SelectQuote, Inc. Form 10-Q Summary
Business context and reporting period
SelectQuote is a technology-enabled, direct-to-consumer insurance distributor selling Senior, Life, and Auto & Home policies on behalf of insurance carriers. The company earns first-year and renewal commissions, production bonuses, and other carrier payments and does not bear insurance underwriting risk. This filing covers the three months ended September 30, 2020, the first quarter of fiscal 2021, compared with the three months ended September 30, 2019.
The company early adopted ASC 842 lease accounting on July 1, 2020, recording $41.3 million of lease liabilities and $29.7 million of right-of-use assets. The company stated that COVID-19 did not materially affect reported results for the quarter, but continued to monitor the situation.
Financial performance and key metrics
| Metric | Q1 FY2021 | Q1 FY2020 | Change |
|---|---|---|---|
| Total revenue | $124.2 million | $65.2 million | Up 91% |
| Commission revenue | $106.5 million | $57.8 million | Up 84% |
| Production bonus and other revenue | $17.6 million | $7.3 million | Up 140% |
| Income from operations | $7.3 million | $(1.4) million | Improved |
| Net income (loss) | $0.8 million | $(1.7) million | Improved |
| Adjusted EBITDA | $12.1 million | $0.9 million | Up $11.2 million |
| Operating cash flow | $(9.3) million | $(11.7) million | Improved by $2.4 million |
Revenue increased primarily from Senior and Life. Senior revenue rose 165% to $73.2 million, driven by higher Medicare Advantage and Medicare Supplement volumes and $7.9 million of advertising revenue associated with InsideResponse. Life revenue rose 55% to $42.8 million, largely from a 405% increase in final expense revenue. Auto & Home revenue declined 5% to $9.5 million.
Operating expenses were $116.9 million, or approximately 94% of revenue, compared with 102% in the prior-year quarter. Cost of revenue increased 56% to $51.0 million, marketing and advertising increased 91% to $49.8 million, general and administrative expense increased 138% to $12.2 million, and technical development expense increased 42% to $3.8 million. The operating margin was approximately 6%, compared with negative 2% in the prior-year quarter. Net margin was approximately 1%, compared with negative 3%.
Interest expense increased to $6.8 million from $0.7 million, primarily because of the term loan. The company recorded a $1.1 million income tax benefit and reported an unusually high 413.5% effective tax benefit rate, primarily due to discrete items.
Senior submitted policies increased 118% to 79,617 and approved policies increased 129% to 69,493. Average productive agents increased 100%, while productivity per productive agent increased 8%. On a rolling twelve-month basis, Senior Adjusted EBITDA margin per approved MA/MS policy declined to 38% from 43%, and the revenue-to-customer-acquisition-cost multiple declined to 3.5x from 4.0x.
Liquidity, cash flow, debt, and other financial position items
- Cash, cash equivalents, and restricted cash totaled $347.4 million at September 30, 2020, down from $368.9 million at June 30, 2020. Cash and cash equivalents were $305.4 million, with $42.0 million of restricted cash.
- Operating cash flow was negative $9.3 million, primarily reflecting a $45.9 million increase in commissions receivable and $8.7 million of lower accounts payable and accrued expenses, partly offset by $23.7 million of higher other liabilities, including commission advances.
- Investing cash flow was negative $4.2 million, including $2.8 million of capital expenditures and $1.6 million of software and capitalized development costs.
- Financing cash flow was negative $7.9 million, including IPO costs of $3.9 million, private placement costs of $1.8 million, and $2.5 million of tax-withholding payments related to equity awards.
- Debt consisted of $325.0 million of term-loan principal and $312.6 million of net debt after unamortized issuance costs and discount. No amounts were drawn under the $75.0 million revolving facility.
- The term loan matures November 5, 2024, with principal repayments beginning March 31, 2022. The company was in compliance with its debt covenants at September 30, 2020.
- A $325.0 million interest-rate swap hedges the term loan through November 2024. The swap had a $2.0 million liability at September 30, 2020.
- Commissions receivable, current and non-current, totaled approximately $558.9 million at September 30, 2020, compared with $513.0 million at June 30, 2020.
Management stated that cash, IPO proceeds, and availability under the Senior Secured Credit Facility should be sufficient for projected operating and debt-service requirements for at least the next 24 months, while noting that future financing could be required if liquidity becomes insufficient.
Material changes, outlook, risks, and unusual items
- The May 2020 acquisition of InsideResponse was accounted for at preliminary total consideration of $67.1 million, including a $30.4 million fair value for the contingent earnout. By September 30, 2020, management determined that the maximum earnout target had been achieved and recorded a $0.8 million fair-value expense. The earnout liability was $31.6 million at quarter-end and is expected to be paid by March 15, 2021, 65% in cash and 35% in shares.
- InsideResponse generated $7.9 million of advertising revenue during the quarter and was previously a related-party lead supplier. Investors should distinguish this acquired revenue from organic growth.
- The company increased agent capacity and marketing spend to pursue Senior enrollment opportunities and expanded Life final expense sales. Management expects seasonal effects from Medicare annual enrollment and open enrollment periods, with Senior revenue generally highest in the second and third fiscal quarters.
- Adjusted EBITDA improved substantially, but it excludes interest, depreciation and amortization, share-based compensation, earnout fair-value adjustments, restructuring, and other non-recurring expenses. It is not a GAAP measure.
- Key risks include seasonality, carrier concentration, persistency and renewal assumptions, lead acquisition costs, collection timing for commissions receivable, high leverage and variable-rate debt, dependence on insurance carrier relationships, regulatory requirements, COVID-19 uncertainty, and execution of the InsideResponse integration.
- The company reported no material legal proceedings, no material changes to previously disclosed risk factors, and no off-balance-sheet arrangements.
Investor verification checklist
- Verify whether the rapid Senior and Life growth, particularly final expense and InsideResponse-related revenue, is sustainable and how much reflects acquisitions or changes in agent allocation.
- Monitor commissions receivable growth, collection timing, operating cash flow, and the funding required for upfront marketing expenditures.
- Confirm achievement and eventual payment of the maximum InsideResponse earnout, including the cash and equity components.
- Assess debt-service capacity, interest-rate exposure, swap effectiveness, covenant compliance, and the November 2024 term-loan maturity.
- Evaluate changes in Senior persistency, lifetime value per policy, customer-acquisition costs, and the decline in the rolling twelve-month Adjusted EBITDA margin per MA/MS policy.
- Review the unusually high effective tax benefit rate and determine whether future tax results will normalize.