SelectQuote Q1 2027 Earnings Call Transcript

SelectQuote (NYSE:SLQT) reported first-quarter financial results on Wednesday. The transcript from the company’s first-quarter earnings call has been provided below.

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View the webcast at https://events.q4inc.com/attendee/147967155

Summary

SelectQuote, Inc. outperformed internal forecasts and Street estimates, with a significant year-over-year improvement in adjusted EBITDA. The company reduced its loss to $17 million and achieved a 30% increase in adjusted EBITDA on a trailing twelve-month basis.

Revenue for the first fiscal quarter of 2027 was $280 million, a 15% decline from the previous year, largely due to the Inflation Reduction Act impacting the Healthcare Services segment and a conservative hiring approach in the Senior segment.

Strategic initiatives include the Evergreen Initiative, which leverages technology and AI to enhance profitability and cash flow, as well as preparations for a dynamic Medicare Advantage season focused on customer engagement and retention.

The company reported a substantial improvement in profitability per SelectRx member, representing a 60% increase from the previous year, and maintained its guidance of at least $60 million in operating cash flow for fiscal 2027.

Management highlighted ongoing investments and efficiency gains in technology and AI that are expected to drive future profitability, with notable advancements in the Olathe facility and pharmacy management systems.

Full Transcript

OPERATOR

If you would like to ask a question during this time, simply press star followed by the number one on your telephone keypad. If you’d like to withdraw your question, press star and one again. It is now my pleasure to introduce Matt Gunter, SelectQuote Investor Relations. Mr. Gunter, you may begin the conference.

Matt Gunter (Investor Relations)

Thank you and good morning, everyone. Welcome to SelectQuote’s fiscal first 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 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, Form 10-K for the fiscal year ended June 30, 2026, 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.

Tim Danker (Chief Executive Officer)

Thank you, Matt, and thank you to everyone joining us this morning. I’ll begin with an overview of SelectQuote’s performance highlights for our first fiscal quarter of 2027. Then I’ll discuss planning and expectations for this Medicare Advantage season, which is off to a strong start. Lastly, I’ll provide details on SelectQuote’s Evergreen Initiative to leverage technology and AI as part of our North Star goal to maximize profitability and cash flow for shareholders.

So let me start on slide 3 with an overview of our first quarter. SelectQuote outperformed both our internal forecasts and Street estimates for both EBITDA and operating cash flow. Specifically, our adjusted EBITDA loss of $17 million represents more than $15 million of year-over-year improvement. As a reminder, our first quarter is a seasonal low for our business as we invest and prepare for this year’s AEP and OEP seasons. On a trailing twelve-month basis, our adjusted EBITDA totaled $124 million, representing a 30% increase from the prior trailing twelve-month period.

We are proud of this operational execution, especially in light of the revenue headwinds our industry faced in the past year. As previously discussed, the Inflation Reduction Act negatively impacted top-line results for our Healthcare Services segment. Additionally, as we noted last quarter, we took a conservative hiring approach for Senior this season given the dynamic MA environment. As a result, consolidated revenue for fiscal 1Q totaled $280 million, or 15% lower than a year ago.

More broadly, we believe our payer partners are making significant progress towards their profitability targets and, as the nation’s leading direct-to-consumer distributor, we are well positioned to return to growth as payer priorities shift back towards growth in the future. With that perspective, SelectQuote’s strong year-over-year performance in profitability and cash flow becomes that much more impressive and continues to validate our operating strategy and execution.

Before we turn to the season ahead, let me give some quick segment highlights. In Senior, SelectQuote’s differentiated outreach capabilities are already driving strong early-season results as policyholders navigate another year of plan changes. For fiscal 1Q, our Senior business recognized an adjusted EBITDA loss of $12 million, which is a $9 million improvement compared to a year ago. Turning to Healthcare Services, we continue to succeed in scaling profitability with adjusted EBITDA improving 56% year over year to $11 million for fiscal 1Q.

