Hello and welcome to today's EverQuote Third Quarter 2022 Earnings Conference Call. My name is Bailey and I will be the moderator for today's call. All lines will be muted during the presentation portion of the call with an opportunity for questions-and-answers at the end. [Operator Instructions] I would now like to pass the conference over to our host Brinlea Johnson. So please go ahead when you are ready.

Thank you. Good afternoon and welcome to EverQuote's third quarter 2022 earnings call. We'll be discussing the results announced in our press release issued today after the market closed. With me on the call this afternoon is Jayme Mendal, EverQuote's Chief Executive Officer; and John Wagner, Chief Financial Officer of EverQuote. During the call, we will make statements related to our business that may be considered forward-looking statements under federal securities laws including statements concerning our financial guidance for the fourth quarter and full year 2022, our growth strategy, and our plans to execute on our growth strategy, key initiatives including our direct-to-consumer agency, our investments in the business, the growth drivers we expect to drive our business, our ability to maintain existing and acquire new customers, our expectations regarding recovery of the auto insurance industry, our recent acquisitions, and our goals for integrations and other statements regarding our plans and prospects. Forward-looking statements may be identified with words and phrases such as we expect, we believe, we intend, we anticipate, we plan, may, upcoming and similar words and phrases. These statements reflect our views only as of today and should not be considered our views as of any subsequent date. We specifically disclaim any obligation to update or revise these forward-looking statements except as required by law. Forward-looking statements are not promises or guarantees of future performance and are subject to a variety of risks and uncertainties that could cause the actual results to differ materially from our expectations. For a discussion of material risks and other important factors that could cause our actual results to differ materially from our expectations, please refer to those contained under the heading Risk Factors in our most recent Quarterly Report on Form 10-Q which is on file with the Securities and Exchange Commission and available on the Investor Relations section of our website at investor.everquote.com and on the SEC's website at sec.gov. Finally, during the course of today's call, we'll refer to certain non-GAAP financial measures, which we believe are helpful to investors. A reconciliation of GAAP to non-GAAP measures is included in the press release we issued after the market closed today, which is available on the Investor Relations section of our website at investors.everquote.com. And with that, I'll turn it over to you Jayme.

Thank you, Brinlea, and thank you all for joining us today. Third quarter performance demonstrated our continued agility as we quickly adapted our operations to a changing environment and exceeded expectations across our three primary financial KPIs, producing revenue of $103.2 million variable marketing margin or VMM of $31.8 million and adjusted EBITDA of $2 million, despite ongoing headwinds in the auto insurance industry. The state of the auto insurance market remains unsettled. In August, we began to see the first major carrier return to more normalized historical spending patterns as they started to restore rates and profitability to their desired levels. While this positive dynamic drove better than expected Q3 performance, Hurricane Ian expected to be among the largest loss events in history, has put significant incremental downward pressure on the market and on carriers marketing spend through year end. As a result, we continue to expect the bulk of the auto recovery to materialize in 2023. Despite a challenging backdrop, we executed well in Q3 and continued to make progress on several fronts across our business. On the consumer side of the marketplace, we grew consumer volume by 27% year-on-year through strong execution from our customer acquisition teams. On the provider side of our marketplace, agent-oriented distribution channels continue to demonstrate relative strength and resilience. Feedback from multiple carrier partners indicates that EverQuote is the largest and highest performing referral partner to their local agents. In addition, data suggests EverQuote has gained market share since the start of the downturn and we also continue to mix strides on longer term strategic initiatives. Our Direct-to-Consumer-Agency, or DTCA, continues to perform well. However, we have moderated agent headcount growth relative to earlier plans as part of tighter company-wide operating expense management efforts and in order to prioritize improving our unit…

Thank you, Jayme, and good afternoon everyone. I'll start by discussing our financial results for the third quarter and then provide guidance for the fourth quarter and updated guidance for the full year 2022. I'm pleased to report that we exceeded our prior guidance on all our key metrics this quarter and have raised guidance for the full year 2022. Total revenue for Q3 was $103.2 million, a decline of 4% year-over-year and above our guidance range provided last quarter as strong growth in consumer volume nearly offset reductions in monetization that resulted from the auto insurance industry downturn. Within the auto insurance vertical, carrier demand remains at low levels due to the industry pullback in carrier spending. However, we experienced some stability and demand within the quarter and a notable increase in consumer acquisition activity by one major carrier. Though limited, we were encouraged by the first instance of a carrier increase in spending on consumer acquisition after achieving adequate rate increases. Consumer volumes increased significantly again this quarter with year-over-year growth consistent with that of Q2. These consumer volume gains largely offset lower monetization and resulted in revenue in our auto insurance vertical decreasing only 2% year-over-year to $88.1 million. We drove more volume at lower cost due to continued nimble consumer acquisition and an industry reported increase in consumer shopping behavior in reaction to premium increases. Revenue from our other insurance verticals, which includes home and renters, life and health insurance decreased 16% year-over-year to $15.1 million for the third quarter and represented 15% of revenue. The decline was caused by a combination of lower demanded certain verticals and a proactive reduction in dedicated resources to align our cost structure with the current market conditions. Within health DTCA, revenue growth slowed as expected based on a planned…

Thank you. [Operator Instructions] Our first question today comes from the line of Ralph Schackart from William Blair. Please go ahead. Your line is now open.

