Welcome to SelectQuote Second Quarter Earnings Conference Call. [Operator Instructions]. It is now my pleasure to introduce Mr. Matt Gunter, SelectQuote Investor Relations. Mr. Gunter, you may begin the conference.

Thank you, and good afternoon, everyone. Welcome to SelectQuote's Fiscal Second Quarter Earnings Call. Before we begin our call, I would like to mention that on our website, we have provided a slide presentation to help guide our discussion this afternoon. After today's call, a replay will also be available on our website. Joining me from the company, I have our Chief Executive Officer, Tim Danker; and Chief Financial Officer, Raff Sadun. Following Tim and Raff's comments today, we will have a question-and-answer session. [Operator Instructions]. As referenced on Slide 2, during this call, we will be discussing some non-GAAP financial measures. The most directly comparable GAAP financial measures and a reconciliation of the differences between the GAAP and non-GAAP financial measures are available in our earnings release and investor presentation on our website. And finally, a reminder that certain statements made today may be forward-looking statements. These statements are made based upon management's current expectations and beliefs concerning future events impacting the company and therefore, involve a number of uncertainties and risks, including, but not limited to, those described in our earnings release, annual report on Form 10-K and other filings with the SEC. Therefore, the actual results of operations or financial condition of the company could differ materially from those expressed or implied in our forward-looking statements. And with that, I'd like to turn the call over to our Chief Executive Officer, Tim Danker. Tim?

Thanks, Matt, and thank you to everyone joining on the call. As you saw in our press release, SelectQuote had a disappointing quarter compared to our expectations. We will use the beginning of this call to discuss the challenges we faced with this AEP and how we are evolving our strategy going forward. Before we begin though, I'd like to be clear to shareholders that we view these results as unacceptable, unacceptable to us certainly, but also unacceptable compared to what we know is achievable within SelectQuote organization and our differentiated position within the shifting health care system. With that, let's begin on Slide 3. SelectQuote's consolidated revenue for the quarter totaled $195 million, and adjusted EBITDA finished at negative $163 million. Revenues decreased 45% compared to a year ago, and adjusted EBITDA declined significantly, driven by a number of unexpected factors this AEP season, which we will detail in a minute. Beyond the challenges within AEP in the quarter, we also recognized a cohort sale adjustment of $145 million in the quarter, which includes the potential risk previously disclosed. This earlier and larger adjustment reflects lower persistency primarily from higher intra-year loss rates we experienced during the calendar year 2021. Bottom line, these results were materially below our expectations. And given the significant weighting and importance of the second quarter, our full year results will come in below our outlook range as well. As you saw in our press release, our new outlook range for revenue is $810 million to $850 million the range of adjusted EBITDA is negative $235 million to negative $260 million given the headwinds we've realized to date. Raff will give more details on our outlook for 2022. But clearly, this will be a transitional year for our company. To that point, the SelectQuote management…

Thanks, Tim. Turning to Slide 11 and our consolidated results. As Tim already said, this was an extremely difficult quarter. We had multiple operational issues we had to deal with. And despite pulling many levers, we could not offset all the headwinds that we faced. In addition, we took certain proactive measures to address persistency like assessing the cohort tail adjustment and increasing the constraint and provision, which impacted the quarter. Consolidated revenue for the quarter came in at $195 million. This included a $145 million negative adjustment for the senior MA cohort tail adjustments. Given the visibility into the January renewal event and the lapse rates experienced during calendar year 2021, we determined an adjustment was probable and reduced our commission revenue in the second quarter. Excluding this cohort tail adjustment, revenue was $340 million, which was down about 5% year-over-year. Despite growing MA-approved policies 27%, lower LTV per policy improved lower revenue in our senior business year-over-year. As stated earlier, we incurred incremental costs associated with trying to produce more policies, but lower revenue associated with lower-than-expected policy production and the cohort tail adjustment. This drove adjusted EBITDA to negative $163 million for the quarter. Excluding the cohort tail adjustment, the adjusted EBITDA would have been negative $18 million. Needless to say, this has been a humbling quarter for all of us and has forced us not only do we examine the current environment we find ourselves in, but also how we want to run the business going forward. While the margins of the business have certainly been compressed, we believe there are meaningful changes that we can make that will have a positive impact on the senior distribution business going forward. These include resetting the baseline of policy production. While we're not providing guidance for fiscal '23…

[Operator Instructions]. We have your first question from Jailendra Singh with Credit Suisse.