Similar to our consolidated results, the profit improvement is particularly notable given the 16% decline in revenue, primarily caused by the Inflation Reduction Act. We believe a significant and increasingly important indicator of success is the profitability per SelectRx member, which increased 60% compared to a year ago. On the heels of the strong execution, we’re pleased to reiterate our consolidated target of at least $60 million of operating cash flow in fiscal 2027.

While we expect another dynamic year for Medicare Advantage, our model is purpose built to serve customers during times like these. While early, we’ve seen increased customer engagement during the first few weeks of AEP and remain focused on retention given continued elevated levels of plan disruption. We’ve said before the business is positioned to deliver strong margins in a range of selling environments. Our confidence in the strategy is underpinned by both the power of our agents as well as increasing efficiency captured through technology and AI.

And as I mentioned, we are well positioned to further expand profitability and cash flow in future seasons when the opportunities to accelerate top-line growth become more attractive. If you turn to slide 4, I’ll discuss our expectations and strategy for this Medicare Advantage season. Similar to recent years, this AEP is marked by continued disruption as carriers further refine plan features and benefits. SelectQuote planned accordingly. We expect our agent-led model will again produce results that benefit policyholders, carrier partners, and our investors. In fact, early results in AEP are encouraging, as proactive engagement with customers has been well received.

This engagement helps improve our visibility into dynamics like recapture rate and benefit demand patterns for new policyholders. Specifically, we enter this AEP with a high mix of tenured agents who historically perform about two times the average productivity of a new agent. Additionally, these agents have already had conversations with over 50% of our beneficiaries experiencing plan terminations this season. This proactive focus on policyholder retention has been foundational to SelectQuote operational success in recent years.

As I noted before, we have a lot of confidence in the strategy and have a goal to exceed last year’s recapture results. As you know, we took a cautious approach to hiring this season given the continued market disruption and our focus on cash flow. However, we believe we are nearing an inflection point for the Medicare Advantage industry. Carriers have largely right-sized their business and, more importantly, have better aligned benefits to fit their economic objectives. In fact, some carrier partners have publicly commented that they are expecting targeted growth where profitability and long-term viability have been demonstrated.

We’re encouraged by these signs and continue to hear indications that industry conditions are improving, with carriers noting that they are tracking ahead of target profitability for Medicare Advantage plans. Strategically, SelectQuote remains focused on profitability and cash flow in fiscal 2027. That said, our agent- and technology-enabled model remains nimble and can drive incremental growth when attractive opportunities emerge. Our new agent class, while intentionally smaller for this environment, was trained over the summer and is well ramped heading into the season. Similarly, we’ve added agent tools designed to support both policyholder retention and new policy growth, especially in areas including HMOs, special needs plans, and underserved geographies.

Put plainly, Senior business remains focused on expanding profitability. But we are also primed for growth when our carrier partners accelerate their own policy growth efforts. Before Ryan reviews our financials, let me provide an update on how SelectQuote is leveraging technology and AI to drive value for shareholders on slide 5. As you recall from last quarter, we identified and removed over $30 million in permanent run-rate costs from our business as part of our fiscal ’27 operating plan. SelectQuote’s commitment to technology as a core pillar of our model drives the majority of these cost savings. Here we wanted to highlight several tangible, measurable examples across both our Senior and Healthcare Services businesses.

What differentiates SelectQuote is that we are applying AI and technology across the entire value chain—from customer acquisition and enrollment to coaching, quality assurance, and pharmacy fulfillment. In Senior, AI is helping us become more efficient while simultaneously improving the beneficiary experience. Today, more than one third of incoming calls are screened and routed using AI. Every agent call is transcribed and analyzed, giving agents real-time support during conversations that help improve the customer experience. Managers are then provided post-call scorecards they can use to further improve coaching and training. These measures save a significant amount of time and human resources and, similarly, can flip a bad experience or customer into a good one.

These capabilities are especially valuable for newer agents, helping them ramp faster and perform more consistently during the most important periods of the selling season. We’re also seeing meaningful benefits to agent productivity driven by our voice AI tools. In Q1, one of our tools screened over 200,000 unique calls, saving over 600,000 minutes of valuable agent talk time. Given these results, we’ve expanded the strategy across the enterprise and, most notably, into our Medicare distribution process during the annual enrollment period, increasing productivity and allowing our licensed agents to focus more time and attention on the more complex portion of the calls.