Great, thanks. Two, if I could please. Jayme, in the call, it sounded like you had one major carrier customer that came in and unfortunately with Hurricane Ian the carriers are out for Q4. But maybe if you could provide some perspective on sort of the nature of your conversations as you think through 2023 and how the carrier conversations are going? Should we expect them to come back at least on some level in 2023? It sounds like the guide – or I'm sorry you discussed 2023 returning a growth year, but I just love your perspective on that then I have a follow up.

Sure. Thanks, Ralph. So the leading edge of the recovery is somewhat beginning to take shape as expected in Q3. So if you recall, we had this earlier moving cohort of carriers that immediately race rates, pull back on ad spend and then the expectation was that as they got rate adequacy, they would return to more normalized spending patterns on customer acquisition. And then you had this later moving cohort of carriers that sort of going through the same process, but several quarters removed. What we saw in Q3 was signs of the – the sort of leading carrier begin to recover as we would have expected. And so we saw rates increase profitability, return to target levels and subsequently spending return to more normalized historical patterns. And then, of course, the hurricane hit and it's likely thrown that off course for the balance of the year, but the recovery was beginning to materialize as we had expected. With respect to the balance of the carriers, the majority of them have not yet achieved rate adequacy and have not yet begun to lean in the same way. And so consistent with our expectations, we would expect anticipate seeing the balance of the carriers recovering into 2023 and what we're planning for right now and the data that we have would suggest is a gradual recovery over the course of 2023. So a step up from Q4 into Q1 and then a gradual recovery over the course of the year where you'll see 2024 getting back to more normalized historical levels in aggregate.

Okay, that's really helpful. Maybe follow up for John. John thinking the prepared remarks, you talked about 2023 positive EBITDA or some commentary around that. Just sort of confirming that's what I heard A. And then B, just maybe philosophically how are you thinking about OpEx in this environment? Would you protect profitability going into 2023 if there is any sort of further stiffening macro headwinds or further carrier headwinds? Thanks.

Sure. So, I guess, looking back on Q3, I think that's a demonstration that we are focused on operating expenses and efficiency and making sure that when we see upside in VMM as we did in Q3, that we're being pretty disciplined about operating expenses and allowing that to flow down to adjusted EBITDA. In terms of as we move forward we continue to think we'll hold that stance. Going into 2023, we think it's a period of increased adjusted EBITDA. I am very pleased that we're able to move kind of the full year target for 2022 to overall positive EBITDA for the year as we go into 2023. We think we'll expand on that with the gradual recovery that Jayme spoke of within the auto insurance industry.

Great. Thanks, Jayme. Thanks, John.

Thanks, Ralph.

Thank you. The next question today comes from the line of Michael Graham from Canaccord. Please go ahead. Your lines now open.

Thanks a lot. Hi, guys, I have two questions for you. The first one is just at a high level, I know you're not guiding for next year, but there are two things that could impact the way you're thinking about next year. One is the possibility of a recession. Just wondering how you would expect in generic terms your business to respond to that if it were to come to pass. And similarly, I think there's this dynamic where carriers like to set budgets for the New Year, before it starts, and we're sort of not yet at that rate adequacy milestone, Jayme, that you mentioned. So I'm just wonder how you're thinking about those two dynamics and then I have a quick follow up.

Sure. So with respect to our expectations in the event of a recession, I think, historically you would look at this business as being somewhat insulated from recessionary pressures for a number of reasons. The first would be as consumers are looking for savings, insurance tends to be a top three to five line item and the personal income statement and so they've been conditioned to shop and seek insurance savings as you know one tactic to address any shortfalls in income. And so we expect to see shopping behavior elevated in the event that that there is continued economic pressure out there. The second is if you think about what is causing a lot of the rates, the last issues for the carriers in the first place, it is severity of claims, so the cost to repair and replace vehicles. And one of the big drivers of that is the cost of vehicles. So used and new car prices factor in significantly to the loss pressures that carriers are experiencing. In the event of recession and prolonged period of higher interest rates, we would expect to see demand for vehicles come down and therefore subsequently pricing of both new and used cars coming down, which could alleviate some loss pressures on carriers and therefore stimulate carrier demand and monetization in the marketplace. And so, I think if you're looking for a relatively safe bet in the event of a recession, the business is relatively well insulated from that.