I want to better understand this comment around greater parity and plan benefits for the 2022 benefit year suppressing those rates. How do we reconcile that with the comment from some of the insurance companies as well as your peers that MA plans are getting more competitive, driving market share shift for insurers? We would have drive -- given more shopping behavior on seniors. Just help us reconcile that commentary.

Yes, Jailendra, this is Tim, I'll make some comments and have maybe Bob double click on your specific question. I mean clearly, this AEP was very different than anything we've ever experienced in our decade-plus of experience in the Medicare space. Obviously, we had a confluence of events around industry-wide CMS issue that masked some of the underlying issues. We also talked about the tight labor market and our need to bring on some of our agents later than we expected. And I think those things at the time of -- the last time that we talked, that was what we really thought were the issues on to really, as we kind of peeled it back and uncovered throughout the course of AEP that planned parity was more of the underlying issue that caused a significant compression in close rates that we mentioned on the call here. Bob, do you want to talk a little bit from a sales perspective and carrier perspective?

Yes. So really good question, Jailendra. And again, we've never really seen anything like this during AEP. And what we are describing as far as plan parity is, I guess, just less compelling reasons to buy a plan on each individual call. However, we are seeing a big increase in shopping behavior, which I know that sounds counterintuitive, but it's driving less close rate on each call that we have while still seeing people switch at a high level which is really different than the environment we've really seen, Jailendra.

Okay. And then my follow-up. I would like to understand your comment about modest top line long-term growth you referred. Can you be a little bit more specific? Are you talking about like going in line with the MA market growth? And maybe I'd love to get any thoughts on your LTV longer term. And more importantly, with the increase total on the distribution channel, pressure on LTV, fast pressure on marketing and specific costs, can the unit economics even work in this business, especially if there's no operating leverage?

Yes. I guess I'll address that. I think we're making lots of changes to the business going forward. I think this year is obviously going to be a challenging year but it's not reflective of what we think the business can do in the future. Clearly, the margins have been compressed, and we are going to be making changes to be able to operate in an environment that has lower close rates to the extent that, that continues and lower margins. But it will look very different than it did this year. That's on the distribution side. Obviously, it's important to have a healthy distribution business as an on-ramp for our growing health care services business. And so that is the plan going forward. Relative to growth rates and how we think about that. While we're not providing guidance with respect to fiscal '23, we are going to build a plan next year that has less policy production than we will produce this year and basically resetting the baseline there. And that has lots of immediate benefit that I think we talked about on the call. After that, we'll return to some level of growth, but it will be modest and certainly modest relative to the growth rate that we've seen before. Exactly what that growth rate looks like, we'll have more to share on that over the next couple of quarters as we work through our strategic plans.

I mean, Jailendra, just to double-click on Raff's comments. I mean an understatement, it's extremely challenging year for us, a transitional year for the company. But I don't think the return characteristics that we're seeing today is what they'll be moving forward. We alluded to changes that we're going to make and refinance to our strategy to take out some of the operating leverage, things that we're doing with respect to a higher percentage of core agents, marketing optimization to focus on unit profitability and a goal to accelerate our cash flow breakeven. We think as we're highlighting through some of the good early progress on SelectRx, Population Health can be an extension of the services that we provide, ultimately, to drive additional underlying value to consumers. But financially a way for us to leverage the investment that we have in play. And we think that moving forward, we will still have a strong and robust MA platform. But strategically, we want to use that as the on-ramp into a broader health care services ecosystem.

We have your next question from Steven Valiquette with Barclays.

So a couple of questions here. I guess, I'm sure there's a bias to that one to talk too much about individual carriers. But just given the high visibility on Humana's AEP results, it seems the issues that you guys are facing almost the opposite of what they're -- what was happening from their point of view, which I think Jailendra kind of touched on a little bit just at a high level. But I guess 2 questions that I have would just be at a high level, is this -- can we say yes or no that some of your issues are related to Humana's results and you're correlated with that? Or is it almost the opposite? I'm just trying to get to the bottom of that. And then number 2 would just be, is there any sense that major carriers are just taking matters into their own hands? And maybe this year and going forward, they may rely more on internal channels and sales efforts to drive growth for themselves instead of external telesales channel that includes SelectQuote and your peers?

