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SelectQuote Reports Strong Results Amid Unique Medicare Advantage Landscape

The company highlights its effective strategies and financial performance, emphasizing support for seniors in a turbulent market.

As mentioned over the past two and a half years, we believe that the operational and cash flow efficiency in our senior segment can be replicated across various Medicare Advantage environments. We take pride in our team’s engagement model, which provided essential assistance to existing customers during this unprecedented Annual Enrollment Period (AEP). This Medicare Advantage season has highlighted the critical need for our agent-led and information-driven approach for seniors.

Prior to AEP, we bolstered our customer care function, assisting tens of thousands of customers affected by carrier plan terminations and changes in plan benefits. Our agents played a key role in guiding customers through these changes and, when necessary, helping them find new plans that better met their needs. The industry faced a significant upheaval, yet SelectQuote’s model—centered on information, connectivity, and experienced agents—served as a steady support system for American seniors. Shareholders took notice of our effective AEP planning, as reflected in strong returns and profitability.

Importantly, our results align with our mission to assist seniors in finding the right care. As we have consistently stated, SelectQuote succeeds when our customers succeed. Moving to Slide 5, I will discuss our strategy to enhance our capital structure. On October 15th, 2024, we took a significant step by completing our initial $100 million securitization of Medicare Advantage receivables.

This first transaction’s capital cost was over 500 basis points lower than our term debt, and it significantly extended the maturities of our term debt. While still in the early stages, we are pleased with the initial performance of our securitized policies during this AEP season. Future securitizations of our MA receivables may become a vital component of our funding model. The next step in our optimization journey is the planned $350 million preferred equity offering I mentioned earlier.

This action should be regarded as a deliberate move within our ongoing strategy to strengthen our balance sheet. We are now positioned for capital structure stability in the foreseeable future, enabling us to focus on business operations and growth. As discussed previously, we continue to explore additional strategic options to bolster our balance sheet. We believe this strategic investment facilitates the pursuit of further capital structure actions, including evaluating future securitizations.

The capital actions taken so far are expected to lower our ongoing cost of capital by more than 150 basis points and cut our annual cash interest obligations by roughly $30 million. More importantly, our company is now better positioned for growth in both our senior and healthcare services segments in the coming quarters and years. Although we have further goals to meet regarding our capitalization, we are proud of the progress made in the last two quarters. Please allow me to summarize our company’s mission on the next slide.

As previously stated, our platform holds a unique competitive edge to generate significant value in the $5 trillion American healthcare market. Our senior Medicare Advantage business serves as the foundation for our data and service expertise. This AEP season’s strong performance adds to the evidence supporting our belief that our business represents a sustainable and highly lucrative opportunity while addressing the needs of America’s seniors, including the approximately 10,000 individuals reaching age 65 each day. Furthermore, our enhanced capital position allows us to capitalize on the substantial growth witnessed in healthcare services, particularly through SelectRx.

Improving our balance sheet flexibility and cash flow conversion will enable us to accelerate growth in our core business as well as in other healthcare service sectors that are currently underserved in the U.S. Finally, I would like to address our revenue relative to customer acquisition costs (CAC). While EBITDA and cash flows remain crucial financial metrics, the ratio of revenue to CAC demonstrates the strength of our scale. We take great pride in having steadily increased our revenue to CAC from below 2x to over 5x this quarter.

As our company increasingly establishes itself as a central hub for healthcare information and coordinated services, we see tremendous potential to offer additional value-added services to our customers, resulting in multiple revenue streams. Healthcare services have the potential to embody the essence of scale, and we eagerly anticipate delivering real financial returns to our investors. Now, I will turn the call over to Ryan, who will delve deeper into our financial results. Ryan?

Ryan Clement — Chief Financial Officer

Thank you, Tim. I’ll begin with an overview of our consolidated results. SelectQuote reported $481 million in revenue for the second quarter, reflecting a 19% increase compared to last year. This growth was primarily driven by our SelectRx business, while our senior segment also performed strongly, as Medicare Advantage volumes exceeded expectations thanks to impressive agent productivity and close rates.

Consolidated adjusted EBITDA rose to $88 million, marking a 30% increase year over year. This results in a company-wide margin of 18%, which remained steady as the rapid growth of SelectRx contributed more significantly to overall revenues. We are pleased with our financial performance during AEP. Importantly, we believe the usually embedded future returns, from both new policyholder customers and those changing plans, will benefit shareholders moving forward.