Under this new workflow, our skilled agents will continue to handle the robust needs analysis portion of the call, helping beneficiaries select the optimal plan for their specific needs. From there, our AI enrollment agent takes over to guide the beneficiary through the formal enrollment. These tools do not replace our licensed agents. Instead, AI-supported enrollment handles the administrative lifting so our agents can spend time where it matters most—guiding seniors through increasingly complex Medicare choices.

This capability is particularly critical during our peak season, allowing us to efficiently scale when beneficiary demand historically exceeds agent capacity. The same philosophy is driving results in Healthcare Services, where automated enrollment capabilities are completing enrollments roughly 20% faster while also producing higher enrollment rates. The result is a better experience for members, more productive agents, and a more scalable operating model. The link between technology, AI, and our purpose-built facility in Olathe, Kansas has been an essential part of the ramp we’re driving in segment profitability.

As we’ve noted, the facility itself is running about 30% higher efficiency compared to legacy distribution sites. The improvement in efficiency—for those who have visited the site—is relatively obvious in the technology hardware we’ve invested in. We are increasingly excited about the potential of our new pharmacy management system. We view the PMS as a missing link for the Healthcare Services segment and an asset that will drive growth and efficiency in the years ahead. So what is the PMS system? The PMS serves as a technology backbone of SelectRx, connecting member onboarding, prescription verification, enrollment, fulfillment, and shipping into a single integrated workflow. Today, fewer than 20% of our prescriptions are shipped from our hyper-efficient Kansas facility.

With our new PMS in place, we expect to enroll and fill many more members through Kansas and end the year at a higher percentage of total scripts shipped through this facility. This is an important dynamic that underpins our confidence in doubling Healthcare Services margins in fiscal 2027. To conclude my remarks, I’ll reiterate how important SelectQuote’s commitment to technology has been in the evolution of our company. Efficiency and service gains drive real value for customers and carrier partners in all market environments. Constant improvement at SelectQuote will always be the foundation. For that reason, for shareholders, we are proud of these same gains that drove real profitability and cash flow through the challenging industry environment of the past three years.

We plan to compound those gains and are highly confident in our model and the value we can create in an improving and growing Medicare Advantage industry in the years ahead. With that, let me turn the call to our CFO, Ryan Clement, to review our financials. Ryan.

Ryan Clement (Chief Financial Officer)

Thank you, Tim. Let’s begin on Slide 6 with our consolidated results for the first fiscal quarter of 2027, which is a seasonal investment quarter for our business across both Medicare Advantage and Healthcare Services. To echo Tim, the key takeaway is that we meaningfully improved profitability despite our prudent strategy in Senior for the current season and the impact to Healthcare Services revenue from the Inflation Reduction Act. Specifically, our Q1 revenue totaled $280 million compared to $329 million in fiscal 2026.

To disaggregate the delta, our deliberate decision to operate with a smaller agent force in Senior drove approximately 15% of the year-over-year decline. The remainder was predominantly attributable to the Healthcare Services segment, principally driven by the Inflation Reduction Act. As a reminder, while the Inflation Reduction Act had a meaningful impact on our Healthcare Services revenue, the impact on EBITDA and profitability was far less significant given our lower drug prices were largely offset by manufacturer reimbursements.

Despite the smaller revenue base, adjusted EBITDA improved $15 million year over year to a loss of $17 million for the quarter. There are two important highlights we’d like to emphasize for investors. First, the improvement in profitability is the result of intentional strategies to drive efficiency within both Senior and Healthcare Services. As Tim noted, the efficiency gains we’ve made through technology-enabled process optimizations are meaningful and durable.

Second, while we’ve driven these efficiency gains in a down cycle for Medicare Advantage, which impacts both of our businesses, I’d like to reiterate Tim’s point that we are pleased with the customer engagement we are seeing early in AEP and that SelectQuote is poised for growth when carrier and consumer demand supports it. While we have planned for a mixed year in MA, that statement still applies for the upcoming season. As you have seen in past years, there’s upside capacity in our model on the Senior side of our business.

