MEDIAALPHA, INC. The following discussion and analysis of our financial condition and results of operations should be read together with our unaudited consolidated financial statements and related notes included in Part I, Item 1 of this Quarterly Report on Form 10-Q. This discussion, particularly information with respect to our future results of operations or financial condition, business strategy and plans, and objectives of management for future operations, includes forward-looking statements that involve risks and uncertainties as described under the heading "Cautionary Statement Regarding Forward-Looking Statements" in this Quarterly Report on Form 10-Q. You should review the disclosure under the heading "Risk Factors" in Part II, Item 1A of this Quarterly Report on Form 10-Q for a discussion of important factors that could cause our actual results to differ materially from those anticipated in these forward-looking statements.
Management overview
Our mission is to help insurance carriers and distributors target and acquire
customers more efficiently and at greater scale through technology and data
science. Our technology platform brings together leading insurance carriers and
high-intent consumers through a real-time, transparent, and results-driven
ecosystem. We believe we are the largest online customer acquisition channel in
our core verticals of property & casualty ("P&C") insurance, health insurance,
and life insurance, supporting $926 million in Transaction Value across our
platform over the the twelve-month period ended March 31, 2022 .
We have multi-faceted relationships with top-tier insurance carriers and
distributors. A buyer or a demand partner within our ecosystem is generally an
insurance carrier or distributor seeking to reach high-intent insurance
consumers. A seller or a supply partner is typically an insurance carrier
looking to maximize the value of non-converting or low LTV consumers, or an
insurance-focused research destination or other financial website looking to
monetize high-intent users on their websites. For the twelve-month period ended
March 31, 2022 , the websites of our diversified group of supply partners and our
proprietary websites drove an average of 8.2 million Consumer Referrals on our
platform each month.
We generate revenue by earning a fee for each Consumer Referral sold on our
platform. A transaction becomes payable upon a qualifying consumer action, such
as a click, call or lead, and is not contingent on the sale of a product to the
consumer.
We believe in the disruptive power of transparency. Traditionally, insurance
customer acquisition platforms operated in a black box. We recognized that a
consumer may be valued differently by one insurer versus another; therefore,
insurers should be able to determine pricing granularly based on the value that
a particular customer segment is expected to bring to their business. As a
result, we developed a technology platform that powers an ecosystem where buyers
and sellers can transact with full transparency, control, and confidence,
aligning the interests of the parties participating on our platform.
We believe our technology is a key differentiator and a powerful driver of our
performance. We maintain deep, custom integrations with partners representing
the majority of our Transaction Value, which enable automated, data-driven
processes that optimize our partners' customer acquisition spend and revenue.
Through our platform, our insurance carrier partners can target and price across
over 35 separate consumer attributes to manage customized acquisition
strategies.
Key factors affecting our business
Revenue
We believe that our future performance will depend on many factors, including those described below and in Part I, Item 1A "Risk Factors" in the 2021 Annual Report on Form 10-K.
Secular trends in the insurance industry
Our technology platform was created to serve and grow with our core insurance
end markets. We believe secular trends in the insurance industry are critical
drivers of our revenue and will continue to provide strong tailwinds for our
business. More insurance consumers are shopping online and direct-to-consumer
marketing, which fuels our revenue, is the fastest growing insurance
distribution channel. In addition, insurance customer acquisition spending is
growing over time. As mass-market customer acquisition spend is becoming more
costly, insurance carriers and distributors are increasingly focusing on
optimizing customer acquisition spend, which is at the core of the service we
deliver on our platform. As long as these secular trends persist, we expect
digital insurance customer acquisition spending to continue to grow over time,
and we believe we are well-positioned to benefit from this growth.
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Transaction Value
Transaction Value fromOpen Marketplace transactions is a direct driver of our revenue, while Transaction Value fromPrivate Marketplace transactions is an indirect driver of our revenue (see "Key business and operating metrics" below). Transaction Value on our platform declined to$239.0 million for the three months endedMarch 31, 2022 , from$262.5 million for the three months endedMarch 31, 2021 due primarily to a decrease in customer acquisition spending by P&C insurance carriers in response to reductions in underwriting profitability. We have developed multi-faceted, deeply integrated partnerships with insurance carriers and distributors, who are often both buyers and sellers on our platform. We believe the versatility and breadth of our offerings, coupled with our focus on high-quality products, provide significant value to insurance carriers and distributors, resulting in strong retention rates. As a result, many insurance carriers and distributors use our platform as their central hub for broadly managing digital customer acquisition and monetization. For the three months endedMarch 31, 2022 , 99.0% of total insurance Transaction Value executed on our platform came from demand partner relationships from 2021.
Our demand and supply partners
We retain and attract demand partners by finding high-quality sources of Consumer Referrals to make available to our demand partners. We seek to develop, acquire and retain relationships with high-quality supply partners by developing flexible platforms to enable our supply partners to maximize their revenue, manage their demand side relationships in scalable and flexible ways and focus on long-term sustainable economics with respect to revenue share. Our relationships with our partners are deep and longstanding and involve most of the top-tier insurance carriers in the industry. In terms of buyers, during the three months endedMarch 31, 2022 , 15 of the top 20 largest auto insurance carriers by customer acquisition spend were on our platform.
