(EDGAR Online via COMTEX) -- Item 2. Management's discussion and analysis of financial condition and results of operations
The following discussion and analysis of our financial condition and results of operations should be read together with our unaudited condensed consolidated financial statements and related notes included in Part I, Item 1 of this Quarterly Report on Form 10-Q as well as the discussion in the "Business" section of our prospectus dated October 27, 2020, filed with the SEC in accordance with Rule 424(b) of the Securities Act on October 29, 2020. This discussion and analysis reflects our historical results of operations and financial position, and, except as otherwise indicated below, does not give effect to the Reorganization Transactions or to the completion of our IPO.
This discussion, particularly information with respect to our future results of operations or financial condition, business strategy and plans, and objectives of management for future operations, includes forward-looking statements that involve risks and uncertainties as described under the heading "Special Note About Forward-Looking Statements" in this Quarterly Report on Form 10-Q. You should review the disclosure under the heading "Risk Factors" in this Quarterly Report on Form 10-Q for a discussion of important factors that could cause our actual results to differ materially from those anticipated in these forward-looking statements.
Our mission is to help insurance carriers and distributors target and acquire customers more efficiently and at greater scale through technology and data science. Our technology platform brings leading insurance carriers and high-intent consumers together through a real-time, transparent, and results-driven ecosystem. We believe we are the largest online customer acquisition channel in our core verticals of property & casualty insurance, health insurance, and life insurance, supporting over $1 billion in Transaction Value across our platform over the last two years.
We have multi-faceted relationships with top-tier insurance carriers and distributors. A buyer or a demand partner within our ecosystem is generally an insurance carrier or distributor seeking to reach high-intent insurance consumers. A seller or a supply partner is typically an insurance carrier looking to maximize the value of non-converting or low LTV consumers, or an insurance-focused research destination looking to monetize the high-intent insurance shoppers on their websites. On a monthly basis, an average of 27.6 million consumers shop for insurance products through the websites of our diversified group of supply partners and our proprietary websites, driving an average of over 6.3 million Consumer Referrals on our platform for the twelve-month period ended September 30, 2020.
We generate revenue by earning a fee for each Consumer Referral sold on our platform. A transaction becomes payable only on a qualifying consumer action, such as a click, call or lead, and is not contingent on the sale of a product to the consumer.
We believe in the disruptive power of transparency. Traditionally, insurance customer acquisition platforms operated in a black box. We recognized that a consumer may be valued differently by one insurer versus another; therefore, insurers should be able to determine pricing granularly based on the value that a particular customer segment is expected to bring to their business. As a result, we developed a technology platform that powers an ecosystem where buyers and sellers can transact with full transparency, control, and confidence, aligning the interests of the parties participating on our platform.
We believe our technology is a key differentiator and a powerful driver of our performance. We maintain deep, custom integrations with partners representing the majority of our Transaction Value to enable automated, data-driven processes that optimize our partners' customer acquisition spend and revenue. Through our platform, our insurance carrier partners can target and price across over 35 separate consumer attributes to manage customized acquisition strategies.
For the three and nine months ended September 30, 2020, we earned $151.5 million and $394.6 million of revenue representing a 37.3% and 40.0% increase over the $110.4 million and $281.9 million of revenue we earned for the three and nine months ended September 30, 2019.
For the three and nine months ended September 30, 2020, we earned $4.8 million and $23.8 million in net income, compared to $7.8 million and $7.4 million in the same periods in 2019, a decrease of 37.8% and an increase 219.9% that was driven primarily by increased professional fee expenses incurred to prepare the company for the IPO.
For the three and nine months ended September 30, 2020, we earned $14.0 million and $39.9 million in Adjusted EBITDA, an increase of 19.9% and 37.6%, respectively, over the same periods in 2019, when we earned $11.7 million $29.0 million in Adjusted EBITDA.