Similarly, the scale and automation advantages we are building in Healthcare Services through the pharmacy management system are markedly better than they were in the past few years. The key point is that while fiscal 2027 is poised to be another dynamic recovery year for Medicare Advantage, SelectQuote has made significant strides both operationally and with our balance sheet to drive increased profitability and cash flow. We expect further improvement in the seasons and quarters ahead.

Lastly, before I turn to our segment results, while not operationally or economically impactful, SelectQuote will seek approval at our November 10th annual shareholder meeting for a reverse stock split later in the month. The decision aligns with our commitment to remain listed on the New York Stock Exchange. To be clear, the action has no material impact on economic interest and we are not raising capital. In fact, we have ample capital to operate SelectQuote and believe SelectQuote’s stock remains significantly undervalued.

Flipping to Slide 7, let me start with details on our first quarter performance in Senior. As Tim indicated, while we are very pleased with the early results we are seeing in AEP, our stated strategy for this Medicare Advantage season is to approach AEP and OEP with a smaller agent force and a proactive focus on policyholders impacted by plan terminations and significant benefit changes. In simpler terms, the 2027 season is another good season to prioritize profitability over volume.

As Tim noted, we are hearing positive growth indications from a few carriers, but conversely we know many carriers are still in process on significant benefit restructuring and rightsizing. As I just noted, our strategy in Senior for 2027 is aligned at the agent and technology level to optimize policyholder retention both for plans impacted by benefit changes and for plans that have been terminated by carriers. We have high confidence in our ability to replicate or improve upon our successful retention efforts from a year ago.

Additionally, the agent footprint for 2027 is also well armed to capture quality growth where available this season. Our four-year track record of strong execution and agent efficiency gives us confidence in the upside potential that exists in our model. So with that backdrop, our Q1 results in Senior are representative of our strategy. Senior revenue of $51 million for the quarter declined $8 million compared to a year ago. The decline primarily reflected our deliberate decision to operate with a smaller agent force. To be more specific, though our tenured agent force is effectively flat compared to a year ago, while we deliberately hired fewer new agents, our most productive agents are poised to capture upside volume efficiently.

As I just noted, as you know, the majority of our Senior business occurs over the second and third fiscal quarters. That said, the improvement in operating efficiency is evident even in our seasonally slowest quarter. As is typical of the seasonality in our business, first-quarter Senior adjusted EBITDA loss totaled $12 million, which is a $9 million improvement from a year ago, again on a smaller base of revenues. Looking over the trailing 12 months, our Senior EBITDA has increased 18% to $157 million.

To summarize, we are pleased with the results in our Senior division in first quarter and are pleased with early indicators thus far in AEP. We have confidence in our strategy for the current season and we are positioned to return to growth as industry conditions improve. Moving to Slide 8, I’ll review our strong performance in Healthcare Services. In this segment, our top-line results are skewed given the previously mentioned impact of the Inflation Reduction Act on certain drug pricing in our SelectRx. As noted before, the impact to EBITDA is much less material given the counteracting impact on reimbursement from manufacturers. Healthcare Services revenue for fiscal Q1 totaled $186 million compared to $221 million a year ago.

In contrast, our Q1 adjusted EBITDA this year increased 56% to $11 million compared to $7 million a year ago. As part of our company-wide priority to maximize cash flow and profit growth, the SelectRx membership base continued to mature with less focus on acquiring new members. Over more than five years operating SelectRx, we have continued to optimize where our service best matches the needs of our members. With a greater mix of seasoned SelectRx members utilizing the services, SelectQuote grew EBITDA per member to $108 this quarter, which is over a 60% increase compared to a year ago.

While a more mature membership base contributed to higher margins, we are also seeing increasingly meaningful operating efficiency driven by the pharmacy management system that Tim detailed earlier. Overall, we are very pleased with the performance in Healthcare Services and believe the segment is well positioned for growth in the seasons ahead. As a reminder, AEP and OEP are peak onboarding windows for the Healthcare Services business. We’re excited to efficiently onboard new SelectRx members over the current Medicare Advantage season.

