Welcome to the SelectQuote's Third Quarter Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. [Operator Instructions] It is now my pleasure to introduce, Matt Gunter, SelectQuote Investor Relations. Mr. Gunter, you may begin your conference.

Thank you, and good morning everyone. Welcome to SelectQuote's fiscal third 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. 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. In order to allow everyone the opportunity to participate, we do ask that you limit yourself to one question and one follow-up at a time and then fall back into the queue for any additional questions. 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. Good morning and thank you all for joining us. In my remarks today, I'll touch on two topics. First, I'll summarize the quarter and how we saw encouraging sequential improvement in our Senior business during the OEP compared to AEP. Second, I'll provide an update on the strategic redesign we discussed on our last call. It's certainly too early to declare victory, but we observed tangible improvement over the past quarter due to our preliminary actions, which gives us confidence of lower growth returns focused strategy is the best way to capitalize on the significant value opportunity, we still see in Medicare Advantage distribution. With that, let's start on Slide 3 with highlights from our fiscal third quarter. As I noted, our Senior business performed better in OEP as compared to AEP across a number of key performance indicators. Our agents delivered higher conversion rates driven primarily by more comprehensive onboarding training and longer agent tenure. Again, early days, but this observed close rate improvement supports our plan to hire earlier and carry a higher mix of tenured core agents in future seasons. The second operating highlight in our Senior business was a significant improvement in marketing costs, driven by our decision to optimize marketing partners and refined customer segmentation and targeting. Additionally, better conversion rates by our agents helped reduce cost per approved policy and overall marketing efficiency. Lastly, going forward, we are placing even greater emphasis on the cash flow and profitability of our business, and we are pleased with our early actions to reduce costs as part of our developed plan that should yield over $200 million of cost savings, excluding SelectRx. About 20% of that total comes from fixed cost reductions, which were implemented during the quarter. We'll provide more detail on those actions…

Thanks Tim. Turning to slide six and our consolidated results. During our last earnings call, we did say that while the margins of the business have certainly been compressed, we believe there are meaningful changes we can make that will have a positive impact on the Senior distribution business going forward. And this quarter, we started to see some of the early benefits, especially around marketing efficiency and close rates. Consolidated revenue for the third quarter was $275 million and consolidated adjusted EBITDA was $13 million. Revenue was driven by growth in our senior business, which we will discuss later, somewhat offset by a reduction in our Life business, driven by lower term life premium which was the result of fewer agents and continued COVID pressure on conversion of sold policies to in-force policies. Our Auto & Home revenue was flat year-over-year. While we did see significant improvement in per unit operating expenses in our senior distribution business, down 19% year-over-year, the 32% decrease in MA revenue per approved policy more than offset the expense savings. That, plus the investment we're making to grow population health and SelectRx, specifically, negatively impacted adjusted EBITDA year-over-year. During the quarter, we took certain action to cut fixed and variable costs out of the business. Excluding SelectRx, we expect our fiscal 2023 overall operating costs will be over $200 million lower than fiscal 2022 as a result of these actions and the lower policy production we are expecting for next year. We also made significant progress in scaling SelectRx which I will also touch on later. With that, let me now get into our Senior operating results for the quarter. Turning to slide seven, we grew our total approved policies 33% and our MA approved policies 48%. The MA policy growth was driven by…

[Operator instructions] Your first question comes from the line of Daniel Grosslight with Citi.

Hi, guys. Thanks for taking the question. I just want to stick on that reiteration of guidance, particularly on EBITDA and net income, because you did outperform pretty significantly on those two line items this quarter. And really in the senior segment, that outperformance really came through. So I'm curious, was there any one time benefit in the third quarter to senior profitability that's not going to repeat? And can you just kind of walk us through the cadence for 4Q of EBITDA and that pretty steep decline, a reiteration of guidance implies for 4Q EBITDA.

Yeah, maybe I'll take that one. We're obviously encouraged by the performance of the business in the third quarter, certainly relative to our revised expectations. We decided to leave the guidance unchanged as quite frankly, we're much more focused on developing the plan for fiscal '23 and beyond, which we plan to share on our fourth quarter earnings call. I think it's important, though, to be very, very clear that leaving the guidance unchanged is not a signal about the fourth quarter performance, and there were no sort of onetime benefits in the third quarter that the trends that we're seeing so far in the fourth quarter are not meaningfully different than what we saw in the third quarter. So I wouldn't read more into that than just being conservative.