And Michael, on the second part of that question we do generally see carriers set budgets on an annual basis. We often see them managing to combine ratios on a full year basis. So I think even in this past year we saw some increase in demand coming into Q1. And again, as Jayme had mentioned, we expect that there's no difference this year. We expect a sequential increase going into Q1 not only in revenue, but also in demand coming out of auto. That is partially because of the earlier movers in terms of the carriers and setting rates. And part of that is over the course of the year, they'll manage that combined ratio considering the full year. And I think even the other carriers that are not on the vanguard of rate setting, all carriers at this point have taken a fair amount of rate. And so I think you're – as much as we saw an early mover come back to acquiring within the quarter. I think you're starting to see all carriers advanced rates to a point where they're anticipating what the loss – what the losses are they're seeing. So there's a possibility that that we'll see all carriers gradually return to a more normalized acquisition behavior over the course of 2023.

Yes, that was going to be – thank you for that, John. That was going to be kind of the follow up was just that you've got this unfortunate Ian impact, but wow that's happening I think. You've got a lot of carriers trying to get closer to rate adequacy and I was just going to ask if you could characterize sort of how close some of the other ones were, but you basically just did and said they were pretty far along. So I'm not sure if you want to amplify that or not, but that's all for me. Thanks guys.

I guess the only amplification I would add would be that we were encouraged by sign of a carrier that had gotten to rate adequacy and then behaved in a way that we had anticipated, which is return to acquisition mode and return to the marketplace. And so as much as Hurricane Ian has interrupted that, we're encouraged by the kind of the behavior of that carrier as representative of what happens in recovery.

Thank you.

Thank you. Your next question today comes from the line of Dan Day from B. Riley Securities. Please go ahead. Your line is now open.

Yes. Good afternoon guys. Appreciate you're taking the questions. So just curious what kind of trends you're seeing as far as actual, I know you're sort of stop providing the quote request number every quarter, just actual traffic within the marketplace would be great just directionally. You hit on it already, but you'd think in a softening economic environment maybe insurance shopping activity would tick up. I am just wondering if you guys are starting to see that and more people landing in the marketplace. Any commentary on that would be great.

Sure, Dan. So certainly, the biggest driver in this past quarter was volume increases. So Jayme mentioned we saw about a 27% increase, I think it was in quote requests and that’s pretty consistent with Q2 of this year as well. So we’ve seen an uptick in volume. A component of that uptick is the fact that we are doing a good job executing into a more favorable advertising environment within insurance. And then, I think there’s probably a component of that, which is as expected consumers are starting to shop for insurance. We know that many carriers have taken 15% to 20% rate increases in the rear view mirror leading up to now. And so I think you’ve got consumers who are opening their renewal envelopes and seeing those rate increases and looking to shop. So we are seeing good traction in terms of consumer volume that’s now been a couple of quarters in a row and we expect that to continue. And that I think is exciting for us because we think it positions us well going into 2023 as we’re picking up volume and share with consumers. We think we carry that into 2023 where the demand returns gradually from the carriers and the consumers are already in the marketplace.

Thanks. That’s great. Most of my – the other question I had mostly revolved around like OpEx below the VMM line and it’s mostly been answered. I guess just, if I look at your last 10-Q, you had around 670 full-time employees. Can you just comment on whether that number’s materially different today or just given the different strategy with the DTCA here? Thanks.

Yes, I would probably break things into two components, certainly outside of DTCA. We are continuing to look for efficiencies and we’ve – and that’s really been an ongoing process for the past year for us within DTCA, specifically with our first party agents especially within health, we’re seeing lower numbers of agents in Q4 this year. And so that’s kind of why we give some color into what we expect out of the health vertical specifically because we do expect to have a fewer number of agents in Q4. So it’s modest declines really in both categories.

Got it. That’s all I had. Thanks guys.

Thank you. The next question today comes from the line of Aaron Kessler from Raymond James. Please go ahead. Your line is now open.

Hey guys. This is Alex Bolton on for Aaron Kessler. Just had a question on VMM, I guess going higher there. Can you break out how much efficiency you’re seen in advertising as a result of the favorable kind of ad environment versus maybe a pullback in DTCA?

I’ll take that, Alex. I would say, if I contrast Q3 against Q2. Q2, we talked about our performance there mostly being driven by ad spend, efficiencies within our own ad spend as well as overall kind of a more favorable environment. I say as you get to Q3, our VMM achievement there was a combination of slightly stronger revenue per quote request than we anticipated. So some return of demand in Q3 and in addition good execution against that, more favorable advertising landscape. So really in Q3, it was a combination of factors with a little more improvement in demand.

