SelectQuote, Inc. — Form 10-Q Summary
Business context and reporting period
SelectQuote operates a technology-enabled, direct-to-consumer insurance distribution platform for Senior, Life, and Auto & Home products. It earns commissions, renewal commissions, production bonuses, and marketing development funds from insurance carriers. The filing covers the three and six months ended December 31, 2020, representing fiscal 2021 second-quarter and year-to-date results. Senior revenue is seasonally concentrated in the second quarter because of the Medicare annual enrollment period.
Financial results and key metrics
| Metric | Three months ended Dec. 31, 2020 | Three months ended Dec. 31, 2019 | Six months ended Dec. 31, 2020 | Six months ended Dec. 31, 2019 |
|---|---|---|---|---|
| Total revenue | $358.3 million | $176.3 million | $482.4 million | $241.5 million |
| Income from operations | $124.2 million | $57.4 million | $131.4 million | $56.0 million |
| Operating margin | 34.6% | 32.6% | 27.2% | 23.2% |
| Net income | $90.4 million | $39.1 million | $91.3 million | $37.4 million |
| Net margin | 25.2% | 22.2% | 18.9% | 15.5% |
| Adjusted EBITDA | $129.5 million | $69.0 million | $141.6 million | $69.8 million |
| Diluted EPS | $0.55 | $(0.56) | $0.55 | $(0.62) |
- Quarterly revenue increased 103%; year-to-date revenue doubled. Commission revenue rose 102% in the quarter and 97% year to date, while production bonus and other revenue rose 111% and 120%, respectively.
- Quarterly operating expenses were $234.1 million, or 65% of revenue, versus 68% previously. Marketing and advertising increased 160% to $132.2 million and represented 37% of revenue; cost of revenue increased 67% to $84.1 million.
- Quarterly adjusted EBITDA margin was approximately 36.1%, compared with 39.1% in the prior-year quarter. On a rolling 12-month basis, Senior adjusted EBITDA per approved MA/MS policy declined to $567 from $642, and the revenue-to-CAC multiple declined to 3.2x from 4.1x.
- Senior revenue increased 127% in the quarter and 134% year to date, driven primarily by Medicare Advantage. Life revenue increased 26% and 40%, respectively, led by final expense products. Auto & Home revenue declined 15% and 10%, respectively, following the shift of agents toward Senior and Life.
- Senior submitted policies increased 108% in the quarter and 110% year to date; approved policies increased 117% and 120%, respectively. Average productive Senior agents increased approximately 70% in the quarter and 75% year to date.
Cash flow, liquidity, debt, and balance sheet
- Cash, cash equivalents, and restricted cash totaled $245.9 million at December 31, 2020, down from $368.9 million at June 30, 2020. Unrestricted cash and cash equivalents were $209.7 million.
- Operating cash flow was negative $103.1 million for the six months, compared with negative $50.6 million in the prior-year period. The cash use primarily reflected increases of $219.1 million in commissions receivable and $63.4 million in accounts receivable as policy volumes expanded.
- Investing cash flow was negative $9.1 million, including $5.8 million of property and equipment purchases and $3.4 million of software and capitalized development costs. Financing cash flow was negative $10.7 million.
- Debt totaled $313.3 million, consisting primarily of a $325.0 million term loan net of unamortized debt issuance costs and discount. No revolving credit facility borrowings were outstanding at December 31, 2020; the revolver provides up to $75.0 million of capacity.
- The term loan matures November 5, 2024, with quarterly principal amortization beginning March 31, 2022. The company was in compliance with its debt covenants.
- The company expects existing liquidity, IPO proceeds, cash, and available credit capacity to fund projected operating and debt-service requirements for at least the next 18 months, but notes that additional financing could be required if liquidity becomes insufficient.
Material changes, outlook, risks, and unusual items
- The company stated that COVID-19 had not materially adversely affected consolidated results but continues to monitor the pandemic and its effects on operations and liquidity.
- InsideResponse, acquired in May 2020, generated $12.5 million of advertising revenue in the quarter and $20.5 million year to date. The company determined that the maximum earnout was achieved and recorded $0.4 million in quarterly and $1.2 million in year-to-date fair-value adjustments; the earnout liability was $32.0 million at December 31, 2020 and was expected to be paid in February 2021.
- On February 1, 2021, after the reporting period, the company acquired substantially all assets of another lead distribution company for aggregate consideration of up to $33.5 million, including $24.0 million paid at closing, a $6.0 million holdback, and a potential $3.5 million earnout.
- The company early adopted lease accounting under ASC 842 on July 1, 2020, recognizing $41.3 million of lease liabilities and $29.7 million of right-of-use assets at adoption. At December 31, 2020, operating and finance lease liabilities totaled $42.2 million.
- Customer concentration is significant: three Senior carrier customers represented 70% of quarterly revenue and 62% of year-to-date revenue. Revenue recognition depends partly on estimates of renewal commissions and policy persistency.
- Working-capital needs are substantial because marketing and agent costs are generally paid before commission cash is collected. Delays in carrier payments could adversely affect operating cash flow.
- The company has exposure to variable interest rates on its term loan, partially hedged by a $325.0 million interest-rate swap terminating November 5, 2024. The filing reports no material litigation, no off-balance-sheet arrangements, and no material changes to previously disclosed risk factors.
Important facts for investors to verify
- Whether the sharp Senior enrollment growth and agent expansion can be sustained outside the seasonal AEP/OEP periods.
- Whether higher marketing spending and the decline in revenue-to-CAC and adjusted EBITDA per policy indicate worsening unit economics.
- The timing and collectability of the large commissions and accounts receivable balances supporting reported revenue and future cash generation.
- Term-loan refinancing or repayment capacity before the November 2024 maturity, including interest-rate exposure and covenant compliance.
- The realized performance and integration benefits of InsideResponse and the February 2021 lead-distribution acquisition.
- The effect of carrier concentration, policy persistency, renewal commission estimates, regulatory developments, and future COVID-19 disruptions on results.