Prepared remarks
Welcome to SelectQuote's third quarter earnings conference call. Operator instructions: This call is being recorded. At this time, I will turn the call over to Matthew Gunter of SelectQuote Investor Relations.
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, Ryan Clement. Following Tim and Ryan's comments today, we will also have a question-and-answer session. 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 for the period ended June 30, 2025, and subsequent 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?
Thank you, Matt, and appreciate everyone joining us this morning. We're pleased to report another quarter of strong financial results across each of our segments. We reaffirm our outlook for fiscal 2026 and continue to execute our goal to drive profitability and cash flow. We're especially proud of the results given the headwinds our industry has faced over the past year plus. This is a testament to our people and strategy. SelectQuote continued to advance our goal to expand cash flow, and the company is very well positioned to accelerate that effort in fiscal 2027. To summarize, SelectQuote generated $431 million in revenue, driven by solid results across each of our segments. Adjusted EBITDA totaled $45 million, growth of 18% year-over-year. In Senior, we grew revenue by 8% year-over-year to $183 million. Growth was driven by healthier OEP, strong agent productivity and customer retention, as well as a positive change to our commissions receivables that Ryan will detail. As we have mentioned before, we firmly believe SelectQuote's strategy and our agents make the difference. This now marks four consecutive years of strong operating performance in Senior, despite widely varying Medicare Advantage backdrops each year. To say it lightly, we're very proud of the results and our differentiated model. Senior adjusted EBITDA totaled $59 million, which includes the positive $14 million adjustment I just mentioned. It is important to note that the adjustment reaffirms the value of the commissions receivable on our balance sheet and the approximate $1 billion in assets we expect to receive in the quarters and years ahead. When we offer bespoke advice to American seniors and do so year-in and year-out, they get the best care, and we and our carrier partners benefit through strong retention. That said, excluding and normalizing the adjustment for comparison purposes, SelectQuote's model once again drove strong Senior margins of 26% in a Medicare Advantage backdrop that was mixed this season. Turning to Healthcare Services, revenue grew 5% compared to a year ago, totaling $199 million. Our revenue and profitability in SelectRx was impacted by both carrier-specific actions on reimbursement, which we detailed earlier this year, and the implementation of the Inflation Reduction Act. Ryan will provide detail on that impact shortly. Those headwinds notwithstanding, our adjusted EBITDA improved sequentially to $5 million, and we maintain our view that Healthcare Services will be a significant driver of profitable cash flow growth in fiscal 2027 and beyond. Overall, including our Life Insurance segment, we expect to exit fiscal 2026 on very strong footing in spite of what was a challenging environment. Looking ahead to 2027, we are encouraged by increasing visibility within the Medicare Advantage ecosystem. We're excited about SelectQuote's ability to compound cash flow growth in the near future and see significant value for shareholders as a result, especially at what we believe is a wildly dislocated valuation for our company. To that end, let me be clear that we will take all necessary action to maintain our listing on the New York Stock Exchange. We remain confident our stock will continue to be traded on the NYSE for years to come. Lastly, I'd like to take a minute to highlight a new and important initiative called SelectQuote Local. As you know, we have long been proud of our company's ability to help underserved Americans. SelectQuote Local is a natural extension of our model and allows local community healthcare and life insurance participants to leverage our information and market advantages to help more people in need. The business offers our leading marketing, technology, products and customer service platform through a franchise model with local sales and service. Put another way, we're offering local providers the information engine of SelectQuote on a fee-based arrangement, and we can do so with minimal capital investment. Similar to the expansion of our revenue-to-CAC metric with the growth of Healthcare Services, we see SelectQuote Local as another extension of how our model can help more Americans with the same scale dollar of investment. SelectQuote Local won't be a meaningful revenue driver in the near term, but strategically, it broadens our reach and addressable market. Now let's flip to Slide 4, and let's take a look at the KPIs from our very strong quarter. We've shown these before, primarily for our Senior business, but we've also included additional detail on SelectRx. Starting with Senior on the left, we drove another strong quarter measured by agent productivity and OEP. Agent service and productivity are an evergreen goal of ours, but I'd remind you that this