MediaAlpha, Inc. — Q3 2022 Form 10-Q
Reporting period: Three and nine months ended September 30, 2022; compared with the same 2021 periods. Amounts are in U.S. dollars unless noted.
Business context
MediaAlpha operates a digital customer-acquisition platform, primarily for insurance partners. It earns fees from consumer referrals through Open Marketplace transactions and platform fees on Private Marketplace transactions. Management reported $762 million in Transaction Value over the twelve months ended September 30, 2022.
Financial performance and liquidity
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Revenue | $89.0 million | $152.7 million | $335.1 million | $483.7 million |
| Operating income (loss) | $(10.6) million | $(0.1) million | $(28.9) million | $3.8 million |
| Net income (loss) | $(21.2) million | $(4.3) million | $(44.1) million | $(4.5) million |
| Net loss attributable to MediaAlpha | $(14.5) million | $(3.5) million | $(30.7) million | $(3.5) million |
| Class A loss per share | $(0.34) | $(0.09) basic | $(0.74) | $(0.09) |
| Adjusted EBITDA (non-GAAP) | $2.2 million | $13.8 million | $13.8 million | $44.9 million |
| Contribution margin (non-GAAP) | 17.4% | 17.1% | 17.3% | 16.7% |
| Gross margin | 14.2% | 16.1% | 14.9% | 15.7% |
- Cash flow: Nine-month operating cash flow was $34.7 million, versus $6.7 million in 2021. Investing used $49.8 million, principally for the CHT acquisition; financing used $5.3 million. Cash declined to $30.2 million from $50.6 million at year-end 2021.
- Liquidity and debt: Current assets were $69.9 million and current liabilities $63.8 million. Debt principal outstanding was $192.9 million, including $10.0 million drawn on the revolver; $40.0 million remained available. Debt carrying value, net of issuance costs, was $190.3 million. The company reported covenant compliance and expected liquidity to cover operating and debt-service needs for at least twelve months.
- Other balance-sheet items: Total liabilities were $333.6 million; stockholders’ deficit was $68.4 million. The tax receivables agreement (TRA) liability was $83.3 million long term, with expected total payments of $86.1 million.
Material changes and unusual items
- Q3 revenue declined 41.7%; nine-month revenue declined 30.7%. Property and casualty (P&C) revenue fell 58.3% in Q3 and 44.4% for the nine months. Health revenue was down 1.9% in Q3 but up 4.9% year to date; life and other revenue also declined in Q3.
- Transaction Value fell 42.5% in Q3 to $146.7 million and 26.5% for the nine months to $568.6 million. Consumer referrals purchased fell to 21.1 million in Q3 from 25.3 million, and to 68.1 million year to date from 72.7 million.
- Management attributed the P&C weakness mainly to carriers cutting acquisition spending amid poor underwriting profitability, inflation, and higher claims costs. Some partners also shifted transactions from Open to Private Marketplace, where revenue is recognized net of transaction value.
- MediaAlpha acquired substantially all of Customer Helper Team’s assets on April 1 for $49.7 million cash plus contingent consideration initially valued at $7.0 million, for total acquisition-date consideration of $56.7 million. CHT contributed $4.3 million of revenue and a $1.6 million pretax loss from acquisition through September 30.
- An $8.6 million impairment of a cost-method investment was recorded in Q3. CHT contingent consideration was remeasured down by $6.6 million year to date, including a $3.7 million Q3 gain, reducing its September 30 fair value to $0.4 million.
- Equity-based compensation was $14.6 million in Q3 and $44.2 million year to date. Variable-rate interest exposure is material: a hypothetical 1 percentage-point rate change would have changed nine-month interest expense by $1.5 million.
Outlook, risks, and contingencies
- The filing provides no formal revenue or earnings guidance. Management said the P&C downturn’s duration and impact could not be estimated beyond Q4 2022. It cited regulatory approvals of premium increases and expressed confidence in a P&C recovery beginning in the first half of 2023, while emphasizing uncertainty.
- Key risks include continued carrier spending cuts, insurance-industry cyclicality and seasonality, reliance on significant partners and internet search traffic, consumer-data and insurance regulation, competition, and the ability to maintain debt-covenant compliance. The company also noted inflation, rising rates, market volatility, and possible additional deferred-tax-asset valuation allowances if losses continue.
- Management said routine litigation was not expected to materially affect results and no litigation reserves were recorded. The company reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether P&C carrier spending and revenue stabilize, and whether the anticipated 2023 recovery materializes.
- Whether cash generation remains adequate after acquisition spending, debt service, and potential TRA or CHT contingent payments.
- How much of reported Adjusted EBITDA depends on exclusions, including equity compensation, investment impairment, and contingent-consideration gains.
- Whether CHT achieves its revenue and gross-margin targets and how its operating performance compares with acquisition assumptions.
- Whether the company can realize its deferred tax assets and meet covenants under its variable-rate credit facilities.