Consumer Referrals
Our results depend in large part on the number of Consumer Referrals purchased on our platform. The aggregate number of consumer clicks, calls and leads purchased by insurance buyers on our platform grew to 24.6 million for the three months endedMarch 31, 2022 , from 24.5 million for the three months endedMarch 31, 2021 . We seek to increase the number and scale of our supply relationships and drive consumers to our proprietary properties through a variety of paid traffic acquisition sources. We are investing in diversifying our paid media sources to extend beyond search engine marketing, which historically represented the bulk of our paid media spend, into other online media sources, including native, social, and display advertising.
Seasonality
Our results are subject to fluctuations as a result of seasonality. In particular, our property & casualty insurance vertical is typically characterized by seasonal strength in our quarters endingMarch 31 due to a greater supply of Consumer Referrals and higher customer acquisition budgets typically during the start of the year, and to seasonal weakness in our quarters endingDecember 31 due to a lower supply of Consumer Referrals available on a cost-effective basis and lower customer acquisition budgets from some buyers during those quarters. Our health insurance vertical is typically characterized by seasonal strength in our quarters endingDecember 31 due to open enrollment periods for health insurance and annual enrollment for Medicare during those quarters, with a material increase in consumer search volume for health products and a related increase in buyer customer acquisition budgets. Other factors affecting our partners' businesses include macro factors such as credit availability in the market, the strength of the economy and employment levels. Cyclicality Our results are also subject to fluctuations as a result of business cycles experienced by companies in the insurance industry. These cycles in the auto insurance industry are characterized by periods of "soft" market conditions, when carriers are profitable and are focused on increasing capacity and building market share, and "hard" market conditions, when carriers tend to raise prices and prioritize profitability over growth. As our demand partners in these industries go through these market cycles, they often increase their customer acquisition spending during soft markets and reduce it during hard markets, causing their relative demand for Consumer Referrals from our platform to increase and decrease accordingly. We believe that the auto insurance industry is currently in a "hard" market due to higher than expected underwriting losses, and that many P&C insurance carriers are reducing their customer acquisition spending until they can increase their premium rates, the timing of which is difficult to predict. 21
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Regulations
Our revenue and earnings may fluctuate from time to time as a result of federal, state, international and industry-based laws, directives and regulations and developing standards with respect to the enforcement of those regulations. Our business is affected directly because we operate websites, conduct telemarketing and email marketing and collect, process, store, share, disclose, transfer and use consumer information and other data. Our business is affected indirectly as our clients adjust their operations as a result of regulatory changes and enforcement activity within their industries. For example, theCalifornia Consumer Privacy Act ("CCPA"), became effective onJanuary 1, 2020 , and number of other states, includingColorado andVirginia , have enacted or are considering similar laws, all of which may affect our business. While it is unclear how this new legislation may be modified or how certain provisions will be interpreted, the effects of this legislation are potentially significant, and may require us to modify our data processing practices and policies and incur substantial compliance-related costs and expenses. For a description of laws and regulations to which we are generally subject, see Item 1 "Business" and Item 1A "Risk Factors." in our 2021 Annual Report on Form 10-K. In addition, we are impacted by the regulation of the insurance carriers with whom we do business. In most/all states, insurance carriers are required to obtain approval of their premium rates from the regulatory authority in such state. The timing of such approval process, as well as the willingness of insurance regulators to approve rate increases, can impact the profitability of new policies and the level of customer acquisition spending by carriers in a given period, which in turn can cause fluctuations in our revenue and earnings.
COVID-19
While the COVID-19 pandemic has changed the physical working environment of the substantial majority of our workforce to working from home, it has otherwise caused only minor disruptions to our business operations with a limited impact on our operating results thus far. Our Travel vertical is largely driven by consumer spending on airfare, hotels, rentals and other travel products. As a result of COVID-19, we have experienced a dramatic decline in revenue from the Travel vertical and expect this trend to continue for the foreseeable future. For the three months endedMarch 31, 2022 , 2021, and 2020, revenue from the Travel vertical comprised approximately 2.7%, 1.3%, and 7.5%, respectively, of our total revenue. While we have sought to maintain our commercial relationships in the Travel vertical and remain positioned to capitalize on transactions in the Travel vertical when travel activity resumes, we do not expect that revenue from the Travel vertical will match our historical results or have any material impact on our overall revenue or profitability for the foreseeable future. In addition, during the second half of 2021, supply chain disruptions and cost increases caused by the pandemic contributed to higher-than-expected property and casualty insurance claims costs, which has led many carriers to reduce their customer acquisition spending to preserve their profitability. These reductions continue to impact revenue from our P&C vertical, and the duration and extent of this impact are difficult to estimate beyond the second quarter of 2022.
Recent developments
OnFebruary 24, 2022 , we agreed to acquire substantially all of the assets ofCustomer Helper Team, LLC ("CHT"), a provider of customer generation and acquisition services for Medicare insurance, automobile insurance, health insurance, life insurance, debt settlement, and credit repair companies on the terms and subject to the conditions set forth in the Asset Purchase Agreement (as amended, the "Agreement"). We closed the transaction onApril 1, 2022 . We believe the acquisition is a good strategic fit with our long-term objectives and will increase our ability to generate Consumer Referrals on various social media and short form video platforms. The purchase price for the acquisition was$50 million in cash at closing, adjusted for any working capital adjustments as set forth in the Agreement, plus up to an additional$20 million of contingent cash consideration based on CHT's achievement of revenue and profitability targets over the next two years. We funded the transaction in part by drawing$25 million under the 2021 Revolving Credit Facility and the balance from cash on hand as of the closing.
Key components of our results of operations
Revenue
We operate primarily in the P&C insurance, health insurance and life insurance verticals and generate revenue through the purchase and sale of Consumer Referrals.