For the three and nine months ended September 30, 2020, our gross profit increased to $20.7 million and $58.9 million, respectively, which is an increase of 17.1% and 31.7%, respectively, over the same periods in 2019, when our gross profit was $17.7 million and $44.7 million. For the three and nine months ended September 30, 2020, gross margin decreased to 13.7% and 14.9% compared to 16.0% and 15.9% in the same periods in 2019.
For the three and nine months ended September 30, 2020, our Contribution increased to $21.7 million and $61.8 million, an increase of 16.1% and 29.1% over the same periods in 2019, when our Contribution was $18.7 million and $47.8 million. For the three and nine months ended September 30, 2020, Contribution Margin decreased to 14.3% and 15.7% compared to 16.9% and 17.0% in the same periods in 2019, driven by the growth of a supply partner in 2020 at a zero percent revenue share basis; our revenue share with this partner begins on October 1, 2020.
Adjusted EBITDA, Contribution, and Contribution Margin are business and operating metrics that are not presented in accordance with GAAP. We use such metrics, together with financial measures prepared in accordance with GAAP, to measure our operating performance. See "-Key business and operating metrics" below. We also present Transaction Value, which is an operating metric not presented in accordance with GAAP. Although Transaction Value is a driver of revenue in accordance with GAAP, we do not believe Transaction Value is a financial measure because it only measures the gross transaction activity across our platform. Transaction activity on the platform translates to earnings that are recorded as revenue as described below under "-Key components of our results of operations-revenue." As described below under "-Key business and operating metrics-Transaction value," we present Transaction Value because we believe it is useful to investors to assess the overall level of activity on our platform and to better understand the sources of our revenue across our different transaction models and verticals.
Key factors affecting our business
We believe that our future performance will depend on many factors, including those described below and in the section titled "Risk factors" included elsewhere in this Report.
Secular trends in the insurance industry
Our technology platform was created to serve and grow with our core insurance end markets. As such, we believe secular trends in the insurance industry are a critical driver of our revenue and will continue to provide strong tailwinds for our business. More insurance consumers are shopping online and direct-to-consumer marketing, which fuels our revenue, is the fastest growing insurance distribution channel. In addition, insurance customer acquisition spending is growing. As mass-market customer acquisition spend is becoming more costly, insurance carriers and distributors are increasingly focusing on optimizing customer acquisition spend, which is at the core of the service we deliver on our platform. As long as these secular trends persist, we expect growth in digital insurance customer acquisition spend to continue, and we believe we are well-positioned to benefit from the industry's growth.
Transaction Value from open platform transactions is a direct driver of our revenue, while Transaction Value from private platform transactions is an indirect driver of our revenue (see "Key business and operating metrics" below). Transaction Value on our platform grew to $217.6 million and $558.8 million for the three and nine months ended September 30, 2020 from $150.8 million and $390.5 million for the three and nine months ended September 30, 2019. We have developed multi-faceted, deeply integrated partnerships with insurance carriers and distributors, who are often both buyers and sellers on our platform. We believe the versatility and breadth of our offerings, coupled with our focus on high-quality products, provide significant value to insurance carriers and distributors, resulting in strong retention rates. As a result, many insurance carriers and distributors use our platform as their central hub for broadly managing digital customer acquisition and monetization. For the three and nine months ended September 30, 2020, 97.3% and 98.5% of total Transaction Value executed on our platform came from demand partner relationships from 2019.
Our demand and supply partners
Our success depends on our ability to retain and grow the number of demand and supply partners on our platform. The aggregate number of demand and supply partners on our platform decreased to 1,241 for the nine months ended September 30, 2020 from 1,248 for the nine months ended September 30, 2019, driven by decreased engagement in our travel sub-vertical (other) as advertising spend in this vertical decreased period over period. We retain and attract demand partners by finding high-quality sources of Consumer Referrals to make available to our demand partners. We seek to develop, acquire and retain relationships with high-quality supply partners by developing flexible platforms to enable our supply partners to maximize their revenue, manage their demand side relationships in scalable and flexible ways and focus on long-term sustainable economics with respect to revenue share. Our relationships with our partners are deep, long standing and involve the top-tier insurance carriers in the industry. In terms of buyers, 15 of the top 20 largest auto insurance carriers by customer acquisition spend are on our platform. Approximately half of our supply partners have been on our platform since 2016.