is all the more impressive considering the very strong compares in the previous two years. Specifically, we drove a 1% improvement in policies per agent over this timeframe despite historically wide swings in the environment from one season to the next. Moving down the page, we saw even better results on marketing efficiency, spending 14% less per approved policy compared to two years ago. Ryan will speak to elevated approval rates this season, but even excluding that unique impact, we saw a strong return on marketing spend beyond just policy booking. Senior engagement was high across the full range of our channels. We're underscoring our Senior division efficiency performance here, because we oftentimes find investors and analysts overlook the progress we've made on cash conversion in this segment. Moving to the right side of the page, we highlight the significant progress we've made with onboarding of SelectRx members. As you can see, we have driven a 64% increase in prescriptions shipped compared to two years ago relative to a commensurate 55% increase in SelectRx members. Progressive maturity and onboarding of our membership, combined with the improved operating efficiency of our Olathe, Kansas distribution facility, has driven significant leverage on a relatively fixed cost base. As a result, SelectQuote generated a global revenue-to-CAC multiple of 6.7x. Only SelectQuote offers this unique combination of capabilities to help patients in multiple ways. This increases the value we bring to consumers and drives additional profitability with each senior we engage with. For products and services that are inherently recurring, especially when done at our level of care, the cash flow streams from our customers drive very compelling returns on invested capital. As we've noted, there is a wide disconnect between the value we see in our platform and cash flow streams and the valuation of common equity. Take one simple example. Our Medicare Advantage commissions receivable balance at the end of fiscal third quarter totaled nearly $1 billion, which compares to our market cap of under $200 million today. We have fielded questions about the LTV assumptions in our commissions accounting going all the way back to our IPO, but I'd simply note that SelectQuote has just operated in two of the most disruptive Medicare Advantage environments on record. Over those two years, we had a recapture rate of over 33%, and we're able to recognize a favorable adjustment to our receivables. The point being, we have visibility and conviction in our balance sheet asset and multiple capital markets transactions would suggest others analyzing the business closely share that conviction. Before I hand the call over to Ryan, we're very proud of the great progress we've made over the past four years, both operationally and on our capital structure. We continue to prioritize cash flow generation and will deliver significant year-over-year improvement in operating cash flow in fiscal 2026. We expect to build upon that meaningful cash flow improvement in fiscal 2027 and beyond with a stated goal to delever our balance sheet in the years to come. I'll end my comments by underscoring our commitment to remedying the disconnect in our equity value and see a very compelling opportunity in SelectQuote for investors in the future. With that, let me turn the call over to Ryan to review our third quarter. Ryan?
Thanks, Tim. I'll pick it up on Slide 5 with a summary of our consolidated financial results. As Tim noted, SelectQuote had a strong quarter with revenue growth of 6% year-over-year, totaling $431 million. The growth was driven by both our Senior and Healthcare Services businesses, reflecting a strong OEP and continued demand for SelectRx. Adjusted EBITDA of $45 million was aided by the positive change in estimate to our commissions receivable that Tim noted. Excluding the favorable adjustment, our consolidated EBITDA margin for fiscal 3Q would have been 7%, which is a strong result for an OEP quarter. Overall, given the volatile backdrop, we are proud of the progress we continue to make on profitability and cash flow generation. The fiscal third quarter was strong operationally, and we are very well positioned to end fiscal 2026 on a positive note and carry momentum into 2027. Let me begin the segment overview on Slide 6 with a summary of our Senior business. As Tim noted, Senior revenue grew 8% compared to last year, totaling $183 million on 4% growth in approved MA policies and the positive change in estimate. Let's detail those two drivers, starting with approved policies. While growth in approved policies was strong, it's important to note that approval rates this OEP were materially higher than in previous years. While we are encouraged by these strong carrier approval rates, we will continue to monitor as it's possible some of this increase may reflect approval timing and volume that was pulled forward from 4Q, contributing to the outsized strength this quarter. Shifting to the positive adjustment, the majority of the $14 million increase in receivables was due to a change in our estimate of expected renewals driven by additional anticipated renewals from our policyholders as we continue to gain visibility to retention through this most