Understood. Okay. And then very encouraging trends in marketing. You mentioned less competition for leads, which is good, but also optimizing your marketing channels. I was curious, if you can dig in to that latter point a little more. Are you shifting away from certain areas, perhaps direct TV, direct mailers to other, more productive marketing channels? What are those productive marketing channels? And related to that, CMS came out with some new rules that seem pretty prescriptive on how your agents will have to speak to Medicare members, particularly with some stock language at the beginning of the call. Curious, how you're thinking about some of these new rules for marketing and even scripts for fiscal '23 and how that might impact productivity next year.

Yeah, so, this is Bill, and I'll take that. Certainly, as it relates to marketing, I'd say we saw a benefit in a number of areas during OEP. One, we had fewer agents, in terms of kind of the number of mouse we had to feed, so to speak, that we were delivering. So that gives us and our marketing team more ability, right, to optimize the funnel. We had new data sets and learning, so we were able to take a lot of what we saw during AEP. And as Tim mentioned in the opening remarks, it was a unique AEP, so we were able to layer in and our data science team did a great job layering in these new data sets and really working with our marketing team to optimize what we were buying. And I would say to your question around, when we look at optimizing what we were buying, what does that mean? Are we cutting out channels or not? No, not really. We kind of look at it like that we still want a very wide funnel. Within those channels, there's varying degrees of goodness and amount we might cut within a channel. So there may be one channel that is 90% good. And then ultimately, we can we can let through the funnel and there may be another channel where only 10% is good and we let through the funnel. So, we layered on a lot of those things. And again, our marketing team did a really good job along with data sites with getting those things in place. And I think last just to comment some of the things that we did in regards to retraining, which Tim spoke about earlier, with our agents themselves and making sure that they were really up to speed on the benefits, the benefits of this year's plans also made a significant difference in being able to convert the raw marketing material. As it pertains to the CMS things, we feel like we're very well prepared in terms of already a lot of the things that we do within our scripts. And the marketing changes are really more around the things that you would see in online presentations in terms of the order in which that they present plans, which for us we've always been commission agnostic and are always going to go to the best plan for the consumer. So really no effect there that we see and we're well prepared on that front.

Got it. Appreciate the color. Thank you guys.

Your next question comes from the line of Jeff Garro with Piper Sandler.

Yeah, good morning and thanks for taking the questions. I want to ask about the planned pullback in MA submissions for FY 2023. What are the factors over the next couple of months that will influence the magnitude of that pullback you've signaled?

Yeah, Jeff, this is Tim. Good morning, and yeah I think we're definitely pleased with the progress that we're making on the operational front. Obviously, we think in light of the current market conditions it's made sense to pull-back a bit and really optimize. I think we highlighted on the prepared remarks, we are seeing a lot of really good early signs around what we're doing with respect to marketing optimization and segmentation with a lot of good work done on the sales side on retraining. We're going to come into next year with a much higher percentage of core tenured agents as opposed to more historically a higher percentage of flex agents. We think there's some natural benefits from that, a lot of good work that we're doing on the carrier side. Really this is a drive for us to get cash EBITDA breakeven moving forward. We look forward to providing more specifics on that in the fiscal 2023 guide we provided in August.

Got it. Thanks for that and to follow-up maybe ask a little bit more on the $200 million in expense reductions might be helpful for us if you could give a little more detail how that $200 million breaks down across the different line items in your P&L?

Yeah, I'll start maybe Raff provide some additional detail. Yeah, we -- as I just mentioned yeah I think it makes sense to pull-back and really focus our attention on cash flow unit economics in total. We're going to move about $200 million of run rate cost savings in fiscal 2023 excluding the necessary investments in SelectRx, which is very cash generative. That's a total of both variable sales and marketing costs. Those are our biggest cost driver, our people and leads if you will. But we'd also notice part of that $200 million we did identify about $40 million of fixed expenses that we're going to start to realize some benefits as early as this fiscal fourth quarter. Raff, anything you want to double-click that on?

Yeah, I guess just to reiterate the biggest part of that savings is going to be on the marketing side, probably two-third or so of the savings followed by agent headcount fulfillment and then more fixed cost.