Our results also depend on the number of Consumer Referrals purchased on our platform. The aggregate number of consumer clicks, calls and leads purchased by insurance buyers on our platform grew to 19.9 million and 56.6 million for the three and nine months ended September 30, 2020 from 16.0 million and 41.7 million for the three and nine months ended September 30, 2019. We seek to increase the number and scale of our supply relationships and drive consumers to our proprietary properties through a variety of paid traffic acquisition sources. We are investing in diversifying our paid media sources to extend beyond search engine marketing, which historically represented the bulk of our paid media spend, and into other online media sources, including native, social, and display advertising.
Our results are subject to significant fluctuation as a result of seasonality. In particular, for our quarters ending December 31, our property & casualty insurance vertical is characterized by seasonal weakness due to lower supply of Consumer Referrals during the holiday period on a cost-effective basis and lower customer acquisition budgets from some buyers. In our quarters ending March 31, this trend generally reverses with greater supply of Consumer Referrals and often customer acquisition budgets at the beginning of the year for our partners with fiscal years ending December 31. Our quarters ending March 31 and December 31 are typically characterized by seasonal strength for our health insurance vertical due to open enrollment for health insurance and annual enrollment for Medicare, with a material increase in consumer search volume for health products and a related increase in buyer customer acquisition budgets.
Other factors affecting our partners' businesses include macro factors such as credit availability in the market, the strength of the economy and employment.
Our earnings may fluctuate from time to time as a result of federal, state, international and industry-based laws, directives and regulations and developing standards with respect to the enforcement of those regulations. Our business is affected directly because we operate websites, conduct telemarketing and email marketing and collect, process, store, share, disclose, transfer and use consumer information and other data. Our business is affected indirectly as our clients adjust their operations as a result of regulatory changes and enforcement activity within their industries. For example, the recent enactment of the CCPA, which became effective on January 1, 2020, may affect our business. While the CCPA has already been amended multiple times, it is unclear how this legislation will be further modified or how it will be interpreted. The effects of this legislation potentially are far-reaching, however, and may require us to modify our data processing practices and policies and incur substantial compliance-related costs and expenses. For a description of laws and regulations to which we are generally subject, see "Business-Regulation" and "Risk factors-Risks related to laws and regulation."
COVID-19 and impact on travel
In 2015, we began to expand into the travel vertical, which is ultimately driven by consumer spending on airfare, hotels, rentals and other travel products. However, as a result of COVID-19, we have experienced a dramatic decline in revenue from the travel vertical and expect this trend to continue indefinitely. For the three and nine months ended September 30, 2020 and 2019, revenue from the travel vertical comprised approximately 0.8% and 2.7%, and 11.1% and 12.3%, respectively, of our total revenue. While we have sought to maintain our commercial relationships in the travel vertical and remain positioned to capitalize on transactions in the travel vertical when travel activity resumes, we do not expect that revenue from the travel vertical will match our historical results or have any material impact on our overall revenue or profitability for the foreseeable future.
Key components of our results of operations
We operate primarily in the property & casualty insurance, health insurance and life insurance verticals and generate revenue through the purchase and sale of Consumer Referrals.
The price and amount of Consumer Referrals purchased and sold on our platform varies and is a function of a number of market conditions and consumer attributes, including (i) geographic location of consumers, (ii) demographic attributes of consumers, (iii) the source of Consumer Referrals and quality of conversion by source, (iv) buyer bids and (v) buyer demand and budget.
In our open platform transactions, we have control over the Consumer Referrals that are sold to our demand partners. In these arrangements, we have separate agreements with demand partners and suppliers. Suppliers are not party to the contractual arrangements with our demand partners, nor are the suppliers the beneficiaries of our demand partner agreements. We earn fees from our demand partners and separately pay (i) a revenue share to suppliers and (ii) a fee to internet search companies to drive consumers to our proprietary websites. We are the principal in the open platform transactions. As a result, the fees paid by demand partners are recognized as revenue and the fees paid to suppliers are included in cost of revenue.