Before I turn to our Life business, I would just note that the trend of improving profitability in a period where we have purposely limited growth underscores why we are so excited about the future. In fact, the cash efficiency of our Healthcare Services business is a significant driver in our $60 million plus operating cash flow target this year. But even that achievement is understated compared to what it means for our shareholders. As Tim noted last quarter, as SelectQuote becomes increasingly cash efficient, value to our equity holders compounds.

We can increasingly use cash to reduce high-cost debt, which drives even greater cash conversion from EBITDA. On Slide 9, let me outline our quarter for Life Insurance. The segment generated $43 million of revenue, down $4 million compared to a year ago. Final Expense delivered strong efficiency and profitability in the quarter with improved margins year over year despite operating with a smaller agent force. The business also benefited from strong lead transfer rates from Senior, providing a meaningful source of leads at no incremental acquisition cost and demonstrating the synergies across our business lines.

Term Life has also performed well, generating modest revenue growth year over year with margins remaining relatively stable. The favorable mix and improved efficiency across the business drove meaningful margin expansion. Adjusted EBITDA was up 31% year over year to $7 million, representing a 17% margin, an improvement of more than 500 basis points compared to last year. Overall, Life results remain in line with our expectations. We’re encouraged by the profitability in Final Expense and expect demand to remain healthy while continuing to manage Term Life with a focus on attractive returns.

Before we turn to your questions, let me conclude by highlighting a slide we showed last quarter. On Slide 10, you can see the sharp improvement SelectQuote is experiencing in our operating cash flow efficiency. We are maintaining our guidance of $60 million plus of operating cash flow for fiscal 2027. From a calendar perspective, we’d remind investors that fiscal 2Q is historically our peak investment quarter before cash flow ramps sharply in the second half.

As Tim and I have repeated often this fall, we are proud of our team’s ability to accomplish this through such a challenging and dynamic environment within both Senior and Healthcare Services. We are increasingly confident in our ability to not only maintain these results, but to accelerate and leverage our operating efficiency in the future. In Senior, we have maintained EBITDA margins through well-informed season-to-season operating strategies.

We have strengthened the durability and potential of that operating leverage through continued adoption and advancement of our technology. In Healthcare Services, we drove over 60% growth in adjusted EBITDA per member year over year as we better match our services with customers that benefit most from them. We’ve also invested in systems and facilities with greater growth capacity, upside margin, and cash conversion potential as the business grows overall in a sideways market.

So SelectQuote has made significant progress in our earnings power and cash flow generation. We are excited about the season ahead and look forward to updating investors with that. Let me turn the call over to the operator.

OPERATOR

We will now begin the question and answer session. If you’d like to ask a question, please press star one to raise your hand. To withdraw your question, press star one again. We ask that you pick up your handset when asking a question to allow for optimum sound quality. If you are muted locally, please remember to unmute your device. Please stand by while we compile the Q&A roster. Your first question comes from Ben Hendricks with RBC Capital Markets.

Your line is open. Please go ahead.

Michael Murray (Analyst)

Hey guys, this is Michael Murray on for Ben. On AEP, it sounds like payers are behaving as you expected with plan terminations and benefit pullbacks. Are you still expecting MA-approved policies to decline 10% to 15% this year, or have any of the assumptions underlying this changed?

Tim Danker (Chief Executive Officer)

Yeah, Michael, this is Tim. Thanks for joining. I’ll be happy to address that. As we indicated in our prepared remarks, we’re off to a good start. It’s early, but we’re off to a good start for AEP. There are a couple different factors that we’re seeing overall in terms of, to your point, a high level of beneficiary engagement. A lot of folks are in market given the plan disruption and plan terminations. While we do have a smaller agent force that will impact what we guided last quarter in terms of overall policy volumes, having a high-tenured agent force is leading to good levels of agent productivity, which is typically a good indicator of output.

We also think a lot of investments that we’ve made in our technology platform are paying off, which is providing some underlying agent efficiency and capacity. So I do think, with respect to what we guided to, we have a smaller agent plan than in prior years, but I would say a highly efficient and a highly effective one for what we’re seeing early on. And while we’re the largest direct-to-consumer distributor, we’re also very nimble and we’re able to capitalize on opportunities as we see them.