Next, let me provide details regarding our senior segment financial performance. Revenue hit $256 million in the second quarter, surpassing our original expectations, which were based on a lower policy volume due to a reduced capital budget. The strong performance stemmed from our experienced agent workforce. Although it’s challenging to pinpoint exact reasons in the data, we believe specific factors this AEP drove seniors to seek out an agent-led model for assistance.

This scenario illustrates the value of our platform and highlights the alignment between our business and our customers’ needs. As Tim has noted, we succeed when our customers succeed. This is clearly demonstrated on the right side of the page, with adjusted EBITDA of $101 million achieving a 28% year-over-year growth and a margin of 39%, which is nearing a record high for this segment. Since our strategic redesign in early 2022, we’ve delivered three consecutive AEP seasons with adjusted EBITDA margins exceeding 30%.

At that time, we aimed to improve operating leverage and ensure attractive returns across various sound environments. We believe these quarterly results underscore the progress we’ve made in this area over the past three years. Moving on, I will provide context on the uniqueness of this Medicare Advantage season and how SelectQuote’s approach yielded strong results. To provide some perspective, in a typical AEP, less than 1% of Medicare Advantage plans are terminated by carriers. This season, however, terminations amounted to approximately 6%, a striking increase of about 15 times the normal rate as carriers restructured policies.

We specifically prepared for this impact before AEP began, understanding that American seniors would seek guidance from experienced professionals, regardless of whether their policies changed. This is where SelectQuote’s high-touch model excelled. For the 6% of policies that were terminated, we managed to recapture over 30% of those plans. It’s important to note that we receive most of the cash flows from a policy’s lifetime value during the first two years, leading to a positive net cash impact from the terminated and recaptured plans.

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Strong Quarterly Results Propel Growth for SelectRx and Medicare Advantage

Record Membership Growth and Increased Revenue Highlight Financial Performance

The commission’s receivable balance, exceeding 1 billion, remains a highly attractive asset that we believe is undervalued. Policyholder persistency trends for active policies were stable, reinforcing our confidence in the current Lifetime Value (LTV) constraints.

Let’s delve into the key performance indicators across our segments. In our senior division, we achieved a total Medicare Advantage policy volume of 248,000, marking a growth of 6%. This performance exceeded our original guidance that forecasted a 10% to 15% decline year over year. Our effective customer recapture strategies greatly contributed to this positive outcome by redefining terminated policies as new customers on a new policy. However, strong new customer acquisition and favorable economics accounted for the majority of this year’s policy production.

On the right side, we observe a slight decline in year-over-year Medicare Advantage lifetime value, which decreased by 3% to 907. This trend stems from a shift in carrier mix rather than instability in persistency, which remains steady within our receivables. The next slide highlights the ongoing strength of our SelectRx membership growth.

We closed the quarter with 97,000 SelectRx members, a 54% increase compared to last year. This growth emphasizes the value our services offer, coupled with our informational advantage in healthcare. Driven by this membership increase and its maturity, revenue rose to 183 million, reflecting a 64% year-over-year growth and yielding an annual run rate that surpasses 700 million.

This remarkable growth is largely attributed to strong results from our senior division. Many SelectRx members discover us while exploring their health insurance options, showcasing the synergies present between our senior and healthcare businesses. This growth also attests to our improving onboarding process.

During the AEP season, not only did we seize enrollment opportunities, but we also converted enrollees into new members at a higher rate than in previous years. In healthcare services, we reported an adjusted EBITDA of 2 million. It’s important to note that the AEP quarter is usually marked by high upfront spending to onboard new members, which can dampen profit margins compared to other quarters, as mentioned in last quarter’s communication.

On the life insurance front, our business also showed strong results, with revenue of 40 million and an adjusted EBITDA of 7 million—up 62% year over year. The EBITDA margin reached 19%, up from 12% last year, driven by robust performance in our final expense business and favorable momentum with our Swift Term Select product. I will now provide an update on our fiscal 2025 outlook.

We are raising our fiscal year 2025 guidance for revenue, adjusted EBITDA, and net income. Revenue is now projected to be between 1.5 billion and 1.575 billion, up from our previous estimate of 1.425 to 1.525 billion. This increase is fueled by our strong senior division results during AEP and significant growth in healthcare services. Our SelectRx membership growth is now anticipated to moderate in the second half due to a higher conversion rate of AEP enrollees to members in the previous quarter.

Expected consolidated adjusted EBITDA has also been raised to a range of 115 million to 140 million, an increase from 100 million to 130 million, thanks to near-record senior margins delivered in the fiscal second quarter. Additionally, we now anticipate net income to fall between a loss of 24 million and a profit of 11 million, compared to a previous range of a loss of 59 million to positive 3 million. We take pride in the results from this AEP and aim to maintain our momentum for the remainder of fiscal 2025.