With respect to our private platform transactions, buyers and suppliers contract with one another directly and leverage our platform to facilitate transparent, real-time transactions utilizing the reporting and analytical tools available to them from use of our platform. We charge a platform fee on the Consumer Referrals transacted. We act as an agent in the private platform transactions and recognize revenue on the platform fee received. There are no separate payments made by us to suppliers in our private platform.
We adopted ASC 606, Revenue from Contracts with Customers ("ASC 606"), which governs how we recognize revenue derived from Consumer Referrals. We recognize revenue when we transfer promised goods or services to clients in an amount that reflects the consideration to which we are entitled. We recognize revenue pursuant to the framework contained in ASC 606: (i) identify the contract with a client; (ii) identify the performance obligations in the contract, including whether they are distinct in the context of the contract; (iii) determine the transaction price, including the constraint on variable consideration;
Generally, our contracts with buyers specify a period of time covered and a budget governing spend limits. While contracts can specify a term, most of our contracts can be terminated at any time without penalty upon 30- or 60-days' notice. As a result, the transaction price for the delivery of each Consumer Referral is determined and recorded in real time and no estimation of variable consideration or future consideration is required. We satisfy our performance obligations as services are provided. We do not promise to provide any other significant goods or services to our partners after delivery and generally do not offer a right of return.
Cost and operating expenses
Cost and operating expenses consist primarily of cost of revenue, sales and marketing expenses, product expenses and general and administrative expenses.
Cost of revenue
Our cost of revenue is comprised primarily of revenue share payments to suppliers and traffic acquisition costs paid to top tier search engines as well as telephony infrastructure costs, internet and hosting, merchant fees, salaries and related expenses, amortization expense and other expenses.
Sales and marketing
Sales and marketing expenses consist primarily of an allocation of personnel expenses for employees engaged in demand side and supply side business development, marketing and media acquisition activities and includes salaries, wages and benefits, including non-cash equity-based compensation. Sales and marketing expenses also include costs related to attracting partners to our platform, including marketing and promotions, tradeshow and related travel and entertainment expenses. Sales and marketing expenses also include an allocated portion of rent and facilities expenses and depreciation and amortization expense.
Product development expenses consist primarily of an allocation of personnel expenses for employees engaged in technology, engineering and product development and includes salaries, wages and benefits, including non-cash equity-based compensation. Product development expenses also include an allocated portion of rent and facilities expenses and depreciation and amortization expense.
General and administrative
General and administrative expenses consist primarily of an allocation of personnel expenses for executive, finance, legal, human resources, and business analytics employees, and includes salaries, wages and benefits, including non-cash equity-based compensation. General and administrative expenses also include professional services and an allocated portion of rent and facilities expenses and depreciation expense.
Other expenses consist of the loss on extinguishment recognized in connection with the termination of the 2019 Credit Facilities.
Interest expense consists primarily of interest expense associated with outstanding borrowings under our loan and security agreements and the amortization of deferred financing costs and debt discounts associated with these arrangements. See "-Liquidity and capital resources-Financing activities" below.
Provision for income taxes
The Company is a pass-through entity for federal and state income tax purposes and is not subject to income tax as each member of the limited liability company is responsible for the tax consequences of its proportionate share of the pass-through income or loss. As such, the Company's tax provision consists solely of the activities of its wholly owned Taiwanese subsidiary, Skytiger Studio Ltd., which is a taxpaying entity in Taiwan. Accordingly, the Company provides current and deferred income taxes for this entity.