The price and amount of Consumer Referrals purchased and sold on our platform
vary based on a number of market conditions and consumer attributes, including
(i) geographic location of consumers, (ii) demographic attributes of consumers,
(iii) the source of Consumer Referrals and quality of conversion by source,
(iv) buyer bids and (v) buyer demand and budget.
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In ourOpen Marketplace transactions, we have control over the Consumer Referrals that are sold to our demand partners. In these arrangements, we have separate agreements with demand partners and suppliers. Suppliers are not a party to the contractual arrangements with our demand partners, nor are the suppliers the beneficiaries of our demand partner agreements. We earn fees from our demand partners and separately pay (i) a revenue share to suppliers and (ii) a fee to internet search companies to drive consumers to our proprietary websites. We are the principal in theOpen Marketplace transactions. As a result, the fees paid by demand partners are recognized as revenue and the fees paid to suppliers are included in cost of revenue. With respect to ourPrivate Marketplace transactions, buyers and suppliers contract with one another directly and leverage our platform to facilitate transparent, real-time transactions utilizing the reporting and analytical tools available to them from use of our platform. We charge a platform fee on the Consumer Referrals transacted. We act as an agent in thePrivate Marketplace transactions and recognize revenue for the platform fee received. There are no separate payments made by us to suppliers in ourPrivate Marketplace .
Costs and operating expenses
Costs and operating expenses consist primarily of cost of revenue, sales and marketing expenses, product expenses and general and administrative expenses.
Cost of revenue
Our cost of revenue is comprised primarily of revenue share payments to suppliers and traffic acquisition costs paid to top tier search engines, as well as telephony infrastructure costs, internet and hosting costs, and merchant fees, and include salaries, wages and benefits, including non-cash equity-based compensation, and other expenses.
Sales and marketing
Sales and marketing expenses consist primarily of an allocation of personnel expenses for employees engaged in demand side and supply side business development, marketing and media acquisition activities, and include salaries, wages and benefits, including non-cash equity-based compensation. Sales and marketing expenses also include costs related to attracting partners to our platform, including marketing and promotions, tradeshows and related travel and entertainment expenses. Sales and marketing expenses also include an allocated portion of rent and facilities expenses and depreciation and amortization expense.
Product development
Product development expenses consist primarily of an allocation of personnel expenses for employees engaged in technology, engineering and product development and include salaries, wages and benefits, including non-cash equity-based compensation. Product development expenses also include an allocated portion of rent and facilities expenses and depreciation and amortization expense.
General and administrative
General and administrative expenses consist primarily of an allocation of personnel expenses for executive, finance, legal, human resources, and business analytics employees, and include salaries, wages and benefits, including non-cash equity-based compensation. General and administrative expenses also include professional services and an allocated portion of rent and facilities expenses and depreciation expense.
Interest expense
Interest expense consists primarily of interest expense associated with outstanding borrowings under our loan and security agreements and the amortization of deferred financing costs associated with these arrangements.
Provision for income taxes
MediaAlpha, Inc. is taxed as a corporation and pays corporate federal, state and local taxes on income allocated to it from QLH based uponMediaAlpha, Inc.'s economic interest held in QLH. QLH is treated as a pass-through partnership for income tax reporting purposes and is not subject to federal income tax. Instead, QLH's taxable income or loss is passed through 23
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to its members, including
Net income (loss) attributable to Non-controlling interest
Net income (loss) is attributed to non-controlling interests in accordance with QLH's limited liability company agreement. We allocate the share of net income (loss) incurred subsequent to the Reorganization Transactions to the non-controlling interest holders pro-rata to their holdings. The non-controlling interests balance represents the Class B-1 units, substantially all of which are held by Insignia and the Senior Executives.
Operating results for the three months ended
The following table sets forth our operating results in absolute dollars and as
a percentage of revenue for the three months ended
Three months ended
March 31,
(in thousands) 2022 2021
Revenue $ 142,599 100.0 % $ 173,588 100.0 %
Costs and operating expenses
Cost of revenue 120,881 84.8 % 147,180 84.8 %
Sales and marketing 7,223 5.1 % 5,391 3.1 %
Product development 5,216 3.7 % 3,320 1.9 %
General and administrative 17,148 12.0 % 15,749 9.1 %
Total costs and operating expenses 150,468 105.5 % 171,640 98.9 %
(Loss) income from operations (7,869) (5.5) % 1,948 1.1 %
Other (income), net (523) (0.4) % (150) (0.1) %
Interest expense 1,359 1.0 % 2,301 1.3 %
Total other expense, net 836 0.6 % 2,151 1.2 %
(Loss) before income taxes (8,705) (6.1) % (203) (0.1) %
Income tax expense (benefit) 1,143 0.8 % (364) (0.2) %
Net (loss) income $ (9,848) (6.9) % $ 161 0.1 %
Net (loss) attributable to non-controlling
interest (2,772) (1.9) % (124) (0.1) %
Net (loss) income attributable to
MediaAlpha, Inc. $ (7,076) (5.0) % $ 285 0.2 %
Net (loss) income per share of Class A
common stock
-Basic $ (0.17) $ 0.01
-Diluted $ (0.17) $ 0.00
Weighted average shares of Class A common
stock outstanding
-Basic 40,847,941 33,136,632
-Diluted 40,847,941 62,163,390
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Revenue
The following table presents our revenue, disaggregated by vertical, for the
three months ended
Three Months Three Months
Ended Ended
March 31, March 31,
(dollars in thousands) 2022 $ % 2021
Property & Casualty insurance $ 87,454 $ (38,087) (30.3) % $ 125,541
Percentage of total revenue 61.3 % 72.3 %
Health insurance 42,109 6,213 17.3 % $ 35,896
Percentage of total revenue 29.5 % 20.7 %
Life insurance 7,067 (886) (11.1) % $ 7,953
Percentage of total revenue 5.0 % 4.6 %
Other 5,969 1,771 42.2 % $ 4,198
Percentage of total revenue 4.2 % 2.4 %
Revenue $ 142,599 (30,989) (17.9) % $ 173,588
The decrease in P&C insurance revenue for the three months ended March 31, 2022 ,
compared with the three months ended March 31, 2021 , was due to a decrease in
customer acquisition spending by certain insurance carriers to address
profitability concerns caused by higher-than-expected automobile repair and
replacement costs and overall inflationary pressures and certain carriers and
supply partners shifting their transactions with each other from our Open
Marketplace to our Private Marketplace due to lower platform fees for our
Private Marketplace , which transact on a net revenue basis . The auto insurance
industry began to experience a cyclical downturn in the second half of 2021,
with many P&C carriers experiencing lower than expected underwriting
profitability, leading them to reduce marketing budget allocations to our
channel. We are currently unable to predict the duration of this cyclical
downturn or its impact on our revenue from the P&C insurance vertical, or our
profitability, beyond the second quarter of 2022.
