SelectQuote, Inc. Form 10-Q Summary
Reporting period: Fiscal third quarter and nine months ended March 31, 2022. The request identifies “2021 Q3,” but the filing is for SelectQuote’s fiscal Q3 2022 and compares results with the prior-year periods ended March 31, 2021. Amounts are in thousands unless otherwise stated.
Business Context
SelectQuote operates a technology-enabled, direct-to-consumer insurance distribution platform across Senior, Life, and Auto & Home. Its Senior segment also includes InsideResponse lead generation and Population Health, including SelectRx. The company earns commissions, production bonuses, lead-generation revenue, and pharmacy revenue. It does not underwrite the insurance policies sold.
Results are seasonal because Senior enrollment activity is concentrated in the Medicare annual enrollment period from October through December and the open enrollment period from January through March.
Key Financial Metrics
| Metric | Three months ended March 31, 2022 | Three months ended March 31, 2021 | Nine months ended March 31, 2022 | Nine months ended March 31, 2021 |
|---|---|---|---|---|
| Total revenue | $275.1 million | $265.3 million | $627.6 million | $745.7 million |
| Commission revenue | $222.5 million | $235.2 million | $495.5 million | $660.6 million |
| Production bonus and other revenue | $52.6 million | $30.1 million | $132.1 million | $85.1 million |
| Operating income (loss) | $3.1 million | $53.1 million | $(224.4) million | $182.4 million |
| Net income (loss) | $(6.4) million | $35.2 million | $(190.6) million | $124.8 million |
| Adjusted EBITDA | $13.0 million | $63.6 million | $(196.7) million | $203.1 million |
| Net cash used in operating activities | Not presented for the quarter | $(284.4) million | $(60.9) million |
For the third quarter, total revenue increased 4%, but operating costs increased 28% to $272.0 million. Operating margin declined to approximately 1% from 20%, and net margin declined to approximately negative 2% from 13%.
For the nine-month period, total revenue declined 16%, while operating costs increased 51% to $852.0 million. The resulting operating margin was approximately negative 36%, compared with positive 24% in the prior-year period.
Liquidity, Capitalization, and Cash Flow
- Cash and cash equivalents were $199.4 million at March 31, 2022, down from $286.5 million at June 30, 2021.
- Total debt was $706.6 million, including $470.7 million of term loans and $244.4 million drawn under the delayed draw term loan facility, net of issuance costs and discount.
- The company had no borrowings under its revolving credit facility at March 31, 2022. As of May 5, 2022, available capacity was $135.0 million under the revolving facility and $100.0 million under the delayed draw facility.
- Operating cash flow was negative $284.4 million for the nine months, while investing cash flow was negative $40.0 million and financing cash flow was positive $237.3 million, primarily from delayed draw term loan proceeds.
- Commissions receivable totaled $838.3 million, including current and long-term amounts, at March 31, 2022.
Material Changes Versus the Prior Comparable Period
- Revenue mix shifted: Commission revenue declined 5% in the quarter and 25% year to date, while production bonus and other revenue increased 74% and 55%, respectively. The increase included SelectRx pharmacy revenue and higher Senior marketing development funds.
- Senior performance weakened: Senior revenue increased 8% in the quarter due primarily to SelectRx and bonus revenue, but declined 18% year to date. Senior Adjusted EBITDA fell to $32.2 million in the quarter from $75.5 million and to negative $149.4 million year to date from positive $218.9 million.
- Commission estimates were reduced: The company recorded a $157.4 million reduction in commissions receivable from changes in transaction-price estimates, including a $145.0 million adjustment primarily related to higher lapse rates and lower persistency for Senior Medicare Advantage policies.
- Policy volume increased but economics deteriorated: Senior submitted policies rose 38% in the quarter and 37% year to date; approved policies rose 33% and 31%, respectively. However, Medicare Advantage lifetime commission value per approved policy declined 31% in the quarter and 28% year to date.
- Costs rose substantially: Year-to-date cost of revenue increased 74%, marketing and advertising increased 37%, general and administrative expense increased 45%, and technical development expense increased 39%.
- Other segments were weaker: Life revenue declined 12% in the quarter and 2% year to date. Auto & Home revenue increased 3% in the quarter but declined 13% year to date.
- Acquisitions and expansion: SelectQuote acquired Simple Meds for approximately $7.4 million and continued expanding SelectRx and Population Health. SelectRx generated $18.4 million of pharmacy prescription revenue in the quarter and $31.6 million year to date.
- Prior-period correction: The company corrected previously issued financial information for an error in the lapse-rate provision for certain final expense policies. The error reduced reported 2021 commission revenue by $6.1 million for the year and $2.4 million for the quarter ended September 30, 2021.
Guidance, Outlook, Risks, and Unusual Items
- Going-concern uncertainty: Although the company was in compliance with debt covenants at March 31, 2022, management projected that it would not maintain the required asset coverage ratio within one year. A future violation could permit lenders to accelerate the Senior Secured Credit Facility, and the company stated it would not have sufficient liquidity to repay the debt. Management was seeking a covenant waiver or modification, but provided no assurance of success. The filing therefore states that substantial doubt exists about the company’s ability to continue as a going concern.
- No formal financial guidance was provided in the supplied filing text. Management stated that current liquidity and available credit were expected to meet projected operating and debt-service requirements for at least the next 12 months, subject to the covenant risk described above.
- Internal-control material weakness: Disclosure controls were ineffective because of a material weakness involving the completeness and accuracy of carrier and policy data used to calculate final expense commission provisions. Remediation was underway but had not yet been completed or validated through sufficient testing.
- Interest-rate exposure: The company had a $325.0 million interest-rate swap, with a fair value of $12.3 million, hedging part of its term-loan exposure. Interest expense increased 50% year to date because of higher debt balances, financing-cost amortization, and delayed-draw ticking fees.
- Legal matters: The filing discusses two previously disclosed securities class actions and a derivative action filed on March 25, 2022. The company did not believe these matters would have a material adverse effect, but acknowledged potential defense costs and management distraction.
- Concentration: Three Senior insurance carrier customers accounted for 62% of quarterly revenue and 53% of year-to-date revenue in aggregate.
- Other unusual items: The company recorded a $65.2 million year-to-date income tax benefit, $2.9 million of non-recurring expenses, and $17.0 million of capital expenditures for property, equipment, and software.
Investor Verification Checklist
- Confirm whether SelectQuote obtained an effective waiver or amendment of the asset coverage covenant and assess any revised debt terms.
- Reconcile cash usage, debt balances, available borrowing capacity, and required principal payments against near-term operating needs.
- Evaluate whether Medicare Advantage lapse rates and persistency have stabilized and whether further commission-receivable reductions are possible.
- Assess whether higher Senior policy volumes can produce acceptable lifetime value after marketing, agent, fulfillment, and pharmacy costs.
- Review remediation testing for the material weakness and monitor whether additional prior-period corrections are required.
- Track SelectRx growth, profitability, working-capital requirements, and acquisition-related earnout or holdback obligations.
- Review customer concentration, carrier relationships, legal proceedings, and the effect of interest-rate movements on debt service.