MediaAlpha, Inc. — Q1 2021 Form 10-Q
Reporting period: Three months ended March 31, 2021; comparisons are with Q1 2020 unless stated otherwise. MediaAlpha operates a digital customer-acquisition platform connecting insurance buyers and suppliers, principally in property and casualty (P&C), health, and life insurance.
Financial results and liquidity
| Metric | Q1 2021 | Q1 2020 / prior date |
|---|---|---|
| Revenue | $173.6 million | $119.4 million; up 45.3% |
| Gross profit / gross margin | $26.4 million / 15.2% | $18.8 million / 15.7% |
| Operating income | $2.0 million | $10.6 million |
| Net income | $0.2 million | $8.8 million |
| Net income attributable to MediaAlpha, Inc. | $0.3 million; $0.01 basic and $0.00 diluted EPS | Not comparable: pre-reorganization income was attributed to QLH |
| Adjusted EBITDA (non-GAAP) | $16.3 million | $12.7 million; up 28.5% |
| Contribution / Contribution Margin (non-GAAP) | $27.9 million / 16.1% | $19.7 million / 16.5% |
| Cash and cash equivalents | $12.9 million | $23.6 million at Dec. 31, 2020 |
| Operating cash flow | $(9.4) million | $7.3 million provided |
| Long-term debt, net of issuance costs | $183.0 million | $182.7 million at Dec. 31, 2020 |
Cost of revenue was $147.2 million, or 84.8% of revenue, versus $100.7 million, or 84.3%. The decline in gross margin reflected increased equity-based compensation. Net income fell sharply despite higher revenue, primarily due to higher equity compensation and professional and legal costs related to the secondary offering. Q1 equity-based compensation was $10.6 million, versus $1.3 million.
At March 31, 2021, current assets were $100.4 million and current liabilities were $69.9 million. Accounts receivable were $80.3 million. The $186.4 million term loan has a stated contractual maturity in 2023; the $5.0 million revolver was undrawn. The company reported compliance with its credit-facility covenants. Management said cash, operating cash flow, and revolver availability should cover projected operating and debt-service needs for at least 12 months.
Business and changes versus prior year
- P&C revenue rose 74.2% to $125.5 million, supported by greater carrier spending and increased consumer supply. Health revenue rose 28.8% to $35.9 million. Life revenue declined 16.8% to $8.0 million, partly reflecting a shift from open- to private-platform transactions.
- Other revenue fell 57.8% to $4.2 million, primarily due to the pandemic-related downturn in travel. Travel represented 1.3% of revenue, versus 7.5% in Q1 2020.
- Transaction Value, a non-GAAP operating metric, increased 58.1% to $262.5 million. Consumer referrals purchased increased to 24.5 million from 18.0 million; the reported number of demand and supply partners rose to 1,356 from 911.
- General and administrative expense increased to $15.7 million from $3.2 million, primarily due to equity compensation and secondary-offering professional fees. Sales and marketing and product development expenses also increased, including from compensation and planned headcount additions.
- Operating cash flow turned negative, driven mainly by working-capital needs, including lower accounts payable, secondary-offering expenses, and lower net income. Cash declined by $10.7 million during the quarter.
Outlook, risks, and unusual items
- No specific revenue or earnings guidance is provided. Management cites insurance-industry digital acquisition trends as potential growth drivers, while warning that quarterly results are seasonal and interim results may not indicate full-year performance.
- Management does not expect travel revenue to recover to historical levels or materially affect overall revenue or profitability in the foreseeable future. The pandemic’s broader future effects remain uncertain.
- Google announced a U.S. health-insurance advertising certification policy, expected to take effect June 2, 2021. MediaAlpha was pursuing required approvals and expected compliance by early Q3; delays for the company or supply partners could reduce revenue. Management could not estimate the effect on forecasts.
- The March secondary offering involved 8,050,000 shares sold by existing holders and generated no proceeds for the company. Separately, 4,457,796 Class B-1 units and corresponding Class B shares were exchanged for Class A shares. The exchange generated a $53.1 million tax receivable agreement (TRA) liability; expected total TRA payments were $75.5 million at quarter-end.
- Significant risks include dependence on a limited number of customers and suppliers, search engines and paid traffic, partner budgets, insurance regulation, data protection and cybersecurity, and variable-rate debt. Three customers represented approximately 39% of Q1 revenue.
- Disclosure controls and procedures were reported ineffective because of a previously identified material weakness in internal control over financial reporting. Remediation was ongoing and was not yet considered complete.
- Management reported no litigation expected to have a material adverse effect and no material changes to the previously disclosed risk factors beyond the search-engine and advertising-policy update.
Important facts for investors to verify
- Whether traffic acquisition costs, partner revenue shares, and customer/supplier concentration affect growth and margins as platform volume expands.
- Progress and financial impact of Google’s health-advertiser certification requirements, including certification of supply partners.
- Operating cash conversion, accounts-receivable collections, and liquidity relative to the term loan and future TRA payments.
- The scale and duration of equity-based compensation and offering-related costs, and how non-GAAP Adjusted EBITDA reconciles to GAAP earnings.
- Remediation and testing of the disclosed material weakness in internal controls.
- The pace of recovery, if any, in travel and other pandemic-affected activity; the filing states that recovery timing is uncertain.