The increase in health insurance revenue for the three months ended March 31,
2022 , compared with the three months ended March 31, 2021 , was driven by
increased customer acquisition spending in our marketplaces by health insurance
carriers and brokers, as well as by an increased supply of customer referrals to
our marketplaces by our supply partners and our proprietary websites due to the
increased demand. Additionally, the Open and Annual Enrollment periods for
fiscal 2021, which typically end by December 15th , were extended until January
15, 2022 , resulting in increased revenue from our health insurance vertical
during the current quarter.
The decrease in life insurance revenue for the three months ended
The increase in other revenue for the three months endedMarch 31, 2022 , compared with the three months endedMarch 31, 2021 , was driven primarily by an increase in travel comparison shopping, due to the easing of concerns related to COVID-19, as well as higher activity levels from our consumer finance supply and demand partners due to the continued strength in the mortgage and refinance market.
Cost of revenue
The following table presents our cost of revenue for the three months endedMarch 31, 2022 and 2021, and the dollar and percentage changes between the two periods: Three Months Ended Three Months Ended (dollars in thousands) March 31, 2022 $ % March 31, 2021 Cost of revenue $ 120,881$ (26,299) (17.9) % $ 147,180 Percentage of revenue 84.8 % 84.8 %
The decrease in cost of revenue for the three months ended
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Sales and marketing
The following table presents our sales and marketing expenses for the three months endedMarch 31, 2022 and 2021, and the dollar and percentage changes between the two periods: Three Months Ended Three Months Ended (dollars in thousands) March 31, 2022 $ % March 31, 2021 Sales and marketing $ 7,223$ 1,832 34.0 % $ 5,391 Percentage of revenue 5.1 % 3.1 % The increase in sales and marketing expenses for the three months endedMarch 31, 2022 , compared with the three months endedMarch 31, 2021 , was due primarily to higher equity-based compensation expense of$1.0 million and an increase in personnel-related costs of$0.8 million resulting from planned headcount additions.
Product development
The following table presents our product development expenses for the three months endedMarch 31, 2022 and 2021, and the dollar and percentage changes between the two periods: Three Months Ended Three Months Ended (dollars in thousands) March 31, 2022 $ % March 31, 2021 Product development $ 5,216$ 1,896 57.1 % $ 3,320 Percentage of revenue 3.7 % 1.9 % The increase in product development expenses for the three months endedMarch 31, 2022 , compared with the three months endedMarch 31, 2021 , was due primarily to higher equity-based compensation expense of$0.9 million and an increase in personnel-related costs of$0.8 million resulting from planned headcount additions to continue to enhance our technology.
General and administrative
The following table presents our general and administrative expenses for the
three months ended
Three Months Ended Three Months Ended
(dollars in thousands) March 31, 2022 $ % March 31, 2021
General and administrative $ 17,148 $ 1,399 8.9 % $ 15,749
Percentage of revenue 12.0 % 9.1 %
The increase in general and administrative expenses for the three months ended
March 31, 2022 , compared with the three months ended March 31, 2021 , was due
primarily to higher equity-based compensation expense of $1.3 million and an
increase in personnel-related costs of $0.7 million resulting from planned
headcount additions, offset in part by lower legal and professional fees.
Equity-based compensation
The following table presents our equity-based compensation expense that was included in costs and operating expenses for the three months endedMarch 31, 2022 and 2021, and the dollar and percentage changes between the two periods: Three Months Ended Three Months Ended (dollars in thousands) March 31, 2022 $ % March 31, 2021 Cost of revenue $ 398$ (2) (0.5) % $ 400 Sales and marketing 2,705 1,003 58.9 % 1,702 Product development 2,249 917 68.8 % 1,332 General and administrative 8,421 1,253 17.5 % 7,168 Total $ 13,773$ 3,171 29.9 % $ 10,602 The increase in equity-based compensation expense for the three months endedMarch 31, 2022 , compared with the three months endedMarch 31, 2021 , was driven primarily by expenses related to additional restricted stock units granted during 2021. 26
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Amortization
The following table presents our amortization of intangible asset expense that was included in costs and operating expenses for the three months endedMarch 31, 2022 and 2021, and the dollar and percentage changes between the two periods: Three Months Ended Three Months Ended (dollars in thousands) March 31, 2022 $ % March 31, 2021 Sales and Marketing $ 683$ (63) (8.4) % $ 746
The decrease in amortization expense for the three months ended
Other (income), net
The following table presents our other income for the three months ended
Three Months Ended Three Months Ended
(dollars in thousands) March 31, 2022 $ % March 31, 2021
Other (income), net $ (523) $ (373) 248.7 % $ (150)
Percentage of revenue (0.4) % (0.1) %
The increase in other income for the three months ended March 31, 2022 , compared
with the three months ended March 31, 2021 , was driven primarily by estimated
future state tax benefits adjustments related to the tax receivables agreement
("TRA").
