SelectQuote, Inc. — Fiscal Q1 2024 Form 10-Q Summary
Business context and reporting period
SelectQuote operates a technology-enabled direct-to-consumer platform for senior health, life, auto and home insurance, and healthcare services, including SelectRx pharmacy and Population Health. The filing covers the three months ended September 30, 2023, compared with the three months ended September 30, 2022. Results are seasonal, particularly in the Senior segment, because Medicare enrollment activity is concentrated in the annual and open enrollment periods.
Financial performance and position
| Metric | Q1 FY2024 | Q1 FY2023 | Change |
|---|---|---|---|
| Total revenue | $232.7 million | $162.5 million | +43% |
| Operating loss | $22.4 million | $39.5 million | Improved $17.1 million |
| Net loss | $31.1 million | $42.5 million | Improved $11.4 million |
| Net loss per share | $0.19 | $0.26 | Improved |
| Adjusted EBITDA | $(11.4) million | $(27.5) million | Improved $16.1 million |
| Cash flow from operations | $(23.7) million | $(47.2) million | Improved $23.5 million |
Revenue growth was led by pharmacy revenue, which increased 131% to $94.8 million, and by commission revenue, which increased 11% to $117.8 million. Other revenue increased 34% to $20.2 million. Revenue represented approximately 41% pharmacy, 51% commission, and 9% other revenue.
The operating loss margin improved to approximately 9.6% from 24.3%, while the net loss margin improved to approximately 13.3% from 26.1%. Adjusted EBITDA margin improved to approximately negative 4.9% from negative 16.9%. Pharmacy gross margin was approximately 11.4%, based on pharmacy revenue of $94.8 million and pharmacy cost of goods sold of $84.0 million.
- Senior revenue increased 16% to $89.9 million; approved policies increased 12% to 109,876, although Medicare Advantage lifetime commission value per approved policy declined 2% to $761.
- Healthcare Services revenue increased 126% to $97.4 million, primarily from SelectRx. SelectRx members increased 62% to 52,750.
- Life revenue increased 3% to $37.8 million, reflecting higher term revenue partly offset by lower final expense revenue.
- Auto & Home revenue increased 27% to $9.0 million.
- Segment Adjusted EBITDA was $(1.3) million for Senior, $2.3 million for Healthcare Services, $5.2 million for Life, and $3.3 million for Auto & Home. Corporate and eliminations were $(20.9) million.
Cash and cash equivalents were $48.5 million at September 30, 2023, down from $83.2 million at June 30, 2023. Operating cash use was partly driven by the net loss and a $29.1 million increase in commissions receivable. Investing cash use was $2.1 million, primarily for software and property and equipment. Financing cash use was $8.9 million, primarily from $8.5 million of term-loan principal payments.
Total debt was $695.1 million, including $702.7 million of term-loan principal, net of $7.6 million of issuance costs and discounts. The effective interest rate was 13.3%. The $100.0 million revolving facility was undrawn and fully available at September 30, 2023. Net interest expense increased 28% to $21.4 million. The company maintained a $325.0 million interest-rate swap with a September 30 fair value of $15.4 million.
Material changes versus the prior comparable period
- Revenue growth accelerated substantially because SelectRx pharmacy revenue more than doubled and Senior policy volumes improved.
- Healthcare Services moved from a $11.8 million Adjusted EBITDA loss to a $2.3 million gain, while Senior's Adjusted EBITDA loss narrowed by $2.5 million.
- Total operating costs increased 26% to $255.1 million, including a 98% increase in pharmacy cost of goods sold to $84.0 million and an 8% increase in marketing and advertising to $62.3 million.
- Selling, general and administrative expense declined 7% to $28.7 million, while technical development expense increased 24% to $7.6 million.
- Interest expense increased $4.7 million because of higher interest rates, partially offset by interest income from the interest-rate swap and cash balances.
- Accumulated deficit increased to $266.7 million from $235.6 million, and shareholders' equity declined to $316.7 million from $347.0 million.
Outlook, liquidity, risks, contingencies and unusual items
Management did not provide quantitative earnings or revenue guidance in the filing. Management stated that available cash and the Senior Secured Credit Facility are expected to meet projected operating and debt-service requirements for at least the next 12 months, and that the company expects to remain in compliance with its debt covenants. Management is actively exploring debt restructuring and additional financing, including possible securitization.
The Senior Secured Credit Facility matures November 5, 2024, creating a significant refinancing or repayment requirement. Mandatory term-loan amortization increased to 4.75% annually beginning July 1, 2023. The company was in compliance with all covenants at September 30, 2023. A Seventh Amendment entered into November 1, 2023 reduced certain minimum asset-coverage and liquidity covenant requirements for specified future dates.
Key risks include continued operating losses and negative operating cash flow, high leverage and rising interest expense, dependence on successful refinancing, working-capital needs caused by upfront marketing costs and delayed commission collections, pharmacy execution and margin risk, Medicare enrollment seasonality, reliance on major carrier customers, and regulatory or sales-practice risk. UnitedHealthcare and Humana accounted for 32% and 17% of total revenue, respectively, in the quarter.
The company disclosed 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 adverse outcomes could be costly and could divert management resources. No material changes to previously disclosed risk factors were reported. No off-balance-sheet arrangements were identified.
Investor verification priorities
- Verify the company's ability to refinance or otherwise address the November 2024 debt maturity and satisfy amended liquidity and asset-coverage covenants.
- Assess whether SelectRx growth can generate sustainable cash flow after medication, fulfillment, onboarding, and other operating costs.
- Monitor commissions receivable collection timing, policy persistency, revenue-estimate adjustments, and the effect of Medicare enrollment seasonality.
- Reconcile Adjusted EBITDA with GAAP results and evaluate the substantial corporate and elimination expense burden.
- Review concentration with UnitedHealthcare, Humana, and other carrier partners, as well as regulatory and litigation developments.
- Consider dilution from outstanding options, restricted stock units, price-vested units, and other reserved shares.