With that, we will open the call for questions.

Questions & Answers:

Operator

[Operator instructions] Your first question comes from the line of Ben Hendrix of RBC Capital Markets. Please go ahead.

Ben Hendrix — RBC Capital Markets — Analyst

Thank you, and congratulations on an impressive quarter. I have a question regarding your guidance. The new midpoint seems somewhat conservative considering your recent performance. Could you share your insights on ongoing Open Enrollment Period (OEP) trends, as well as planned investments leading up to the fiscal year-end?

Tim Danker — Chief Executive Officer

Good evening, Ben. Thank you for your inquiry. We’re proud of our team’s results and the ongoing business momentum. With these strong outcomes, we had previously raised our guidance in November and again tonight.

We recognize that this is a unique season, so we want to assess how the remainder of the fiscal year unfolds. I’ll turn it to Ryan for more details on our planned investments for the latter half of the year.

Ryan Clement — Chief Financial Officer

I appreciate the question, Ben. We are pleased with our results. We are making strategic investments, particularly in healthcare services, where we are developing a facility in Kansas to enhance overall efficiency.

There are indeed investments occurring in the latter half of the year. Overall, we’re satisfied with the broader business performance and will continue focusing on onboarding new members within our healthcare services division. For the senior division, we expect margins to range from low to mid-20s, in line with the past two years. From a healthcare services perspective, we anticipate low single-digit margins for fiscal 2025, while expecting improvement as we grow our customer base.

Ben Hendrix — RBC Capital Markets — Analyst

Thank you. I’d like to follow up on SelectRx. The growth momentum is impressive, and we often get inquiries about the broader market opportunity. It seems extensive and aligns well with your senior engagement. Can you elaborate on the synergies between these segments? While you mentioned moderated growth in the latter half, how should we assess penetration in the long term regarding SelectRx and the senior segment correlation?

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Healthcare Firm Shows Positive Growth Prospects Amid Strategic Changes

Improving Market Penetration and Financial Stability

“Yeah, Ben, we feel great about where we stand regarding attachment rates on both sales and no sales,” said a company representative during the Q&A session. They noted improvements in understanding customer needs and aligning them with appropriate healthcare solutions, specifically mentioning SelectRx as a significant asset. They believe that their existing market connection is set to expand as they continue to find customers outside their core base. The company has been successful in managing medication adherence, which they claim reduces waste and offers better healthcare outcomes. Furthermore, management is optimistic about the market’s vast potential beyond its current customer base.

Investment Boost and Its Implications

Ben Hendrix, an analyst from RBC Capital Markets, congratulated the company on its recent investment from Bain and others. He questioned how this investment might influence their securitization efforts and their strategy regarding the $1 billion in receivables. In response, Tim Danker, the Chief Executive Officer, expressed confidence that the new funding would strengthen their financial positioning, aiding in continued debt reduction and enhancing their securitization capabilities.

This question ties to the company’s maiden $100 million securitization, which has yielded positive performance. With a more stable capital base and strong business results, the company plans to explore further securitization possibilities to support their ongoing deleveraging initiatives.

Utilization of Funds and Future Growth

The conversation shifted to the allocation of proceeds from a recent capital raise. George Sutton from Craig-Hallum noted that around $250 million would be directed toward debt repayment, leading to decreased interest expenses, while an additional $100 million would enhance operational flexibility. Bob Grant, President of the Senior Segment, elaborated that servicing debt obligations would decrease by about $30 million annually, positioning the organization for significant growth.

They anticipate that their healthcare services sector would thus generate cash, enabling further investments in additional healthcare opportunities. Reflecting on the recent performance weaknesses, Tim Danker added that the company’s growth endeavors remain in focus, highlighting the importance of improved capital structure.

Opportunities for Organic Growth

When discussing future growth, Tim emphasized the investor confidence around expanding their Medicare Advantage (MA) platform and healthcare services. The company believes they are well-positioned for organic growth, which is evidenced by increasing revenues relative to customer acquisition costs. However, they acknowledged the challenges faced earlier in the season due to a lower agent count impacting new MA businesses. Tim suggested that with their current operational changes, they expect opportunities for growth that could lead to better financial outcomes in the upcoming quarters.

In closing, Bob noted their operational efficiencies and effectiveness demonstrated this past year and expressed optimism for continued performance improvements, despite the limited workforce.

Conclusion

The discussions reflect a company keen on leveraging new investments for strategic growth while effectively managing their debt and expanding market reach. This indicates that, despite facing challenges, there is a strong belief in potential long-term success.