And we think there’s an environment here where there may be some potential to do that that may help curb some of the initial guidance we provided on volumes being down year over year.

Michael Murray (Analyst)

That’s helpful. And then I wanted to see if you could unpack the LTV strength. Looks like it grew 16% year over year. Is this mix-driven, carrier repricing, or more durable structural shift in how you’re selling policies? Thank you.

Ryan Clement (Chief Financial Officer)

I’ll take that one. I mean, LTVs tend to move with carrier mix, and so, as you mentioned, that’s part of it. I would also say, obviously, there’s been a benefit from CMS commission rate increases. So I think there’s a number of factors in play. But we’re pleased with the LTVs we’re posting.

Michael Murray (Analyst)

All right, thanks, guys.

Matt Gunter (Investor Relations)

Appreciate it, Michael.

OPERATOR

Your next question comes from David Windley with Jefferies. Your line is open. Please go ahead. Is David Windley with us from Jefferies? Your next question comes from Logan Lillehog from Craig-Hallum Capital Group. Your line is open. Please go ahead.

Logan Lillehog (Analyst)

Hey, guys, Logan on for George this morning. I wanted to start on the plan terminations. You talked about trying to get ahead of that earlier this year. Obviously last year we also had a pretty high level of plan termination. So just curious if you could compare what you’ve seen this year so far to last year in terms of engagement with beneficiaries. And also wondered if you could just address how carriers are approaching commissions on some of these plans where, you know, they might be trying to retain members.

Tim Danker (Chief Executive Officer)

Great question, Logan. I’ll let Bob Grant, our president, talk about that. Yeah, go ahead, Bob.

Robert Grant (President)

Yeah, as far as plan terminations, the environment is fairly similar to last year, with some nuances where they’re being very intentional about plans that they want to invest in versus not. I do think there’s a lot more healthiness within the market on the plans that are there. Also, there’s been a little bit of a change on D-SNPs with, as you guys know, the plan integration with some of the states that did take some folks out of certain states as far as D-SNPs.

The engagement, though, has been really high. We’re really happy with where we are—again, you know, similar to years past where we believe that we can recapture a really large percentage of those customers. They’re very happy with our service, and as you guys know, we’re really good at getting a hold of people. I do think as far as the commissions go, so far this has been a much more stable environment. I think that’ll continue due to the fact that there is more healthiness.

You see it on the public earnings calls of the payers, right? They are healthier, their MLRs are healthier, and they seem more excited about investing in plans, and they believe their benefits are in the right place to be profitable on a multiyear basis. So we feel really, really good about that and then also feel really good about what that means in the future, because it does feel like this disruption is getting towards the tail end where, again, the payers are very excited about the plans that they have sitting out there and the profitability of those plans, especially the larger players, which, as you guys know, is the vast majority of our business.

Logan Lillehog (Analyst)

Got it. Good to hear. And I think just one item worth calling out—

Ryan Clement (Chief Financial Officer)

The only point I was going to add is, obviously, when we engage with someone where a policy is being terminated, we’re able to help them with the new policy and then actually book a new one. So that is incremental commission receivables that we would expect to receive, and it’s an opportunity for the business both with our existing customers but also other customers that may be shopping in the marketplace.

Logan Lillehog (Analyst)

Understood. Maybe switching over to SelectRx. Obviously it’s pretty striking how much more efficient the Olathe facility is. Just wondered if you could give us any frame on how many scripts you could start moving over to that facility over the next few years, and then is there any timeline you can give us around taking that PMS technology to your other pharmacy sites?

Robert Grant (President)

Yeah, that’s again a really good question. And we are stacking a significant amount of volume already in Kansas in that Olathe facility. That’ll take some time, though, because we are not doing a ton of facility transfers. That’s more new members that are going there for now, and then we will get into facility transfers as we go. As we do that, we are already planning for how we retrofit the technologies in the other facilities in an efficient manner.