Great. That helps. Thanks again.

Thanks Jeff.

Your next question comes from the line of Jonathan Yong with Credit Suisse.

Hey, thanks for taking my question. I guess just in relation to the pullback in marketing spend that you're talking about, are there any concerns that the pullback may be too much where you may actually end up exceeding market share as some of the MCOs have also talked about bulking up their own marketing capacity and internal sales force?

Yeah, Jonathan this is Tim. I'll speak first and then maybe ask Bill to comment. I think in any scenario, we're going to continue to be a very significant and critical part of carrier distribution. This is a business that's historically policy growth of three-year CAGR, north of 80%. So even if we pull-back it's going to be a very significant player relative to almost anyone in the industry. We continue to see significant amount of momentum with our carriers. I know there's been chatter in the industry about their commitment to direct-to-consumer. We're certainly not seeing any of that pull-back. They remain very strongly committed and aligned to SelectQuote compensation, still no changes there, quite frankly looking to continue to expand with our high-quality model. So I think we're in very good shape there. Bob, anything you'd like to comment on?

No, I think that was really well said, and I think to simply put no our -- we are not concerned about that. Right now we've had really good conversations with the carriers about that focus on quality, 98% persistency in all of the things that we are doing to bolster the quality of the policies, the carriers are extremely supportive of and understand what that looks like and really could come with a -- it's obviously a decline in the overall number of submissions not as big of a decline in the overall number of approved -- sorry of effective policies there.

Okay. And then just in terms of the marketing spend again, everyone talked about optimizing their spend and going to specific marketing channels. I guess is there a concern that everyone may end up letting a specific channel that they believe to be -- to have the highest return and then thus inflating to CAC. Any thoughts there?

I think that we're really well-positioned to be able to deal with that with our approach because we're not narrowing down to a single channel like we're not saying, hey, we're eliminating TV or we're eliminating some other source. I'd be concerned about it for us if we were saying, okay, we're solely going to rely on one of those. But our attitude is more, hey, let's expand the number of channels kind of when you look at the top, but let's tighten ultimately what we actually let through the funnel. So, we've got an extremely tight ultimately we'll look at a lot, but will only kind of consume a certain amount. We're very specific now about really what we've layered on in terms of our algorithms on what we'll buy and what we'll take. So, we'll only take 5% of a certain channel or maybe 10% depending on kind of the quality that's coming through. But we certainly think that by remaining open and using kind of data to decide what we buy with the in channel will be kind of a winning approach.

Great. Thanks.

[Operator Instructions] Your next question comes from the line of Meyer Shields with KBW.

Hey, good morning, guys. This is Tommy McJoynt on for Meyer. Thanks for taking our questions here. Just want to clarify on the $200 million, is it meant to say that 80% of that is variable kind of the marketing and 20% is fixed? And then, is that 20% or $40 million of that implies of fixed costs already actioned in terms of the takeout or are those just identified in the third quarter?

Yeah, no great question. So, 80% is variable and the biggest piece of that is marketing, but there's obviously agent cost reduction there just based on the pullback that we're expecting next year year-over-year for policy production and then corresponding fulfillment as well. So, it's a mix of all those things but marketing is the biggest piece of the fix. And then on the variable, sorry. And then, on the fixed side, yes, we took some actions in the third quarter to drive the vast majority of those fixed cost savings. They're not necessarily reflected in the full quarter results, but will start being reflected starting this quarter.

Great, thanks for clarifying that. And then switching over, could you talk about the expected increase in spend with SelectRx as that continues to grow? And just how does the benefits of scale improve those economics over time?

Yeah, I'll start there. I think we're very pleased with the progress in SelectRx. I think we're becoming more and more confident about the potential of the business. As we stated, 23,000 active paying members. We're very confident about the ability to exceed our original goal of 25,000 members by the end of fiscal 2022, tenfold increase in a very short period of time. I think it really demonstrates a very tangible way the potential we have in healthcare services. Bob, do you want to speak to other metrics and things around scale of the business?

