SelectQuote, Inc. — Fiscal 2024 Second-Quarter 10-Q Summary
Business context and reporting period
SelectQuote operates a technology-enabled direct-to-consumer platform across Senior insurance, Healthcare Services, Life insurance, and Auto & Home insurance. The filing covers the unaudited three and six months ended December 31, 2023, corresponding to the fiscal second quarter and first half of fiscal 2024. Results are seasonal, with Senior commission revenue typically highest during the Medicare annual enrollment period and the subsequent open enrollment period.
Key financial metrics
| Metric | Three months ended Dec. 31, 2023 | Three months ended Dec. 31, 2022 | Six months ended Dec. 31, 2023 | Six months ended Dec. 31, 2022 |
|---|---|---|---|---|
| Total revenue | $405.4 million | $319.2 million | $638.2 million | $481.7 million |
| Operating income | $55.3 million | $53.0 million | $32.9 million | $13.5 million |
| Net income (loss) | $19.4 million | $22.5 million | $(11.7) million | $(20.0) million |
| Adjusted EBITDA | $67.4 million | $63.6 million | $56.0 million | $36.1 million |
| Net cash used in operating activities | Not separately disclosed | Not separately disclosed | $(49.2) million | $(75.6) million |
- Quarterly revenue increased 27%; commission revenue rose 14% and pharmacy revenue rose 111%. Six-month revenue increased 32%, led by a 120% increase in pharmacy revenue.
- Quarterly operating margin was approximately 13.6%, versus 16.6% in the prior-year quarter. Six-month operating margin was approximately 5.2%, versus 2.8%.
- Quarterly net margin was approximately 4.8%, versus 7.1% in the prior-year quarter. Six-month net margin was approximately negative 1.8%, versus negative 4.1%.
- Quarterly Adjusted EBITDA margin was approximately 16.6%, versus 19.9%. Six-month Adjusted EBITDA margin was approximately 8.8%, versus 7.5%.
- Interest expense increased 16% for the quarter and 21% year to date, reflecting higher interest rates. The Term Loans carried a 14.9% effective interest rate at December 31, 2023.
- Cash and cash equivalents declined to $10.8 million from $83.2 million at June 30, 2023. The primary working-capital use was a $113.9 million increase in commissions receivable.
- Total debt was $693.5 million, including $699.6 million of gross Term Loans less unamortized issuance costs and discounts. No revolving facility borrowings were outstanding at December 31, 2023, and the full $100.0 million facility was available at that date.
Material changes versus the prior comparable period
- Senior revenue increased 11% for the quarter and 12% year to date. Approved Senior policies increased 6% for the quarter and 8% year to date, while Medicare Advantage lifetime value per approved policy increased 7% and 4%, respectively.
- Healthcare Services revenue more than doubled for the quarter and increased 112% year to date, primarily from SelectRx. SelectRx members increased 59% year over year to 62,623, and quarterly prescriptions per day increased to 17,010 from 9,652.
- Life revenue increased 10% for the quarter and 6% year to date. Auto & Home revenue increased 34% and 31%, respectively.
- Senior Adjusted EBITDA declined to $78.7 million from $83.6 million for the quarter and to $77.4 million from $79.8 million year to date, as higher marketing and compensation costs exceeded revenue growth.
- Healthcare Services Adjusted EBITDA improved to $3.0 million from a $9.3 million loss for the quarter and to $5.3 million from a $21.1 million loss year to date, reflecting scale benefits despite higher medication and fulfillment costs.
- Marketing and advertising expense increased 30% for the quarter and 22% year to date, primarily due to higher lead costs and customer acquisition costs per policy.
- Contract commissions receivable increased to $954.4 million from $840.5 million at June 30, 2023. The company recorded a $1.6 million net commission revenue adjustment from changes in estimates, including a $1.5 million negative adjustment related to Senior.
Outlook, liquidity, risks and unusual items
- Management stated that available cash and the credit facility are expected to support projected operating and debt-service needs for at least the next 12 months and that the company expected to remain compliant with debt covenants based on its projections.
- Management also stated that operating cash flow is not expected to be sufficient to repay all debt at maturity. The company may need refinancing, additional financing, asset sales, or significant reductions in operations.
- On February 7, 2024, after quarter-end, the company amended its credit facility. A new $692.0 million extended term-loan class was established with maturity extended to February 15, 2025; $9.4 million of non-extended term loans remained due November 5, 2024. Revolving commitments were reduced to $73.6 million, and the company paid $0.7 million of lender fees.
- The debt facility includes minimum liquidity and asset-coverage covenants. The company reported compliance as of December 31, 2023, but covenant compliance and refinancing remain significant risks.
- The company uses an interest-rate swap on a $325.0 million notional amount of Term Loans. The swap had a $10.7 million fair value at December 31, 2023, and approximately $10.5 million was expected to be reclassified into interest expense over the following 12 months.
- Two securities class actions and a related stockholder derivative action remain pending. The company has not accrued a liability because it does not believe a loss is probable, but acknowledged that defense costs and adverse outcomes could be material.
- The company reported no material changes to previously disclosed risk factors and no off-balance-sheet arrangements. Disclosure controls were assessed as effective.
Important facts for investors to verify
- Whether the February 2024 debt amendment and subsequent refinancing actions provide sufficient runway through the revised maturities.
- Available cash, cash generation, commission collections, and the pace of growth in commissions receivable.
- SelectRx unit economics, medication costs, fulfillment costs, and whether Healthcare Services can sustain positive Adjusted EBITDA as it scales.
- Senior customer-acquisition costs, policy persistency, lifetime-value assumptions, and future commission-revenue adjustments.
- Compliance with minimum liquidity and asset-coverage covenants, including the $9.4 million non-extended debt maturity in November 2024.
- Developments and potential exposure from the securities class actions and derivative litigation.
- Reconciliation of Adjusted EBITDA to GAAP results, given the exclusion of interest, taxes, depreciation and amortization, share-based compensation, and transaction costs.