Interest expense
The following table presents our interest expense for the three months ended
March 31, 2022 and 2021, and the dollar and percentage changes between the two
periods:
Three Months Ended Three Months Ended
(dollars in thousands) March 31, 2022 $ % March 31, 2021
Interest expense $ 1,359 $ (942) (40.9) % $ 2,301
Percentage of revenue 1.0 % 1.3 %
The decrease in interest expense for the three months ended
Income tax expense (benefit)
The following table presents our income tax expense for the three months endedMarch 31, 2022 and 2021, and the dollar and percentage changes between the two periods: Three Months Ended Three Months Ended (dollars in thousands) March 31, 2022 $ % March 31, 2021 Income tax expense (benefit)$ 1,143 $ 1,507 (414.0) % $ (364) Percentage of revenue 0.8 % (0.2) % For the three months endedMarch 31, 2022 , we recorded an income tax expense of$1.1 million resulting from our effective tax rate of (13.1)%, which differed from theU.S. federal statutory rate of 21%, due primarily to nondeductible equity-based compensation, losses associated with non-controlling interests not taxable to us, state taxes, and other nondeductible permanent items. For the three months endedMarch 31, 2021 , we recorded an income tax benefit of$0.4 million resulting from our effective tax rate of 179.3% which differed from theU.S. federal statutory rate of 21%, primarily due to nondeductible equity-based compensation, state taxes, income not taxable to us associated with the non-controlling interest, nondeductible transaction costs associated with the secondary offering and the impact of tax benefits associated with equity-based awards. 27
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Key business and operating metrics
In addition to traditional financial metrics, we rely upon certain business and operating metrics that are not presented in accordance with GAAP to estimate the volume of spending on our platform, estimate and recognize revenue, evaluate our business performance and facilitate our operations. Such business and operating metrics should not be considered in isolation from, or as an alternative to, measures presented in accordance with GAAP and should be considered together with other operating and financial performance measures presented in accordance with GAAP. Also, such business and operating metrics may not necessarily be comparable to similarly titled measures presented by other companies.
Adjusted EBITDA
We define "Adjusted EBITDA" as net income excluding interest expense, income tax benefit (expense), depreciation expense on property and equipment, amortization of intangible assets, as well as equity-based compensation expense and certain other adjustments as listed in the table below. Adjusted EBITDA is a non-GAAP financial measure that we present to supplement the financial information we present on a GAAP basis. We monitor and present Adjusted EBITDA because it is a key measure used by our management to understand and evaluate our operating performance, to establish budgets and to develop operational goals for managing our business. We believe that Adjusted EBITDA helps identify underlying trends in our business that could otherwise be masked by the effect of the expenses that we exclude in the calculations of Adjusted EBITDA. Accordingly, we believe that Adjusted EBITDA provides useful information to investors and others in understanding and evaluating our operating results, enhancing the overall understanding of our past performance and future prospects. In addition, presenting Adjusted EBITDA provides investors with a metric to evaluate the capital efficiency of our business. Adjusted EBITDA is not presented in accordance with GAAP and should not be considered in isolation of, or as an alternative to, measures presented in accordance with GAAP. There are a number of limitations related to the use of Adjusted EBITDA rather than net income, which is the most directly comparable financial measure calculated and presented in accordance with GAAP. These limitations include the fact that Adjusted EBITDA excludes interest expense on debt, income tax benefit (expense), equity-based compensation expense, depreciation and amortization, and certain other adjustments that we consider useful information to investors and others in understanding and evaluating our operating results. In addition, other companies may use other measures to evaluate their performance, including different definitions of "Adjusted EBITDA," which could reduce the usefulness of our Adjusted EBITDA as a tool for comparison. The following table reconciles Adjusted EBITDA with net income (loss), the most directly comparable financial measure calculated and presented in accordance with GAAP, for the three months endedMarch 31, 2022 and 2021. Three months ended March 31, (in thousands) 2022 2021 Net (loss) income$ (9,848) $ 161 Equity-based compensation expense 13,773 10,602 Interest expense 1,359 2,301 Income tax expense (benefit) 1,143 (364) Depreciation expense on property and equipment 98
82
Amortization of intangible assets 683 746 Transaction expenses(1) 380 2,665 Employee-related costs(2) - 250 SOX implementation costs(3) 110 152 Changes in TRA related liability(4) (630)
(156)
Settlement of federal and state income tax refunds(5) 74 - Adjusted EBITDA$ 7,142 $ 16,439 (1)Transaction expenses consist of$0.4 million of expenses incurred by us for the three months endedMarch 31, 2022 in connection with the acquisition of CHT. For the three months endedMarch 31, 2021 transaction expenses consist of$2.7 million for legal, accounting, and other consulting fees in connection with the Secondary Offering. (2)Employee-related costs include$0.3 million of expenses incurred by us for the three months endedMarch 31, 2021 for amounts payable to recruiting firms in connection with the hiring of certain executive officers to support our operation as a publicly-reporting company. 28
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(3)SOX implementation costs consist of$0.1 million and$0.2 million of expenses incurred by us for the three months endedMarch 31, 2022 and 2021, respectively, for third-party consultants to assist us with the development, implementation, and documentation of new and enhanced internal controls and processes for compliance with SOX Section 404(b) for 2021. (4)Changes in TRA related liability consist of$0.6 million and$0.2 million of income for the three months endedMarch 31, 2022 and 2021, respectively, due to a change in the estimated future state tax benefits and other changes in the estimate resulting in reductions of the TRA liability. (5)Settlement of federal and state tax refunds consist of$0.1 million of expense incurred by us for the three months endedMarch 31, 2022 related to reimbursement toWhite Mountains for state tax refunds for the period prior to the Reorganization Transaction related to 2020 tax returns. The settlement also resulted in a benefit of the same amount which has been recorded within income tax expense (benefit).