So I’d say we’re a little farther out on the, hey, how do we retrofit and get all of the current members into there, because there is a transfer process that’s a little bit complicated, but I do think you’ll quicker see a big percentage of our scripts come out of Kansas due to how we’re enrolling and how we’re dealing with our members right now.

Logan Lillehog (Analyst)

Okay, and I’ll just throw one last one in. Obviously you’ve got the 60 million in operating cash flow this year—or the target, I should say. Certainly looks like that should keep going higher in the out years. Just wondered how you’re thinking about the preferred dividend. I mean, is there a point at which you might consider paying that in cash and stopping the liquidation preference increase?

Ryan Clement (Chief Financial Officer)

Yep, that’s a great question. You know, we’re really pleased with the progress we’re making on the operating cash flow front. Obviously this year, 60 million plus, which is significant improvement year over year. And then when we look at our multiyear model, we see levels of cash flow rising, and so we’re encouraged by that. While we’re not specifically guiding to fiscal 2028, we do see on the horizon a path to cash-paying the dividend. And that would be our plan.

Logan Lillehog (Analyst)

Okay, thanks for taking questions.

OPERATOR

Your next question comes from David Windley with Jefferies. Your line is open. Please go ahead.

David Windley (Analyst)

Let’s try this again. Can you hear me?

Matt Gunter (Investor Relations)

Yes, we can, Dave. Glad you’re here.

David Windley (Analyst)

Okay, fantastic. Sorry if these have been asked while I’ve been talking to the operators. The question I had for you, Tim, was if you could double click in on AEP and give us any perspective on how recapture on plan exits—that part of your focus—has gone. If you have early metrics on that retention. And I know new sales volume seems to be not one of your primary priorities for this AEP, but if there’s any perspective on that, I’d take it.

Tim Danker (Chief Executive Officer)

Yeah, Dave, happy to readdress some of these questions. We’ll talk about two parts of AEP, one being the front-end production part. And as we shared, it’s early, but we’re off to a very good start because of the plan disruption and the plan terminations you mentioned. It’s creating an environment where there’s a high level of beneficiary engagement on our marketing, so we’re seeing a lot of connectivity there. We’ve got a very high-tenured agent mix, which typically will translate into good agent productivity and output.

We’ve also made a lot of investments in our technology platform that are freeing up agent capacity. There’s a lot of efficiency year over year in the model, and we think that can translate to opportunities. With respect to volumes, again, it’s still very early, but that’s why we like what we’re seeing. With respect to the back book, Bob commented on this—we’ve learned a lot. We’ve built a lot of muscle over the past two years with respect to the disruptive plan environment. We are seeing very high levels of consumer engagement. We’re seeing our ability to have outreach and talk with customers at a more accelerated rate than we have in years past. A lot of that is investments from our marketing team and our data science team, where we can have better purview into those customers that are affected the most or having changes to their health plan.

So we do expect, given we were leading in terms of a recapture rate of 30% last year, that we’re going to try to better that, which has a very positive cash flow impact. It’s early, but we like what we’re seeing. On the plan design front, we’re seeing the national players continue to push into SNP plans—D-SNPs especially—and HMO plans. We think that those are all very well aligned to the strength of our platform and also really produce a lot of velocity and opportunity for SRX enrollments as we enter into our busier period for SRX, AEP, and OEP.

David Windley (Analyst)

Got it. So I caught your 30% and trying to better that. I was hoping to hear some metrics, so thanks for that. On the D-SNP, I was actually going to follow up with that and wondered if you can give any numbers relative to, say, engagement or applications relative to SNP plans versus, you know, traditional community-type applications, or is it too early for that?

Robert Grant (President)

It’s a little bit too early for that on how that works. I would say, though, typically we engage a SNP member at a similar level to non-SNP. That’s something we’ve always been very proud of—that we are good at getting a hold of people that are typically, I think, in the market harder to get a hold of. But don’t have exact numbers to share yet.

Tim Danker (Chief Executive Officer)

But I would say it’s a continuation of a trend we’re seeing. Dave? Yeah, go ahead, Dave.