Okay. And then one other question, I guess, there was one carrier that came out recently saying that they were making cuts to their marketing team and putting their agency under review, I guess seen any impacts from that carrier?

The – so the carrier that I think you’re characterizing is in the later moving cohort, sort of I would separate the two cohorts. And so as a result, they’re – they have been meaningfully drawn back over the course of the year, and therefore, the changes that they announced, if I’m thinking of the same one as you haven’t affected us materially relative to our expectations.

Okay. That makes sense. I appreciate it.

Thanks, Alex.

Thanks, Alex.

Thank you. The next question today comes from the line of Cory Carpenter from JPMorgan. Please go ahead. Your line is now open.

Hi, this is Danny Pfeiffer on for Corey Carpenter. I just have one question. After Q4, can you maybe frame the longer-term growth rate you’re targeting for DTCA and if any of your longer-term objection – objectives has changed after this quarter? Thanks.

Sure. I guess as we look forward, DTCA is still something that we’re very excited about in the business. We think it’s – it is a big driver of growth for our other verticals as well as even within auto. So I don’t think things have changed an awful lot for DTCA. I think what we’ve made clear is our growth expectations for DTCA will be with them providing with DTCA operations providing kind of the economics that we require out of that business. We expect that business ultimately contributes more to VMM and ultimately to adjusted EBITDA. And so I think you would expect us to scale that business, but first assuring that we’re achieving those economics and that’s been what we’ve been focused on this year and going into Q4.

Thanks.

Thank you. [Operator Instructions] The next question today comes from the line of Mayank Tandon from Needham & Company. Please go ahead. Your line is now open.

Hey guys, this is Sam Salvas on for Mayank. Thanks for taking the questions and nice results here. Most of my questions have already been asked. But I got a couple quick ones. I wanted to touch on the other verticals that dipped this quarter. Could you guys talk a little bit more about what’s going on here and maybe how we should think about this segment in the coming quarters, was this really mostly a head count issue or is there anything else going on here? Thanks.

Yes, thanks, Sam. So, to put into context that non-auto verticals have grown significantly over the last few years to reach 15%, 20% or so of revenue recently. This year we are managing the business holistically with an eye towards profitability and towards unit economics. And as a result that has had an impact on non-auto on a couple of fronts. The first as you mentioned, is we have moderated agent headcount growth relative to earlier plans as part of company-wide operating expense management efforts. And that impacted the most pronounced in Q4. And we have diverted some investments away from active management of non-auto verticals, particularly in life insurance just as we flow our resources to the areas where we see that the highest near-term opportunity. That’s been compounded by some headwinds in the home insurance market. So the home insurance market is not impervious to the inflationary pressures on the losses that we’re seeing in auto. And as a result, we’ve seen some softening in demand there. The combination of all those things is what has really driven the recent results in the non-auto verticals. As we look ahead in Q4, we would expect this to persist. But long term, we continue to believe that non-auto would be an important growth lever for the business. And moreover, it’s really core to our value proposition of becoming the one stop shop for insurance. And so we see them as a big part of our future, but there are some near-term headwinds.

Got it. That’s super helpful. Thank you for that. And then just a quick follow up, you kind of mentioned it there answering that question, but could you guys give any color on how we could think about some of these operating expenses going into 2023, given, you guys have tightened the belt over the past few quarters and will next quarter as well?

Yes, so I think you could expect that. We’ll continue to make sure that our performance first goes to returning us to adjusted EBITDA. So as we see carriers come back into the marketplace, we’ve said that we are committed to getting back to previous levels of adjusted EBITDA sooner rather than later. And so I think you would expect us to continue to manage operating expenses quite tightly. As we do that, we will then also, as we always have, make decisions around investing for growth. But first I think you’d expect us to get back to those previous levels of adjusted EBITDA and then have this combination of managing the business for growth and growing incremental profitability.

Great. Thanks guys.

Thank you. There were no further questions registered. So I’d like to pass the conference back over to Jayme Mendal for closing remarks. Please go ahead when you’re ready.

All right. Thank you. And thanks everyone for joining us today. We continue making progress towards our long-term vision to become the largest online source of insurance policies by combining data technology, knowledgeable advisors to make insurance simpler, more affordable and personalized. I think this quarter our team continued demonstrating agility. We are adapting to a changing environment, maintaining disciplined expense management and gaining market share during this period. And consequently, we expect to exit this year quite well positioned to emerge from the auto industry downturn as a stronger company. Thank you.

This concludes today’s conference call. Thank you all for your participation. You may now disconnect your lines.