Contribution and Contribution Margin
We define "Contribution" as revenue less revenue share payments and online advertising costs, or, as reported in our consolidated statements of operations, revenue less cost of revenue (i.e., gross profit), as adjusted to exclude the following items from cost of revenue: equity-based compensation; salaries, wages, and related costs; internet and hosting costs; amortization; depreciation; other services; and merchant-related fees. We define "Contribution Margin" as Contribution expressed as a percentage of revenue for the same period. Contribution and Contribution Margin are non-GAAP financial measures that we present to supplement the financial information we present on a GAAP basis. We use Contribution and Contribution Margin to measure the return on our relationships with our supply partners (excluding certain fixed costs), the financial return on and efficacy of our online advertising costs to drive consumers to our proprietary websites, and our operating leverage. We do not use Contribution and Contribution Margin as measures of overall profitability. We present Contribution and Contribution Margin because they are used by our management and board of directors to manage our operating performance, including evaluating our operational performance against budget and assessing our overall operating efficiency and operating leverage. For example, if Contribution increases and our headcount costs and other operating expenses remain steady, our Adjusted EBITDA and operating leverage increase. If Contribution Margin decreases, we may choose to re-evaluate and re-negotiate our revenue share agreements with our supply partners, to make optimization and pricing changes with respect to our bids for keywords from primary traffic acquisition sources, or to change our overall cost structure with respect to headcount, fixed costs and other costs. Other companies may calculate Contribution and Contribution Margin differently than we do. Contribution and Contribution Margin have their limitations as analytical tools, and you should not consider them in isolation or as substitutes for analysis of our results presented in accordance with GAAP. The following table reconciles Contribution with gross profit, the most directly comparable financial measure calculated and presented in accordance with GAAP, for the three months endedMarch 31, 2022 and 2021: Three months ended March 31, (in thousands) 2022 2021 Revenue$ 142,599 $ 173,588 Less cost of revenue (120,881) (147,180) Gross profit 21,718 26,408 Adjusted to exclude the following (as related to cost of revenue): Equity-based compensation 398 400 Salaries, wages, and related 656 464 Internet and hosting 104 102 Other expenses 127 107 Depreciation 6 7 Other services 530 291 Merchant-related fees 15 90 Contribution 23,554 27,869 Gross margin 15.2 % 15.2 % Contribution Margin 16.5 % 16.1 % 29
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Transaction Value
We define "Transaction Value" as the total gross dollars transacted by our partners on our platform. Transaction Value is a driver of revenue, with differing revenue recognition based on the economic relationship we have with our partners. Our partners use our platform to transact via Open andPrivate Marketplace transactions. In ourOpen Marketplace model, Transaction Value is equal to revenue recognized and revenue share payments to our supply partners represent costs of revenue. In ourPrivate Marketplace model, revenue recognized represents a platform fee billed to the demand partner or supply partner based on an agreed-upon percentage of the Transaction Value for the Consumer Referrals transacted, and accordingly there are no associated costs of revenue. We utilize Transaction Value to assess revenue and to assess the overall level of transaction activity through our platform. We believe it is useful to investors to assess the overall level of activity on our platform and to better understand the sources of our revenue across our different transaction models and verticals.
The following table presents Transaction Value by platform model for the three
months ended
Three months ended
March 31,
(dollars in thousands) 2022 2021
Open Marketplace transactions $ 138,096 $ 169,348
Percentage of total Transaction Value 57.8 % 64.5 %
Private Marketplace transactions 100,916 93,114
Percentage of total Transaction Value 42.2 % 35.5 %
Total Transaction Value $ 239,012 $ 262,462 The following table presents Transaction Value by vertical for the three months
ended
Three months ended
March 31,
(dollars in thousands) 2022 2021
Property & Casualty insurance $ 148,083 $ 183,426
Percentage of total Transaction Value 62.0 % 69.9 %
Health insurance 60,255 50,342
Percentage of total Transaction Value 25.2 % 19.2 %
Life insurance 12,392 14,442
Percentage of total Transaction Value 5.2 % 5.5 %
Other (1) 18,282 14,252
Percentage of total Transaction Value 7.6 % 5.4 %
Total Transaction Value $ 239,012 $ 262,462 (1)Our other verticals include Travel, Education and Consumer Finance.