recent renewal event. Having now operated through 15 Medicare seasons, we are proud to say we still have customers from our earliest cohorts. As a reminder, our LTV accounting assumes 10 renewal years and also assumes a 15% constraint. We think this is yet another indicator that our commissions receivables balance represents a large and perhaps not appropriately understood source of future cash flow to the business. Moving to adjusted EBITDA, Senior generated $59 million, including a favorable $14 million adjustment to our commissions receivable. Excluding that adjustment, the Senior segment produced an EBITDA margin of 26%. We have now maintained profitability of at least 25% during the AEP and OEP seasons for each of the last four consecutive years. Over that timeframe, the SelectQuote Senior business has averaged EBITDA margins of over 25% on a full year basis. Moving to Slide 7, our Healthcare Services business performed in line with our expectations against the pressures Tim mentioned. As we forecasted, membership growth in the quarter was strong at 11%, but moderated compared to the recent past. To be clear, demand remains very strong, but we continue to focus on driving further improvement in segment profitability. Our nearly 117,000 members drove revenue of $199 million for the fiscal third quarter. Let me take a moment to speak through the dynamic that changed booked revenue sequentially. The Inflation Reduction Act went into effect on January 1 of this year and set maximum fair prices for 10 higher-priced drugs. Essentially, all of the sequential drop in revenue was driven by that specific price change in the quarter. It's important to note that while the IRA drove a notable change to our top line, the actual impact to EBITDA was in the low single-digit millions and was fully accounted for in our original forecast. To that point, moving down the page, we drove adjusted EBITDA of $5 million despite the headwinds mentioned. As we noted last quarter, we see significant profit and cash flow in our base of SelectRx members. We are driving profit improvement through the seasoning and higher utilization of our membership base. Additionally, we continue to grow more and more optimistic about the cost efficiency of our Olathe distribution facility, which came online in April of 2025. At this time, less than 20% of our prescriptions shipped from that facility, but we are already recognizing 30%-plus efficiency gains on those shipments relative to our two legacy locations. We have been investing in the development of a proprietary pharmacy management system to support all of our locations, and we are in the testing phase at this point. Upon successful completion of our testing, the new pharmacy management system will allow us to fulfill many more SelectRx members through the Olathe facility in the quarters to come. We currently use less than half of the facility space and run only one shift in that facility. So there's ample room to scale into this highly efficient operation. Flipping to Life Insurance on Slide 8, the business remains steady with cross currents between our two main products, Final Expense and Term Life. Final Expense continues to be a tailwind for the business with commissions up more than 8% year-over-year at highly attractive margins. We continue to see strong demand for this product and believe it will be a consistent growth driver well into the future. Strength in Final Expense was partially offset by Term Life, which remains a competitive market as consumers are shifting where and how they consume media. Overall, Life revenue grew 4% to $48 million and generated adjusted EBITDA of $6 million. While small, it's worth noting that the Life business generates sufficient cash flow similar to our Healthcare Services segment. In summary, our Life division remains a steady contributor of profitability and cash flow. Finally, on Slide 9, we are reaffirming our revenue range of $1.61 billion to $1.71 billion and adjusted EBITDA range of $90 million to $100 million. Despite realizing a positive adjustment this quarter, we believe it is prudent to maintain our guidance ranges at this time. As mentioned earlier, 3Q results were aided by approval rates in Senior that were materially higher than previous years. While we are encouraged by this approval rate increase, we want to continue to monitor whether some of this goodness may be timing related, impacting our fourth quarter approved policy levels. To echo Tim's comment, the SelectQuote model is generating visible and strengthening cash profitability, and we are highly focused on closing the disconnect between our equity market value and the real value of those cash flows. With that, let me now turn the call back to the operator to take your questions.
Questions and answers
Operator instructions: We will now begin the question-and-answer session. Your first question comes from the line of Drew Sterrett from RBC Capital Markets.
This is Drew Sterrett on for Ben Hendrix. You previously noted that PBM headwinds have continued for SelectRx. For this quarter, it appears reimbursement came in a little ahead of expectations. Do you have any additional commentary around this? And how should we think about the PBM reimbursement environment going forward?