Steve, this is a good question. And I'll address your second question first in terms of any type of pullback from other carriers. I think there could be pullback with respect to some direct-to-consumer brokers with various carriers. We certainly wouldn't expect to be part of that pullback. I think we have a very long and steady path with respect to our carriers. It continues to grow and expand. And I think as there's been more valuation, if you will, of brokers, as it is doing a better worse job, we've actually seen more engagement and more investment from our carrier partners. I think ultimately, there could be a flight to quality. I think that certainly benefits us. Bob?

Yes, I agree. And I think one thing that's interesting is the carriers are talking about a competitive landscape a lot where they're kind of targeting certain benefits and that is clarity and competitiveness, I know are a little bit different in our mind. The market is extremely competitive for me in a marketing standpoint, things like that. However, parity is driving lower flow rate. So I do want to comment on that first. And yes, we are seeing some of the same pressures that the carriers have seen in the fact that, that competitiveness at times with specific carriers is causing some pressure on churn rates to where we're not better there.

We have your next question from Jeff Garro with Piper Sandler.

You clearly stated how you've been running the business for growth and EBITDA margin. And it sounds now like the focus is going to be shifting more to cash flow. So how should we think about the time line with which you could reach cash flow at breakeven?

Yes, I'll take that. I guess, look, this quarter, obviously very challenging. We are going to make and are making multiple changes to the business, as we discussed. I think the biggest driver of that is really going to be resetting the baseline, which we will do next fiscal year. And as we've talked about, to some extent, achieving cash flow breakeven and timing all of that is relative to the growth that we choose and growth of the choice that we make. Obviously, the last couple of years, we've been growing at very fast growth rates. By pulling back next year, that will have an immediate benefit as the overall cost to write new business will be lower than it was this year, but you'll get the renewal dollars associated with policies that you sold this year coming to the business next year. So I think you'll start seeing that next year. There is obviously a working capital dynamic that I think we talked about on our last earnings call that it takes 12 to 18 months to play itself out. But some of the benefits you shall see as early as this year.

Got it. That helps. And maybe just a follow-up on the unit economic side of things. You've talked a little bit about the hiring and you guys have a lot of control over that. So maybe I'll ask about the customer acquisition side of things. So I was hoping you could comment on what you saw in terms of lead quality and lead costs in the quarter and how your approach need acquisition going forward? And maybe just throw out -- could you shift to owning significantly more of the lead generation or generating more of the lead internally?

Yes, I'll take that. We are certainly in the process of kind of scrubbing all of our channels and layering in all the data that we're seeing in terms of the -- all of the current kind of persistency rates and everything that we've seen because the market has changed incredibly quickly, right? So it's fairly, as Raff mentioned earlier, very consistent for years, and now we've seen rapid change. So what we're seeing as we layer in a lot of that and we really look at our marketing channels and dive into great detail is, one, we see pressure across the board. So there's no one channel that is really working and one that's just really awful. What we see within that is there's kind of good and bad within each of those channels. And what we really need is to kind of to dive in with each of those and figure out how to optimize within those channels, how to eliminate some of the things we're seeing with this growing population of what we call super switchers. So folks that are shopping more and more and more comfortable with shopping. We're not really seeing an issue with kind of raw lead costs in terms of like a huge increase in overall lead costs when you compare year-over-year on an apples-to-apples basis. What we really saw this year was just that customer acquisition cost relative to close rate, not relative to the actual cost. The actual cost came in pretty much in line and really stayed within where we would expect them to see. I don't think, when we look at our quality issue -- I mean, a lot of those channels are the same. A lot of those channels are things that we generate ourselves. So I really think that it comes down to more a compelling reason of why that consumer would switch in terms of when we talked about planned parity. If I look at those plans, we're still good, still loaded with benefits. There just wasn't that one single light -- flashing green light reason why somebody should change, and we saw close rates depressed. I think one thing I want to comment with when we slow down a bit, I do think that it will give us the ability to really optimize our lead channels in terms of kind of figuring out, okay, where are we seeing the most goodness within each of those channels and give us the ability to optimize there better as we move forward.

We have your next question from Yaron Kinar with Jefferies.

My first question, probably just to Bob, you correctly noted that the higher shopping activity in the face of greater plan parity is counterintuitive. And admittedly, I still don't really understand the relationship. Could you maybe try to explain that again?