Consumer Referrals
We define "Consumer Referral" as any consumer click, call or lead purchased by a buyer on our platform. Click revenue is recognized on a pay-per-click basis and revenue is earned and recognized when a consumer clicks on a listed buyer's advertisement that is presented subsequent to the consumer's search (e.g., auto insurance quote search or health insurance quote search). Call revenue is earned and recognized when a consumer transfers to a buyer and remains engaged for a requisite duration of time, as specified by each buyer. Lead revenue is recognized when we deliver data leads to buyers. Data leads are generated either through insurance carriers, insurance-focused research destination websites or other financial websites that make the data leads available for purchase through our platform, or when consumers complete a full quote request on our proprietary websites. Delivery occurs at the time of lead transfer. The data we generate from each Consumer Referral feeds into our analytics model to generate conversion probabilities for each unique consumer, enabling discovery of predicted return and cost per sale across the platform and helping us to improve our platform technology. We monitor the number of Consumer Referrals on our platform in order to measure Transaction Value, revenue and overall business performance across our verticals and platform models. For the three months endedMarch 31, 2022 , Transaction Value generated from clicks, calls and leads was 77.7%, 11.7% and 10.6%, respectively. For the three months endedMarch 31, 2021 , Transaction Value generated from clicks, calls and leads was 82.6%, 7.2% and 10.2%, respectively. 30
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Table of Contents Segment information We operate inthe United States and in a single operating segment. Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker, or decision-making group, in deciding how to allocate resources and in assessing performance. Our chief operating decision maker is our chief executive officer, who reviews financial information presented on a consolidated basis for purposes of allocating resources and evaluating financial performance. No expense or operating income is evaluated at a segment level. Since we operate in one operating segment and reportable segment, all required financial segment information can be found in the consolidated financial statements.
Liquidity and capital resources
Overview
Our principal sources of liquidity are our cash flows generated from operations. Our principal uses of cash include to fund operations, interest payments and mandatory principal payments on our long-term debt. As ofMarch 31, 2022 andDecember 31, 2021 , our cash and cash equivalents totaled$55.3 million and$50.6 million , respectively. We believe that our current sources of liquidity, which include cash flow generated from operations, cash and funds available under the 2021 Credit Facilities, will be sufficient to meet our projected operating and debt service requirements for at least the next 12 months. To the extent that our current liquidity is insufficient to fund future activities, we may need to raise additional funds. Our business is seasonal and cyclical in nature and these trends, if continued for a long period of time, could impact the cash flows generated from operations requiring us to draw on our available borrowing capacity under the 2021 Revolving Credit Facility or raise additional funds in the short term. During the second half of 2021, the auto insurance industry began to experience a cyclical downturn and supply chain disruptions and cost increases caused by the pandemic contributed to higher-than-expected property and casualty insurance claims costs, which led many carriers to reduce their customer acquisition spending to preserve their profitability. These reductions continue to impact revenue from our P&C vertical and we are currently unable to estimate the impact beyond the second quarter of 2022. We have typically not used funds available under our credit facilities to fund our operations and payments under the credit facilities. OnFebruary 24, 2022 , we entered into an agreement to acquire substantially all of the assets ofCustomer Helper Team, LLC ("CHT") for a purchase price of$50.0 million in cash at closing, adjusted for any working capital adjustments, plus up to an additional$20.0 million of contingent cash consideration based on CHT's achievement of revenue and profitability targets over the next two years. We closed the transaction onApril 1, 2022 . We funded the transaction in part by drawing$25.0 million under the 2021 Revolving Credit Facility and the balance from cash on hand as of the closing. OnMarch 14, 2022 , our Board of Directors approved the repurchase of shares of our Class A common stock having an aggregate value of up to$5.0 million from time to time in open market transactions at prevailing market prices or by other means in accordance with federal securities laws. We expect the repurchases to be made over the second and third quarters of 2022. The timing and amount of any share repurchases will be determined by our management team based on their ongoing evaluation of market conditions, our capital needs, debt covenants and other factors. The repurchases will be financed from our cash balances. We may engage in additional merger and acquisition or other activities that could require us to draw on our existing credit facilities or may need to raise additional funds. In the future, we may attempt to raise additional capital through the sale of equity securities or through debt financing arrangements. If we raise additional funds by issuing equity securities, the ownership of our existing stockholders will be diluted. The incurrence of additional debt financing would result in debt service obligations, and any future instruments governing such debt could provide for operating and financing covenants that could restrict our operations. Our material cash requirements include our long-term debt, operating lease obligations, and liabilities under the TRA.
Cash Flows
The following table presents a summary of our cash flows for the three months endedMarch 31, 2022 and 2021, and the dollar and percentage changes between the periods: 31
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Three months Three months
ended March 31, ended March 31,
(dollars in thousands) 2022 $ % 2021
Net cash provided by (used in) operating
activities $ 8,089 $ 17,445 (186.5) % $ (9,356)
Net cash used in investing activities (40) 29 (42.0) % (69)
Net cash used in financing activities (3,325) (2,049) 160.6 % (1,276)
Operating activities
Cash flows provided by operating activities were $8.1 million for the three
months ended March 31, 2022 , compared with cash flows used in operating
activities of $9.4 million for the three months ended March 31, 2021 . The
increase resulted from lower working capital usage due primarily to the timing
of our payables and higher working capital usage in the 2020 and 2021 driven
primarily by growth in our business and expenses incurred in connection with the
IPO and Reorganization Transactions and Secondary Offering, offset in part by
the higher net loss in the current period.