Yes, Drew, thanks for joining. I'll take the first part of the call and maybe have Ryan also speak to the IRA impact. But as far as the PBM reimbursement environment, it remains very stable. As we talked about earlier this year, we faced a challenge with the change in our reimbursement rate. We have successfully resolved that issue and have seen reimbursement rates normalize in the third quarter results. So we would categorize the environment for reimbursement rates as stable, and we're happy to have secured a multi-year agreement with our largest PBM partner. Ryan, maybe you can elaborate a little bit more on the Inflation Reduction Act dynamic that impacted revenue for the quarter.
Yes, happy to. As Tim noted and I mentioned on the call, the revenue sequentially declined and the biggest driver there is the Inflation Reduction Act, which when you look at it optically, revenue obviously dropped, but the bottom-line impact is very different from what we see in the top line. The top line is outsized. The reason for that is we're receiving refunds from the drug manufacturers, and that's actually flowing through in the cost of goods line item. So for the quarter, we actually received $13 million in refunds. But again, there's a bit of a geography change that's happening. And certainly, optically, it looks like there's a sequential decline, but that's really driven by the IRA impacts, which were fully accounted for in our guidance.
Your next question comes from the line of George Sutton from Craig-Hallum.
Craig-Hallum. Nice results. Tim, you mentioned in your prepared comments that you're positioned to accelerate the cash flow dynamics in 2027. Can you give us a bit more color on that?
Yes, I'd be happy to, George, and I appreciate you being on. As far as cash flow dynamics, we feel like we're making substantial progress year-over-year. I think it's a byproduct of the positive changes that we made in the capital structure and our cash interest obligations. Certainly, as you've seen the results for OEP, which I think we have highlighted, there's been a lot of change over the past two years around the environment. So we feel really good about the OEP results and the underlying efficiency that we're driving in our Senior distribution business, both from agent productivity as well as from a marketing efficiency standpoint. And clearly, we had a bounce-back quarter in terms of SelectRx. That's a big part of the story moving forward: those three factors that I would emphasize. SelectRx is a significant opportunity for us to continue to improve cash flow generation. So we highlighted the Olathe, Kansas City facility and some of the things that we're doing there that are driving 30%-plus efficiency relative to our legacy pharmacies, and we expect that to continue to compound as we exit fourth quarter this year into next year.
You also mentioned increased visibility in the Medicare Advantage ecosystem. You've seen some public comments from a large carrier about their plans, which don't necessarily align with brokers. Where are you seeing this increased visibility? Can you give us a sense of the discussions you're having with carriers?
Great question, George. We are certainly seeing some positive developments relative to a few quarters ago in the broader MA market recovery, but we would caution on the pace of recovery. The things we're seeing—based on payer reports—are that medical cost trends are easing a bit, still expected to be up in the high single digits year-over-year, perhaps coming in slightly favorable to that. Reimbursement trends are not fully sufficient to cover those costs, so it's a mixed story. Some changes to the stars rating structure we think are a positive tailwind if payers can manage the enhanced focus on clinical factors. You're seeing payer margin improvement recovery happening. When you put all that together, we think there will be continued discipline in the market for plan year 2027. We believe there is potential for targeted growth to reemerge for plan year 2028. We're anticipating there could be some elevated disruption again as carriers try to get to target margin goals. But we've performed very well over the past two years. The SelectQuote team has deep Medicare experience—many of us have been in Medicare for 20 years—and we know these cycles don't last forever. We remain cautiously optimistic.
Lastly for me, you and Ryan were pretty adamant about wanting to remedy the disconnect in your equity. How broadly are you thinking? Beyond execution, are you considering segment sales, monetizing receivables, other M&A? How broad is the option set?
Fair question, George. We definitely plan to remedy it, and we made public comments about ensuring this company will be listed on the New York Stock Exchange. Beyond that, we continue to evaluate a series of options. We have been on record as a company that continues to evaluate various capital markets transactions—securitization, for example, and we've accomplished one. We think the positive development of how we've worked through the past two years on renewals and the positive change in estimate gives us increased conviction around our back-book receivables; that's certainly an option. There are other M&A opportunities; we've said before that consolidation might make sense. We think there will be a small handful of sophisticated, capability-rich players, and SelectQuote will certainly be one of those. The strength, diversification and durability of our business creates an option set for us that's quite wide.
Your next question comes from the line of Steven Couche from Jefferies.