Yes. To Bill's point, it's -- usually we -- there's carriers that win on core benefits, like max amount of pockets, prescription drug savings, things like that. What we're starting to find is there's way more nuanced plan changes and things like that, a lot of things to market towards. So there's a ton of activity and a ton of people actually calling in and a lot of increased demand. However, it's harder on a single conversation to find the exact reason or the silver bullet like Bill talked about to get somebody to switch. So you see lower close rates on those single calls but increase in the overall kind of shopping throughout AEP. So it just creates a more difficult sales environment, while there's still a really strong kind of demand for change from consumers. So we're seeing kind of pressure on lapses because of the demands for consumers. But at the same time, it's much more difficult to find the exact reason why somebody should switch. We fell towards benefits a lot which would be more towards core benefits in the past. Again, prescription drug savings making sure that your maximum pocket is properly aligned, those types of things. We switched a lot of things up to try to address this and have seen some progress there. But it's still much more complicated.

Got it. And then on the idea or the strategy of pulling back growth to some extent, is that as simple as just trying to weed out some of the serial shoppers that are out there? Or are there other key differences or changes that you're contemplating?

Yaron, I'll hit that at a high level. And Bob, maybe you can walk through it. I think there's a series of things that we think that we can do to optimize our business and our engine as we have kind of pulled back on growth. I think we talked a little bit about a much higher percentage of core agents versus flex agents. It is one thing that we have learned over time that can help kind of moderate the volatility. I think Bill spoke about some of the marketing optimizations. I think we're taking a very hard look at our kind of unit costs and unit margins. And so there's multiple things we can do there. I'd also kind of highlight, and it's up to us to prove it to shareholders into the market. But our move into Population Health, Rx and other ways that we can solve consumer needs and more effectively monetize the marketing spend that's in play, I think that's another important consideration. Bob, anything that you'd add?

Yes. I'd just say, I want to reiterate Bill's point, the pulling back does allow you to kind of pinpoint what's working from a marketing standpoint and really optimize better. I would say though, the other thing that allows you to optimize more successfully is having more tenured agents. We always did have a lot of operating leverage but the later classes this year really hurt us because they're always lower close rates than tenured classes and earlier in the summer hires. However, we've always done quite well with those classes this year. With the adjustments on close rates, we didn't see very good results out of those later classes. And by having more stability, it allows us to make adjustments much faster, be a significantly more cash flow efficient and really hone into what exactly is working. And hindsight being 2020, what we should have done this year because we didn't get the normal operating leverage we do, and we would have been more successful with earlier hires and more core agents.

We have our next question from Daniel Grosslight with Citi.

Your commentary on higher lapse rates and lower persistency suggests that while parity is making it harder to sell new policies, someone's doing it, someone is closing on these seniors or else we wouldn't have this increase in churn. So I'm curious where are they going? Who's closing them? Because they're obviously buying their plans from somewhere. Have you been able to track where these folks are going when they lapse from a policy that was previously sold by SelectQuote?

Yes, there's a couple of things here, and I'll turn it over to Bob. I mean, at 2 separate concepts with respect to what we saw in inter-year lapse rates that continued to mount throughout the year. And then the specific kind of convergence of plans that we saw during the AEP period. I think those are 2 different concepts I would just need to kind of get clarity on. Bob?

Yes, I think also plans really align with consumers' kind of health care needs and things like that. So you still see quite a bit of switching, especially amongst, as Bill talked about, kind of super shoppers, super switchers and those types of cohorts. But we are seeing quite a bit of stability on our other cohorts. It's just we couldn't really deal with the pressure of our newer -- or our older policy switching and kind of those super shoppers and super switchers increasing their switching behavior.

Yes. I think as Bob said before, there are sort of 2 concepts here. The relative to the persistency and lapse rate issues that impacted the cohort tail adjustment. That's really associated with plans that were sold in prior years, not this AEP season. And the biggest driver of that adjustment is obviously lower persistency over a couple of years, but much higher intra-year falloff that impacted persistency this year. So going into AEP, we've already had so many policies that had already fallen off relative to people switching earlier on in the year. The planned parity, which impacted the close rates relative to AEP didn't really impact those prior cohorts, at least not yet. And while the intra-year lapse rates were higher year-over-year, which impacted overall persistency, the actual renewal event that happens at the end of the year was actually slightly better than last year, which certainly from a trend perspective was very different than the intra-year lapses and we think was a function of the planned parity this year. So people sticking with plans that they had is just so many policies that lapsed throughout the year by AEP that, that renewal event at the end of the year wasn't enough to offset those lapses.