Investing activities
Cash flows used in investing activities were immaterial for the three months
ended
Financing activities
Cash flows used in financing activities were$3.3 million for the three months endedMarch 31, 2022 , compared with$1.3 million for the three months endedMarch 31, 2021 . The increase in net cash used was due to the principal payment on the 2021 Term Loan Facility.
Senior secured credit facilities
2021 Credit Facilities
OnJuly 29, 2021 , we entered into an amendment (the "First Amendment") to the 2020 Credit Agreement (as amended by the First Amendment, the "Amended Credit Agreement"). The Amended Credit Agreement provides for a new senior secured term loan facility in an aggregate principal amount of$190.0 million (the "2021 Term Loan Facility"), the proceeds of which were used to refinance all of the$186.4 million of the existing 2020 Term Loan Facility outstanding and the unpaid interest thereof as of the date of the First Amendment, to pay fees related to these transactions, and to provide cash for general corporate purposes, and a new senior secured revolving credit facility with commitments in an aggregate amount of$50.0 million (the "2021 Revolving Credit Facility" and, together with the 2021 Term Loan Facility, the "2021 Credit Facilities"), which replaced the 2020 Revolving Credit Facility. Our obligations under the 2021 Credit Facilities are guaranteed by QLH and secured by substantially all assets ofQLH and QuoteLab, LLC . Borrowings under the 2021 Credit Facilities bear interest at a rate equal to, at our option, the London Interbank Offered Rate plus an applicable margin, with a floor of 0.00%, or base rate plus an applicable margin. The applicable margins will be based on our consolidated total net leverage ratio as calculated under the terms of the Amended Credit Agreement (the "Leverage Ratio") for the prior fiscal quarter and range from 2.00% to 2.75% with respect to theLondon interbank offered rate and from 1.00% to 1.75% with respect to the base rate. Loans under the 2021 Credit Facilities will mature onJuly 29, 2026 . Loans under the 2021 Term Loan Facility will amortize quarterly, beginning with the first business day afterDecember 31, 2021 and ending withJune 30, 2026 , by an amount equal to 1.25% of the aggregate outstanding principal amount of the term loans initially made. As ofMarch 31, 2022 , we had$184.6 million of outstanding borrowings, net of deferred debt issuance costs of$3.0 million , under the 2021 Credit Facilities. OnApril 1, 2022 , we borrowed$25.0 million under the 2021 Revolving Credit Facility to pay a portion of the purchase price for our acquisition of CHT.
Tax receivables agreement
Our purchases (through Intermediate Holdco) of Class B-1 units from certain
unitholders in connection with the IPO, as well as exchanges of Class B-1 units
subsequent to the IPO (together with an equal number of shares of our Class B
common stock) for shares of our Class A common stock (or, at our election, cash
of an equivalent value) ("Exchange"), and the Pre-IPO Leveraged Distribution and
other actual or deemed distributions by QLH to its members pursuant to the
Exchange Agreement,
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have resulted and are expected to continue to result in increases in our allocable tax basis in the assets of QLH. These increases in tax basis are expected to increase (for tax purposes) depreciation and amortization deductions allocable to us and, therefore, reduce the amount of tax that we otherwise would be required to pay in the future. This increase in tax basis may also decrease gain (or increase loss) on future dispositions of certain assets to the extent tax basis is allocated to those assets. In connection with the IPO, we entered into the TRA with Insignia, the Senior Executives, andWhite Mountains related to the tax basis step-up of the assets of QLH and certain net operating losses of Intermediate Holdco. The agreement requires us to pay Insignia and the Senior Executives 85% of the cash savings, if any, inU.S. federal, state and local income tax we realize (or are deemed to realize) as a result of (i) any increases in tax basis of assets of QLH resulting from any Exchange, and (ii) certain other tax benefits related to making our payments under the TRA. The TRA also requires us to payWhite Mountains 85% of the amount of the cash savings, if any, inU.S. federal, state and local income tax that we realize (or are deemed to realize) as a result of the utilization of the net operating losses of Intermediate Holdco attributable to periods prior to the IPO and the deduction of any imputed interest attributable to our payment obligations under the TRA. In addition to tax expenses, we will also make payments under the TRA, which we expect to be significant. We account for the income tax effects and corresponding TRA effects resulting from any Exchange by recognizing an increase in our deferred tax assets, based on enacted tax rates at the date of the Exchange. Further, we evaluate the likelihood that we will realize the benefit represented by the deferred tax asset and, to the extent that we estimate that it is more likely than not that we will not realize the benefit, we will reduce the carrying amount of the deferred tax asset with a valuation allowance. The amounts to be recorded for both the deferred tax assets and the liability for our obligations under the TRA are estimated at the time of any purchase or exchange as a reduction to stockholders' equity, and the effects of changes in any of our estimates after this date will be included in net income (loss). Similarly, the effect of subsequent changes in the enacted tax rates will be included in net income (loss). Judgment is required in assessing the future tax consequences of events that have been recognized in our consolidated financial statements. A change in our assessment of such consequences, such as realization of deferred tax assets, changes in blended tax rates, changes in tax laws or interpretations thereof could materially impact our results.
Recent accounting pronouncements
For a discussion of new accounting pronouncements recently adopted and not yet adopted, see Note 1 to the consolidated financial statements appearing in Part I, Item 1 of this Quarterly Report on Form 10-Q.
Critical accounting policies and estimates
Our critical accounting policies and estimates are included in the 2021 Annual Report on Form 10-K and did not materially change during the three months endedMarch 31, 2022 .
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