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Strategic Growth and Regulatory Changes Enhance Future Outlook

Company Leaders Discuss Hiring Plans Amid Regulatory Restructuring and Positive Market Trends

During a recent conference call, leadership at the company expressed their intent to manage growth carefully while preparing for a promising market. They indicated that they plan to hire substantial new staff in their fiscal year Q4, ensuring these new employees are well-trained for the upcoming Annual Enrollment Period (AEP). Last year also saw a similar hiring strategy that led to successful outcomes.

The company’s leadership believes they can achieve upward growth, emphasizing the need for a balanced approach that avoids excessive leverage. The President of the Senior Segment, Bob Grant, noted that prior years had plenty of business opportunities that weren’t fully capitalized on, but they are now in a stronger position.

George Sutton – Analyst

“One more question if I could,” Sutton inquired, reflecting on the challenges faced over the past three years. “With the new regulatory regime, can you discuss the early signs of improvement?”

Bob Grant – President, Senior Segment

Grant responded positively, acknowledging that the present environment appears much more favorable. “The current administration shows greater support for Medicare Advantage,” he remarked, indicating optimism for future growth prospects.

George Sutton – Analyst

Sutton thanked Grant for the insights, acknowledging that the changes could herald a revitalized market.

Tim Danker – Chief Executive Officer

Danker echoed these sentiments, stating, “Things are indeed looking up.” He mentioned that recent announcements have reassured payers, hinting at a potential stabilization in profitability and benefits reinvestment.

George Sutton – Analyst

“Thank you once more,” Sutton replied, appreciating the overview.

Pat McCann – Noble Capital Markets, Analyst

Following Sutton, McCann congratulated the team on a successful quarter and strategic investment. He questioned how the strong performance of tenured agents might influence hiring strategies moving forward. McCann noted the notable increase in submissions and close rates despite earlier expectations for downturns.

Bob Grant – President, Senior Segment

Grant clarified that current results would not alter their long-term strategy. Their investments in technology and marketing have markedly boosted productivity among seasoned agents. “We believe that if we had followed our usual hiring practices, we would have matched or exceeded this year’s results,” he affirmed.

Tim Danker – Chief Executive Officer

Danker added that they managed to achieve a 6% increase in policy growth despite having 22% fewer agents, which he termed a remarkable achievement under challenging conditions. “With the new capital, we’re positioned for responsible growth,” he indicated, outlining plans to explore further opportunities in the healthcare services sector.

Pat McCann – Noble Capital Markets, Analyst

McCann pressed further about SelectRx, asking how senior consumers perceive the benefits of using a home delivery pharmacy service.

Bob Grant – President, Senior Segment

Grant explained the shift in consumer behavior, noting that more seniors are now engaging with digital services and seeing the advantages of home delivery. He attributed this partly to recent regulatory changes, such as lowered costs associated with the “donut hole” in Medicare plans. As these consumers become more comfortable with technology, Grant expects adoption rates for home delivery services to increase.

This optimistic outlook suggests that both regulatory reforms and strategic investments are setting the stage for positive shifts in the market. Leadership remains confident in their operational strategy, anticipating substantial growth ahead.

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Positive Trends and Future Plans: A Conference Call Recap

High Customer Satisfaction Fuels Growth

During the conference call, key executives discussed how their strategies have led to increased customer satisfaction. They emphasized that their initiatives have improved patient adherence rates from around 80% to 90% across various diseases. This improvement not only benefits patients but also helps carriers meet required thresholds, promoting cost savings and better health outcomes.

A Unique Business Model and Future Enhancements

The team expressed pride in their unique business model, which effectively caters to a complex patient demographic. The executives intend to collaborate with Bill’s customer lifecycle management and customer experience teams to continually enhance their service offerings. They are exploring remote solutions that can further support their customers in achieving necessary health outcomes.

Encouraging Closing Remarks from Leadership

Tim Danker, the CEO, concluded the call by expressing gratitude for participant engagement and optimism for 2025. He highlighted the company’s strong momentum and commitment to delivering updates on strategic initiatives in the coming months. His enthusiasm for the future reassured investors of the organization’s direction.

Operator’s Announcement

The call wrapped up without further questions, allowing for a clear conclusion to the discussion.

Duration: 0 minutes

Call Participants:

Matt Gunter — Investor Relations

Tim Danker — Chief Executive Officer

Ryan Clement — Chief Financial Officer

Ben Hendrix — RBC Capital Markets — Analyst

George Sutton — Analyst

Bob Grant — President, Senior Segment

Pat McCann — Noble Capital Markets — Analyst

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