Yeah, there is some dollars that go into that growth, because just like a more traditional kind of, I'd say, SaaS or delivery business, right? You have to plan for the growth that's ahead. So, it's got lower margins to your point as you're scaling, but then it gets to a more stable place. I'll let Raff speak to what percentage that is, but it's still an extremely cash-efficient business when you look at it, and those margins expand pretty quickly through the life of a customer and the payback period is pretty fast. Raff, do you want to comment on payback and then ultimately what those margins look like?

Yeah, I guess certainly a new member we still expect to be cash flow positive within the first year. As we are scaling the business and as new members represent a very large percent of the overall book that obviously weighs on margins in the short, medium-term. But, as the business grows over time and new members added or a smaller percent of the overall membership base, most of the cost outside of drug costs really-- are geared towards onboarding new customers. And so, as that percent of new goes down over time, the margins will increase from there. We also expect to get some drug margin scale benefits as we continue to scale the business.

Great. Thanks for taking the questions.

Your next question comes from the line of Jim Maseka [ph] with Factset. Jim, your line is open.

Hi. This is actually Joe on for Elizabeth Anderson from Evercore. Apologies for that. Maybe just asking a bit about the Life business in the quarter, Life business EBITDA was a little bit weak in the quarter. Was there anything that in particular that caused that? And then, kind of how are you thinking about it in 4Q? And then just a quick follow-up after that?

Yeah, maybe I'll touch on that first. So the Life business is predominantly driven by, sort of, legacy term life part of that business which is actually consistent with our expectations during the quarter. The third quarter is seasonally a strong quarter for sales. So we have costs and specifically marketing in the third quarter that drive fourth quarter revenue. In terms of the third quarter revenue, we had less agent selling year-over-year during our second quarter. And given the three-month lag between upfront sale and in-force policy that impacted the third quarter revenue and hence, sort of, the profitability of the third quarter. It was also compounded by continued COVID pressures early in the quarter with the rise of Omicron that impacted our invoice conversion rates. So paramedic examiner visits that were impacted by that. We had -- I think those examiners also had staffing issues and some of the carriers had processing delays. So we did start to see some of those pressures improve towards the end of the quarter. And then in the fourth quarter you'll see the, sort of, the benefit of the seasonal selling season within the third quarter. Bill anything that you would add to that?

No, I would say just to reemphasize, I mean, COVID certainly has impacted the Term Life business fairly significantly. And when you look at kind of the I'd say two-fold right you have getting in people's homes which people were very reluctant lots of cancellations in our exams, delays in what we call our CRI ARF which is basically taking -- moving that along and the funnel was delayed. And then you had major kind of staffing issues beyond that that existed in a tough labor with a lot of the carriers actually processing some of that. We are seeing some very positive signs as we kind of are getting out of what feels like light at the end of the tunnel with the decline with kind of with COVID and feel like we're pretty optimistic that we can get back to kind of where we were traditionally on how those -- that business moved up through the funnel.

Thank you for that. That's super helpful. And then maybe just as a quick follow-up. Obviously the conversion rate was strong within Senior. I think there had been a trend to try to have some more tenured agents potentially flex between different divisions within the business. Was there any element of shifting some of those more tenured maybe traditional life agents over in the Senior knowing those dynamics were kind of happening within life within the period?

No, good question, but no that was not due to shifting really the tenured agent percentage we're talking about was just more of a steep cut to the flex group retraining of kind of the lower performing flex agents. And then ultimately really optimizing the way we deliver also. If you look through our productivity we actually were mildly down year-over-year with the large decline in cost for acquisitions that's because we did limit more of lead volume to our lower-performing agents given kind of some of the economic pressure and things like that which did drive our CPA down. So really, really pleased with the results there on what that looks like also pleased with what that means for the future as that kind of -- what we had on paper came true in that in Q3. So I feel really strong about what we can do with that but that was not due to flexing.

Awesome. Well, thank you. Congrats on the quarter.

Thank you.

That concludes our question-and-answer session. I will now turn the call back over to Tim Danker for closing remarks.

Yeah, thank you all again for joining us this morning to recap. We're really proud of the early results of the strategy update. I think most notably the sequential improvements we've seen in OEP, certainly the momentum we have in SelectRx. As I noted, it's like what we'll continue to transition over the course of this year next. But overall we're very encouraged by the early results of the actions we're taking. We look forward to sharing more about our progress in the quarters ahead and thank you very much. Have a great day.

This concludes today's conference call. Thank you for participating. You may…