Root, Inc. (NASDAQ:ROOT) Q1 2024 Earnings Call Transcript April 30, 2024

Root, Inc. beats earnings expectations. Reported EPS is $-0.42, expectations were $-2.51. ROOT isn't one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Hello and thank you for standing by. My name is Regina, and I will be your conference operator today. At this time, I would like to welcome everyone to the Root, Inc. First Quarter 2024 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker’s remarks, there will be a question-and-answer session. [Operator Instructions] I would now like to turn the conference over to Matt LaMalva, Head of Investor Relations. Please go ahead.

Matt LaMalva: Good afternoon and thank you for joining us. Root is hosting this call to discuss its first quarter 2024 earnings results. Participating on today’s call are Alex Timm, Co-Founder and Chief Executive Officer; and Megan Binkley, Chief Financial Officer. Root recently issued a shareholder letter announcing its financial results. While this call will reflect items discussed within that document, for more complete information about our financial performance, we also encourage you to read our first quarter 2024 Form 10-Q. Before we begin, I want to remind you that matters discussed on this call will include forward-looking statements related to our operating performance, financial goals and business outlook, which are based on management’s current beliefs and assumptions.

Please note that these forward-looking statements will reflect our opinions as of the day of this call, and we undertake no obligation to revise this information as a result of new developments that may occur. Forward-looking statements are subject to various risks, uncertainties, and other factors that could cause our actual results to differ materially from those expected and described today. In addition, we are subject to a number of risks that may significantly impact our business and financial results. For a more detailed description of our risk factors, please review our most recent 10-K, 10-Q and shareholder letter. A replay of this conference call will be available on our website under the Investor Relations section. I would also like to remind you that during the call, we will discuss some non-GAAP measures while talking about Roots’ performance.

You can find reconciliations of those historical measures to the nearest comparable GAAP measures in our financial disclosures, all of which are posted on our website at ir.joinroot.com. I will now turn the call over to Alex Timm, Roots’ Co-Founder and CEO.

Alex Timm: Thanks, Matt. For those new to Root, welcome. I’d love to take a minute to tell you a little bit more about the company before I jump into our results. We believe drivers should have more control and understanding of their insurance, so we’ve built car insurance that is transparent, easy to understand and offers great prices. We do this through the Root app, where customers can see how they are driving, manage their policy and file a claim in seconds. We also do this through our partnership channel, where we meet customers where they are in their moment of need. This includes, for example, embedding our insurance product at the point of vehicle sale. This is all enabled through our data science and technology, which allows us to create seamless, flexible customer experiences at what we believe to be some of the best prices.

With that, I’d like to talk a little bit about the quarter. The first quarter of 2024 was an excellent quarter. For the first time in the company’s history, we generated operating income and positive adjusted EBITDA. We did this while doubling gross written premiums and policies in-force year-over-year. These results are a testament to our strong product offering, disciplined execution and the power of our technology. While pleased with this performance, we are far from achieving what we believe we can as a company. Over the long-term, we believe data science and technology will fundamentally change the way insurance is priced. And in the first quarter, we continued to significantly improve the predictive accuracy of our pricing and underwriting models.

As we grow, our data set grows, which allows us to retrain our models and deliver better prices to customers. In turn, with better prices, we are able to grow more efficiently, leading to a virtuous cycle. Also core to our strategy is continuing to build differentiated access to customers through our partnerships channel. Offering a 3-click purchase experience via our partner platform continues to drive differentiated access to customers and we’re pleased to have grown new writings in our partnership channel 68% year-over-year. The expansion of this channel is foundational to our long-term growth strategy. Our Direct channel also continued to have impressive growth in the quarter. We leverage advanced machine learning-based algorithms to optimize for our return targets.

Our data science machine is constantly looking to see how the competitive environment is evolving. As such, this channel fluctuates due to seasonality and competitive dynamics, and as anticipated, we saw competition increase in the Direct channel this quarter. We continue to optimize for target unit economics and believe being responsive to the changing environment is a smart way to profitably grow this business over the long-term, even though it may lead to quarter-over-quarter variabilities. In the first quarter, the path to gap profitability looks stronger than ever. We continue to be excited by the long-term growth potential of the business by adding additional partners, expanding our footprint and continuing to improve our prices and products.

I am proud of our entire team for the dedication toward driving our success in this quarter. I’ll now turn the call over to Megan to discuss our operating results in more detail.

Megan Binkley: Thanks, Alex. Overall, it was an excellent start to 2024, with further improvements across nearly all of our key financial metrics. For the first quarter, our net loss was $6 million, an 85% improvement year-over-year. We are pleased to report for the first time a positive quarterly operating income of $5 million and positive adjusted EBITDA of $15 million. These metrics improved $35 million and $26 million year-over-year, respectively. This strong progress continues to be driven primarily by growth in net earned premium, continued loss ratio performance, a sustained fixed expense base and responsible deployment of marketing investment. As we’ve consistently noted, we do not defer the majority of customer acquisition costs over the life of our customer, which leads to accelerated expense recognition and relative to earned premiums.

We grew new writings fourfold and we more than doubled policies in-force, gross written premium and gross earned premium compared to the first quarter of 2023. We achieved this growth while delivering a gross combined ratio of 99.7%, marking the company’s first gross combined ratio less than 100% and a 23-point improvement year-over-year. The gross accident period loss ratio was 61%, a 4-point improvement year-over-year, driven by our continued investment in data science and technology. Note that we benefit from a favorable seasonality trend in Q1, as there are fewer miles driven in the winter months and also higher purchasing power, resulting from tax season refunds. In the first quarter of 2024, we see that 16% of our gross earned premium and reduced the difference between our gross and net loss in LAE ratios to 2 points for the quarter, reflecting a reduction of 21 points year-over-year.

Our improvements and reinsurance costs were made possible through our continued improvement in operating results. Overall, our results for the first quarter 2024, continue to reflect the sustained momentum towards management’s top priority of reaching profitability with our existing capital. The first quarter also marked the third consecutive quarter of positive operating cash flow. This is a result of improved net loss, continued growth and loss ratio performance, even though the first quarter is consistently a high relative cash outflow quarter. As Alex noted in his remarks, it was a strong start to 2024 as we maintained the disciplined execution of our strategy and continued to build upon the momentum we achieved in 2023. As our market value appreciates, we will incur incremental expenses related to tax liabilities from the vesting of employee equity awards.

The second quarter typically encompasses the largest proportion of vesting equity awards per year. As such, we expect to incur approximately $10.6 million in cash expenses in the second quarter to satisfy this tax liability. Moving forward, we intend to remain focused on thoughtful and disciplined growth and expect to continue investing in customer acquisition as long as targeted unit economics are achieved. We expect gross written premium levels in the second quarter to decrease relative to the first quarter due to seasonality and changes in the competitive landscape. Achieving GAAP net income profitability with our existing capital continues to be our primary objective. This quarter’s results show that we are well on our way. We are excited for our future, appreciate your time and look forward to your questions.

Operator: [Operator Instructions] Our first question will come from the line of Tommy McJoynt with KBW. Please go ahead.

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