David Windley (Analyst)

Okay, sorry. On the marketing spend—the, you know, so we’ve gotten most of the, maybe all of the, third quarter reports, calendar third quarter reports from the carriers. Margins are actually progressing for them I think broadly better than they expected, and so, perhaps contrary to what the thoughts might have been earlier, they might be in a position to want to push marketing a little harder. So wondered if that could still happen—like how far into AEP could they still make budget changes around marketing spends?

Tim Danker (Chief Executive Officer)

Bill, you want to address kind of the broader marketing environment, what you’re seeing from carriers, how that may affect us?

Bill

Yeah, absolutely. I think, as it relates to the carriers, you talk about broader marketing in general, but as it relates to the carriers, Bob probably should take that. Yeah, absolutely. So if they did come do that, I mean, we feel good about our marketing. We’ve always talked about our wide funnel and ability to flex up, and, you know, we still feel like we’re working from a position of strength. So we feel like, you know, our opportunities would be pretty ample if we were in a position where the carriers wanted to be more aggressive with how they approached AEP.

OPERATOR

Your next question comes from Georges Proust with Noble Capital Markets. Your line is open. Please go ahead.

Georges Proust (Analyst)

Hi, and thank you for filling in for Michael Kompinski this morning. My first question is in regards to the IRA pressure on the SelectRx. So it’s been facing pressure for several quarters now. Can you tell us which quarter do you expect will be a first clean year-over-year comparison without the IRA impact? And once you’re past it, what’s the underlying organic growth rate for it?

Tim Danker (Chief Executive Officer)

It’s a great question. Yeah. Why don’t Ryan, you go ahead and address the IRA, and I’ll talk more broadly.

Ryan Clement (Chief Financial Officer)

Yeah, it’s a great question. The IRA program is actually a multi-year program. So there were some drugs that were introduced in 2026, there were some drugs that were introduced in 2027, and it does lead to higher—or, sorry, lower—top-line revenue as drugs are priced lower. That said, we actually receive reimbursements. And so, you know, the EBITDA impact is far less significant. With respect to clean compare though, because it is a multi-year program, it’s going to take a little while for things to work through.

There’s actually a group of, you know, IRA drugs for 2028. I think the really important thing here is that while it does create some pressure at the top line, it really doesn’t materially impact the bottom line. And we’re really encouraged by the margin progression we’re seeing, the ability to drive growth in EBITDA and cash flow from our healthcare services business. Tim?

Tim Danker (Chief Executive Officer)

Yeah, I might just double down on that, and great question, George. I mean, our focus is to continue to expand healthcare margins and cash flow really almost independent of what’s going on in the broader Medicare environment. I think this fiscal year is a good example. Right. We’ve, as we stated last quarter, a slight pullback in terms of our investment in MA, just given the market environment and prudence. But we still expect our healthcare services segment to grow margins, aggregate EBITDA, cash flow given our operational improvements and the recurring nature of our subscription SelectRx model.

And you’re seeing that play out over the last few quarters. To be clear, there’s plenty of demand for SelectRx. And, you know, I think we’re seeing the good questions on the call today, right? You know, broader days ahead to Medicare Advantage and kind of reemergence into responsible growth. And when that happens, right, we’ll incrementally lean in on our MA platform. That’ll naturally be an accelerant to our SelectRx platform. And that also doesn’t stop us as we can continue to get more operationally efficient to pursue leads outside of just those that we get from our MA platform.

So plenty of growth, plenty of demand. The current focus is on margin, cash flow, and we think we’ve had kind of good back-to-back quarters that demonstrate the strength of that particular asset. All right, perfect. Thank you.

OPERATOR

We’ve reached the end of the Q and A session. I’ll now hand the call back to Tim Danker, Chief Executive Officer for closing remarks.

Tim Danker (Chief Executive Officer)

Want to thank you all again for the time. We appreciate your support. As Ryan and I and the team have noted, the SelectRx model continues to drive consistent and reliable value to our customers and insurance carrier partners. We know that 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 it. Have a great day.

Thanks again.

OPERATOR

This concludes today’s call. Thank you for attending. You may now disconnect.

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