I'm on for Dave. Maybe start on SelectRx: do you still expect to exit the year at the $40 million to $50 million EBITDA run rate you previously discussed?
Hello, Steven, I appreciate you joining and I'm happy to answer that. I think we are highly confident that in the very near term, this business will be at a $40 million to $50 million EBITDA run rate. We continue to gain operational efficiencies like we've commented on in our Kansas City facility, and we expect that to continue to compound as we exit 4Q and enter fiscal 2027.
Okay. And then on Kansas City: how do you think about moving volumes out of the other two facilities (I believe they're in Indianapolis and Pittsburgh) and into Kansas City? Does it create stranded costs or decremental margins in the other two facilities when you move volume into Kansas City?
As far as getting volume in, we've been open that we've been working on a new pharmacy management system. In order to take more volume in, we are really close but still working on getting that done. We've sent our first patients through that process and it's gone very well. Pretty soon, we will be moving more patients over. It should help margins in the other facilities because it will take a little bit of a burden off later night shifts and some other operational complexities. So again, that cost savings that Ryan was talking about is real. We feel like that will enhance margins even more as we run more volume through Olathe.
Okay. And then maybe one or two on Senior. Regarding the $14 million positive change in estimate: did that better performance relate to recent policies—this most recent AEP or maybe the one before that? How much of that $14 million should we think about folding into the underlying EBITDA run rate?
With respect to the positive adjustment, we've been through another renewal event and we're assessing the book of business and persistency. Through this enhanced visibility, it became clear that we would expect to collect more than what we currently had on the balance sheet, which led to the change in estimate. It's less about any specific cohort and more a broad assessment of the book of business that suggested the adjustment was appropriate. That said, we're not modifying guidance at this time. I want to see how Q4 develops, especially given the approval rates dynamics we discussed, but we're very pleased with the overall business results and how the book is holding up.
When we think about the LTV calculation, obviously the last AEP was extremely disruptive. Moving forward, do we just need industry-wide enrollment disruption to be less for LTV to benefit? Or are there other variables where stabilization alone wouldn't necessarily result in LTV stabilizing or improving?
There are many factors that impact LTV: customer retention, carrier mix, payment structures, and more. We've been through two disruptive seasons, which put pressure on persistency. We're incredibly pleased with the 34% recapture rate—navigating the season well. When we help someone with a new policy that may have a plan term, we're putting that policy on the books at a very low cost. Strong performance and the ability to navigate a range of Medicare seasons would be a tailwind to lifetime values. So stability in the system would likely benefit LTV, and that's what we're hoping for in the future, though we've been able to navigate four very different Medicare seasons already.
Your next question comes from the line of Michael Kupinski from NOBLE Capital Markets.
Congratulations on your quarter. I have two quick questions. First, in terms of carrier marketing spend, have you seen any changes? Second, on Senior trends for the back half of the year—particularly submission volumes, approval rates and average revenue—how are those trending as we head into the next quarter?
Thanks, Michael. Regarding carrier marketing spend, no additional updates beyond what we shared on our second quarter call regarding strategic marketing investment; we are experiencing what we had projected. Carriers will go through annual planning cycles this summer and we'll have a clearer picture when we provide our fiscal 2027 guide. Regarding the back half of the year, we just went through our second-biggest quarter in OEP and we're proud of the results and efficiency. We absorbed some of the previously mentioned $20 million impact and still drove what we believe are outsized results. We now enter the SEP period, and SEP looks similar to last year—no substantial changes for us year-over-year. Our year-round model and the viability of our economics, inclusive of quieter SEP periods, is unique among direct-to-consumer players. We're able to make the quieter periods work economically, enhanced by SelectRx and how our enterprise economics operate even when demand is slower. So everything is generally in line and we expect to finish the year strong.
At this time, there are no further questions. I will now hand the conference over to CEO Tim Danker for closing remarks.
Yes. Thank you all again for your time, and we appreciate your support of SelectQuote. As Ryan and I have both noted, the SelectQuote model continues to drive consistent and reliable value to our customers and insurance carrier partners. We know the underlying cash flows for our services are real and significant, and we look forward to convincing more and more investors of that value in our equity in the months and years ahead. We appreciate your time. Have a great day.
This concludes today's call. Thank you all for attending. You may now disconnect.