Prior-period segment information was restated accordingly.
Financial performance and key metrics
| Metric | Q1 FY2023 | Q1 FY2022 | Change |
|---|---|---|---|
| Total revenue | $162.5 million | $156.1 million | 4% |
| Commission revenue | $106.3 million | $130.8 million | (19%) |
| Pharmacy revenue | $41.1 million | $4.5 million | 820% |
| Operating loss | $39.5 million | $56.0 million | Improved by $16.5 million |
| Net loss | $42.5 million | $48.2 million | Improved by $5.7 million |
| Net loss per share | $0.26 | $0.29 | Improved |
| Adjusted EBITDA | $(27.5) million | $(47.9) million | Improved by $20.4 million |
| Net cash used in operating activities | $47.2 million | $87.1 million | Improved by $39.9 million |
Revenue growth was driven by Healthcare Services, particularly SelectRx, which increased members 551% to 32,596 and generated $41.1 million of pharmacy revenue. This growth was partly offset by lower insurance distribution revenue: Senior revenue declined 23% to $77.5 million, Life declined 20% to $36.8 million, and Auto & Home declined 5% to $7.1 million.
Operating expenses totaled $202.0 million, or 124% of revenue, compared with $212.1 million, or 136% of revenue, in the prior-year quarter. Marketing and advertising declined 36% to $57.6 million, and cost of revenue declined 25% to $65.2 million, reflecting reduced insurance volume and agent headcount. Pharmacy cost of goods sold increased to $42.4 million, broadly tracking the growth of SelectRx.
Interest expense nearly doubled to $16.7 million from $8.5 million, primarily due to higher term-loan balances, amended debt terms, and amortization and write-off of financing costs. The income tax benefit was $13.6 million, representing a 24.3% effective tax rate.
Liquidity, cash flow, debt, and balance sheet
- Cash and cash equivalents were $71.1 million at September 30, 2022, down from $141.0 million at June 30, 2022.
- Operating cash flow was negative $47.2 million, primarily reflecting the net loss and a $36.0 million increase in commissions receivable.
- Investing cash flow was negative $2.4 million, primarily for software and capital expenditures.
- Financing cash flow was negative $20.4 million, including $8.9 million of term-loan principal payments, $10.1 million of debt issuance costs, and a $2.3 million acquisition holdback payment.
- Term loans had $705.7 million of principal outstanding and an effective interest rate of 13.3%. Total debt, net of issuance costs and discounts, was $690.3 million.
- The $100.0 million revolving credit facility was undrawn and fully available at September 30, 2022.
- The senior secured credit facility matures November 5, 2024. Term-loan interest consists of a cash component plus paid-in-kind interest, with scheduled amortization and the remaining balance due at maturity.
- The Company reported compliance with all debt covenants at September 30, 2022 and stated that available liquidity was expected to meet projected operating and debt-service requirements for at least the next 12 months.
Material changes versus the prior comparable period
- The business shifted resources away from insurance distribution toward Healthcare Services. Senior submitted policies declined 16%, approved policies declined 12%, and the number of productive agents declined 7%.
- Senior Medicare Advantage lifetime value per approved policy declined 20% to $780, reflecting lower persistency, higher lapse provisions, and carrier mix, partly offset by higher commission rates.
- Life and Auto & Home volumes declined as management pursued a strategy to stabilize those businesses and prioritize Healthcare Services.
- Healthcare Services revenue rose 620% to $43.1 million, but the segment reported negative Adjusted EBITDA of $11.8 million due to medication, compensation, and growth-related costs.
- Senior Adjusted EBITDA improved to negative $3.9 million from negative $29.0 million, while Life and Auto & Home generated positive Adjusted EBITDA of $5.2 million and $2.4 million, respectively.
- The Company corrected comparative prior-period financial statements for commission revenue errors related to lapse-rate estimates for certain final expense policies. Q1 FY2022 commission revenue was reduced by $3.8 million and net loss increased by $2.9 million.
- The Company early adopted accounting guidance for contract assets and liabilities acquired in business combinations and changed the presentation of pharmacy revenue, pharmacy cost of goods sold, and contract liabilities.
Outlook, commentary, risks, and unusual items
Management did not provide quantitative revenue, earnings, or cash-flow guidance in the filing. Management expects available cash and borrowing capacity to support operations and debt service for at least the next 12 months, but noted that additional financing could be required if liquidity becomes insufficient.
- The Company recorded $2.1 million of transaction costs, primarily related to the August 2022 amendment of its senior secured credit facility.
- SelectRx acquisition-related obligations included a $1.0 million earnout payment and $2.3 million of remaining holdback payments during the quarter; $2.0 million remained accrued for another earnout provision.
- Management identified a material weakness in internal control over financial reporting involving the completeness and accuracy of third-party carrier lapse information used in commission provisions. Remediation controls had been implemented but had not operated long enough for management to conclude they were effective.
- The Company is defending securities class actions and a related stockholder derivative action. It has not accrued a liability because it has not concluded that a loss is probable, but litigation could be costly and divert management resources.
- On October 20, 2022, the NYSE notified the Company that its average closing share price had fallen below $1.00. The Company had six months to regain compliance or potentially face suspension and delisting.
- Interest-rate exposure remains significant. The Company maintains a $325.0 million interest-rate swap, and rising rates or refinancing difficulties could increase debt-service costs.
- Two customers accounted for 16% and 11% of total revenue in the quarter, indicating material customer concentration.
Investor verification checklist
- Verify whether SelectRx growth can become profitable after medication, fulfillment, onboarding, and compensation costs.
- Track commissions receivable, cash burn, contract liabilities, and the timing of carrier collections.
- Assess the sustainability of lower marketing spending and whether reduced insurance volume affects future commission and renewal revenue.
- Review compliance with the $1.00 NYSE minimum price requirement and any subsequent listing-status developments.
- Monitor remediation of the material weakness and any additional commission-revenue or lapse-rate corrections.
- Evaluate the November 2024 debt maturity, mandatory amortization, high interest burden, covenant compliance, and refinancing requirements.
- Follow the securities litigation and potential financial or governance consequences, noting that no loss accrual was recorded.