SelectQuote, Inc. Form 10-Q Summary
Business context and reporting period
SelectQuote operates a technology-enabled direct-to-consumer insurance distribution platform covering Senior, Life, and Auto & Home products. Senior also includes InsideResponse lead generation and the Population Health platform, including SelectRx and related pharmacy services. The unaudited filing covers the three and six months ended December 31, 2021, representing fiscal second-quarter and year-to-date results for fiscal 2022. Results are highly seasonal because Medicare annual enrollment occurs in October through December.
Key financial metrics
| Metric | Three months ended Dec. 31, 2021 | Three months ended Dec. 31, 2020 | Six months ended Dec. 31, 2021 | Six months ended Dec. 31, 2020 |
|---|---|---|---|---|
| Total revenue | $195.0 million | $357.6 million | $352.5 million | $480.3 million |
| Commission revenue | $140.7 million | $320.3 million | $273.0 million | $425.4 million |
| Production bonus and other revenue | $54.3 million | $37.3 million | $79.6 million | $54.9 million |
| Loss from operations | $(172.9) million | $123.4 million | $(227.5) million | $129.3 million |
| Net income (loss) | $(137.0) million | $89.9 million | $(184.2) million | $89.6 million |
| Diluted EPS | $(0.84) | $0.54 | $(1.12) | $0.54 |
| Adjusted EBITDA | $(163.3) million | $128.8 million | $(209.7) million | $139.5 million |
- Revenue declined 45% in the quarter and 27% year to date. Commission revenue declined 56% and 36%, respectively, while production bonus and other revenue increased 46% and 45%.
- Operating costs and expenses were $367.9 million in the quarter and $580.0 million year to date, representing 188% and 164% of revenue, respectively. Marketing and advertising represented 99% of quarterly revenue and 81% of year-to-date revenue.
- Net loss margins were approximately 70% for the quarter and 52% year to date, compared with net income margins of 26% and 19% in the prior-year periods.
- Senior revenue declined 50% in the quarter and 32% year to date; Life revenue declined 8% in the quarter but increased 4% year to date; Auto & Home revenue declined 15% and 19%, respectively.
- Senior submitted policies increased 29% in the quarter and 36% year to date, while approved policies increased 22% and 30%. However, average productive agents increased substantially while productivity per agent declined 45% in the quarter and 35% year to date.
- Senior Medicare Advantage lifetime value per approved policy declined 27% in the quarter and 25% year to date. Rolling 12-month Senior adjusted EBITDA per approved MA/MS policy was negative $142 versus positive $567 in the prior-year period.
Cash flow, liquidity, debt, and balance sheet
- Cash and cash equivalents were $193.4 million at December 31, 2021, down from $286.5 million at June 30, 2021.
- Cash used in operating activities was $305.7 million for the six months ended December 31, 2021, compared with $103.1 million in the prior-year period. The 2021 outflow reflected the net loss, increases in accounts receivable and commissions receivable, and elevated marketing and personnel spending.
- Cash used in investing activities was $31.1 million, including $17.9 million of property and equipment purchases, $5.2 million of software investment, $6.9 million for the Simple Meds acquisition, and a $1.0 million equity investment.
- Financing activities provided $243.7 million, primarily from $242.0 million of net proceeds under the delayed draw term loan facility.
- Total debt was $707.5 million at December 31, 2021, including $471.9 million of term loans and $245.0 million drawn under the delayed draw facility. No revolving credit facility balance was outstanding.
- The credit facility had $135.0 million of available revolving capacity and $100.0 million of remaining delayed-draw capacity as of February 7, 2022. The facility matures November 5, 2024, with mandatory amortization beginning March 31, 2022. The company reported compliance with its covenants at December 31, 2021.
- Commissions receivable totaled $885.8 million, including current and long-term amounts, at December 31, 2021. Management states that available credit under the Senior Secured Credit Facility should meet projected operating and debt-service requirements for at least the next 12 months, but notes that additional funding could be required.
Material changes versus the prior comparable period
- The primary adverse change was a $145.0 million downward adjustment to Senior Medicare Advantage commission revenue due to higher actual lapse rates and lower early persistency data for January 2022 renewals. The adjustment related primarily to prior policy cohorts.
- Senior operating costs increased sharply as the company expanded its agent base and marketing spend for annual enrollment, while close rates and agent productivity declined. Senior adjusted EBITDA shifted from positive $134.6 million to negative $148.6 million in the quarter.
- Cost of revenue increased 76% in the quarter and 78% year to date, principally from higher agent compensation, facilities and licensing costs, and SelectRx medication costs. Marketing and advertising increased 46% and 56%, respectively.
- The company expanded into pharmacy and population health through the acquisitions of Express Med Pharmaceuticals, now SelectRx, and Simple Meds. SelectRx generated $8.7 million of pharmacy prescription revenue in the quarter and $13.2 million year to date; Simple Meds generated $4.0 million from acquisition through December 31, 2021.
- Debt increased materially following the December 2021 draw under the delayed draw term loan facility, contributing to a 56% quarterly and 41% year-to-date increase in net interest expense.
Guidance, outlook, risks, contingencies, and unusual items
- The filing does not provide formal quantitative revenue, earnings, or EBITDA guidance. Management emphasizes that quarterly results are seasonal and that reported results are not necessarily indicative of future periods.
- Management is focused on improving agent productivity, close rates, marketing efficiency, policy persistency, and the economics of Senior policy acquisition. The filing indicates that lower persistency and lapse rates may continue to affect commission estimates.
- A material weakness in internal control over financial reporting was identified relating to the completeness and accuracy of carrier and policy information used to calculate the first-year provision for certain final expense policies. Management is implementing remediation measures, but the weakness is not yet considered remediated.
- The company corrected prior-period financial information for commission and related receivable errors. The errors reduced fiscal 2021 revenue by $6.1 million and net income by $4.8 million; the filing also reports a $2.4 million revenue correction for the quarter ended September 30, 2021.
- Two putative securities class actions are pending in the Southern District of New York. The company believes the claims lack merit and has not accrued a liability because it does not consider a loss probable, but litigation could be costly and divert management resources.
- Interest-rate exposure is partly hedged through a cash-flow interest-rate swap covering a $325.0 million notional amount of term loans. The company remains exposed to interest costs on unhedged and newly drawn debt.
- COVID-19 had not materially affected the consolidated business as of the filing date, but management continues to monitor the pandemic and related economic effects.
Important facts for investors to verify
- Whether Senior Medicare Advantage lapse rates, persistency, close rates, and agent productivity stabilize or require further downward commission-revenue revisions.
- Whether marketing and agent costs can be reduced sufficiently to restore positive Senior unit economics and adjusted EBITDA.
- Cash burn, collections of commissions receivable, availability under the credit facilities, and compliance with minimum asset-coverage and other debt covenants.
- The timing and terms of required debt amortization beginning March 31, 2022, and the November 2024 maturity.
- Progress in remediating the material internal-control weakness and the effect of future corrections on reported results.
- Potential financial and reputational effects of the securities litigation and any related regulatory or insurance-sales-practice matters.
- Integration costs, earnout obligations, operating performance, and capital requirements associated with SelectRx and Simple Meds.