Overview for the three months ended September 30, 2020 and 2019
The following table sets forth our operating results for the three months ended September 30, 2020 and 2019:
Three months ended September 30, (in thousands) 2020 2019 Revenue $ 151,548 $ 110,397 Cost and operating expenses Cost of revenue 130,830 92,707 Sales and marketing 2,916 3,227 Product development 1,766 1,609 General and administrative 7,595 3,171 Total cost and operating expenses 143,107 100,714 Income from Operations 8,441 9,683 Other expenses 1,998 - Interest expense 1,594 1,920 Total other expenses, net 3,592 1,920 Provision for income tax 20 - Net income $ 4,829 $ 7,763
Revenue The following table presents our revenue, disaggregated by vertical, for the three months ended September 30, 2020 and 2019, and the dollar and percentage changes between the two periods: Three months ended Three months ended (dollars in thousands) September 30, 2020 $ % September 30, 2019 Property & casualty insurance $ 114,132 $ 48,227 73.2 % $ 65,905 Percentage of revenue 75.3 % 59.7 % Health insurance 27,343 4,483 19.6 % $ 22,860 Percentage of revenue 18.0 % 20.7 % Life insurance 7,392 (989 ) (11.8 %) $ 8,381 Percentage of revenue 4.9 % 7.6 % Other 2,681 (10,570 ) (79.8 %) $ 13,251 Percentage of revenue 1.8 % 12.0 % Revenue $ 151,548 41,151 37.3 % $ 110,397
For the three months ended September 30, 2020, property & casualty insurance revenue increased $48.2 million, or 73.2%, from $65.9 million for the three months ended September 30, 2019. The increase was due to an increase in spend from auto insurance carriers, driven by improving carrier profitability and the growing trend of property & casualty insurance carriers allocating customer acquisition budgets to the DTC channel, which in turn allowed our supply partners to drive more consumers through their websites. These dynamics led to a period over period increase in supply from both new and existing supply partners.
For the three months ended September 30, 2020, health insurance revenue increased $4.5 million, or 19.6%, from $22.9 million for the three months ended September 30, 2019. This increase was driven by increased customer acquisition budget allocation from health insurance carriers, which in turn allowed our supply partners to drive more consumers through their websites, and increased supply from our proprietary websites as we increased the volume of media spend to satisfy the increased demand.
For the three months ended September 30, 2020, life insurance revenue decreased by $1.0 million, or 11.8%, from $8.4 million for the three months ended September 30, 2019. This decrease was driven by decreased customer acquisition budget allocation from life insurance carriers, as they assessed profitability through the pandemic, which in turn led to a mild decline in monetization and consumer referrals from our supply partners.
For the three months ended September 30, 2020, other revenue decreased $10.6 million, or 79.8%, from $13.3 million for the three months ended September 30, 2019. This decrease was driven primarily by a decline in our travel vertical related to the global coronavirus pandemic.
Cost of revenue
The following table presents our cost of revenue for the three months ended September 30, 2020 and 2019, and the dollar and percentage changes between the two periods:
Three months ended Three months ended (dollars in thousands) September 30, 2020 $ % September 30, 2019 Cost of revenue $ 130,830 $ 38,123 41.1 % $ 92,707 Percentage of revenue 86.3 % 84.0 %
For the three months ended September 30, 2020, cost of revenue increased by $38.1 million, or 41.1%, from $ 92.7 million for the three months ended September 30, 2019. The increase is correlated with the overall increase in revenue volume and the corresponding increase in revenue share payments to suppliers.
As we experience growth in revenue, we expect the relationship between our costs and revenue to remain in line with our historical results.
Sales and marketing
The following table presents our sales and marketing expenses for the three months ended September 30, 2020 and 2019, and the dollar and percentage changes between the two periods:
Three months ended Three months ended (dollars in thousands) September 30, 2020 $ % September 30, 2019 Sales and marketing $ 2,916 $ (311 ) (9.6 %) $ 3,227 Percentage of revenue 1.9 % 2.9 %
For the three months ended September 30, 2020, sales and marketing expenses decreased by $0.3 million, or 9.6%, from $3.2 million for the three months ended September 30, 2019. The decrease in sales and marketing expense was primarily . . .
Dec 11, 2020
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