Okay. Yes, that's helpful. And then on LTVs, it seems like you're taking the bulk of LTV degradation this quarter. On a sequential basis for the rest of the year, would you expect LTVs to further degrade or have you kind of set a floor with the increase in the constraint and the pull forward of the 36-month average?

Yes. I think relative to the LTVs, obviously, we've tried to be as proactive as possible in terms of seeding in the lower persistency that we're experiencing from this renewal event here in January that normally wouldn't be into sort of the fourth quarter. So we are taking that earlier to try and cite that earlier. And as you noted, we significantly increased the constraint almost 3x from 6% to 15%. So that's the biggest drop, I would imagine in terms of LTVs certainly this year. And then for the next couple of quarters, it will sort of be in line with kind of what we've -- what we are. We're now outside of just general seasonality. There are certain times of the year where the LTV is higher or lower. But the biggest drop has been relative to what we shared in the second quarter.

We have your next question from Lauren Schenk with Morgan Stanley.

Great. And just following up on that last question. I understand that the churn in the older cohorts is the main issue. But it does look like churn is up in all the cohorts. So just kind of trying to square those comments away. And then just one modeling question. What is the tail revenue that you assume in the full year guide?

Yes. So I guess, relative to the experience that we've had with persistency, as we said in the past, it really seems to be concentrated in the first 2 or 3 renewal periods of a policy. Once you get beyond that, it's much, much lower variability in each of those are renewal years and the persistency rates are higher, there's less variability, that's been pretty consistent, and this quite directly also left dollars to collect once you get past the first couple of years of renewal. So those are the trends that we've seen. Relative to the cohort tail adjustment, we'd originally anticipated the potential for a $65 million cohort tail adjustment for the fourth quarter. We have accelerated that. And that has -- we've increased it to $145 million that we took this quarter. So outside of any adjustments that will be required in the fourth quarter when we actually do the calculation, that's the implied thesis in the guide, that we took the second quarter.

We have your next question from Meyer Shields with KBW.

Two, I guess, background questions, if I can. One, can you comment on agent retention, particularly core agents, not just the new ones that didn't show up, but we keep on hearing about the great designation, wondering how you're seeing that with your experience making group?

Bob, do you want to take the lead on that?

Yes, absolutely. So we have seen a mild increase in agent accretion or missense issues but nothing alarming or not what we're hearing on kind of the great resignation to your point. Our level one agents were in the high 80s and low 90s before. Now our level one agents are 83% for the last 6 months. So we are still retaining our good agents at a high level, a little bit of pressure, but that's just because it's a really competitive job environment. They're different than kind of what we've experienced before. But not to the tune of what others we think are experiencing and what we're seeing elsewhere.

Okay. No, that's very helpful. Second question, I don't know how to even ask this specifically. But as you talk about a slower growth rate anticipated for next year, what is the implication of that? If we're talking about fewer MA policies, what does that mean to Population Health and SelectRx over the next 2 or 3 years?

I'll address that first, Meyer, big question. I mean, as we've highlighted, we think we will have a very, very meaningful MA platform as we go and optimize and really focus on accelerating cash flow breakeven. We're having -- there's a ton of demand out there with respect to Population Health. Our opt-in rates are very, very high. And as you've seen, one of the bright spots for the quarter really is the progress we're making on SelectRx. So that is something that we'll continue to push on. We continue to build out, I would say, other highly relevant services for our Population Health engagement platform. The good thing is we will still have a very meaningful MA platform. I want to make that extremely clear. But there's opportunities for those that we may not convert into an MA policy that can still be candidates for health through Population Health, Rx or otherwise. So we don't think that, that necessarily slows down really the ramp-up of our Healthcare Services business.

I'm showing no further questions at this time. I would now like to turn the conference back to Mr. Tim Danker, CEO, for any closing remarks.

Yes. Thanks again for joining us today. As I mentioned, the entire SelectQuote organization is committed to realizing our potential that we know that our unique business is capable in today's health care ecosystem. We certainly believe we can improve the predictability of our core senior business. But more importantly, really leverage our position as a critical connector and provider across health care services beyond Medicare Advantage. We look forward to proving that potential to you and we'll take the significant challenges of this year to make our company stronger. Thank you again for your time, and we'll talk soon.

Ladies and gentlemen, this concludes today's conference call. Thank you for our participation. You may now disconnect.