On Tuesday, SelectQuote (NYSE:SLQT) discussed fourth-quarter financial results during its earnings call. The full transcript is provided below.
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Access the full call at https://events.q4inc.com/attendee/890240794
Summary
SelectQuote reported a strong fiscal 2026, with a 6% increase in revenue to $1.62 billion, and adjusted EBITDA of $109 million, surpassing guidance.
The company emphasized its focus on driving profitable cash flow and reducing leverage, highlighting a $40 million year-over-year improvement in operating cash flow.
Healthcare Services became the largest revenue contributor, achieving $25 million in adjusted EBITDA and exiting fiscal 2026 at a $50 million annual run rate.
Strategic initiatives include AI-enabled tools to improve operational efficiency and a new pharmacy management system enhancing the Kansas facility's efficiency by 30%.
For fiscal 2027, SelectQuote anticipates a 14% decline in revenue due to market dynamics and focuses on maintaining strong margins, with adjusted EBITDA guidance of $90 to $115 million.
Management expressed confidence in leveraging technology to drive further cost savings and outlined a strategic focus on cash flow generation and leverage reduction.
The company plans to approximately double operating cash flow in fiscal 2027 to over $60 million, with an expected free cash flow of around $50 million.
Full Transcript
OPERATOR
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. 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 would like to withdraw your question, please press STAR 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 fourth 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, annual report on Form 10-K for the period 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 Danker, CEO
Thank you, Matt, and thanks to everyone joining us this morning. Before we begin, I'd like to start with what we believe is the most important takeaway from today's call. SelectQuote's highest priority continues to be driving profitable cash flow, and our fiscal 2026 results demonstrate meaningful progress against that objective. As you'll hear throughout our remarks, we're managing the business with a focus on cash generation and leverage reduction, which we believe is the best way to create long-term shareholder value.
We believe the platform we've built is capable of generating substantially more cash flow over time, and we are beginning to see that potential translate into tangible results. Looking towards the future, we expect the Medicare Advantage industry to remain fluid as our carrier partners continue to right-size and get closer to their own operating margin targets. As a result, in fiscal 27 we will be prudent with our MA growth investments, while our primary focus will be to grow and compound our cash flow.
Meanwhile, we reached an inflection point in fiscal 2026 with the Healthcare Services division becoming SelectQuote's largest revenue contributor, and we anticipate increasing cash flow and earnings power from that business in fiscal 27. Beyond fiscal 27, we firmly believe SelectQuote is well positioned to grow both our senior and healthcare services revenues, which will further accelerate cash flow generation. Now, moving to our recent performance, SelectQuote delivered a strong fourth quarter in what has been a highly successful fiscal year for our company.
As you know, 2026 was another challenging year for Medicare Advantage as carriers shifted policy benefits and had widely varying origination volumes and healthcare services. We successfully managed a shift in reimbursement rate from a SelectRx payer partner and changes in drug pricing from the Inflation Reduction Act. Through it all, we modestly grew revenue, maintained strong margins, and significantly increased operating cash flow. Looking ahead, our highest priority is to realize value for our shareholders, which, as I mentioned, is best achieved through cash flow.
To be blunt, we see a wide disconnect in the value of our shares relative to the real cash flow generation of our platform. I'll end today's prepared remarks with more detail on that point, but I'll reiterate that we see fiscal 2027 as a real inflection point for compounding cash flow growth and the value of our equity. Turning to slide 3, I want to frame fiscal 2026 around the key areas where SelectQuote made the most meaningful progress. First, in Healthcare Services, SelectRx continued to prove the earnings power of its scaled membership base, producing approximately $25 million of adjusted EBITDA for the year while exiting at nearly a $50 million annual run rate in the fourth quarter. This is an important milestone for a business we built essentially from scratch over the past several years, and we believe there is still meaningful room to grow profitably as we continue to drive operating leverage across the platform. Second, our Senior business remained highly profitable despite another dynamic Medicare Advantage environment. The business generated adjusted EBITDA margins of 26%, which we believe reflects the durability of our model, the strength of our carrier relationships, and the efficiency of our agent-led, technology-enabled distribution platform.
And third, most importantly, we delivered more than $40 million of year-over-year improvement in operating cash flow. As I mentioned before, that cash flow progress is central to the story we're telling investors today. We have been very clear that our priority is not simply growth for growth's sake, but profitable growth that compounds into stronger cash generation, lower leverage, and ultimately greater equity value for shareholders. To emphasize the point, it is important to remember that there is significant cash flow scale both in our billion-dollar-plus commissions receivable balance, which we grew in fiscal 2026, and our scaling Healthcare Services platform. As we increase operating efficiency and reduce cost, the equity accretion of compounding cash flow will become increasingly powerful. So when we look back on fiscal 26, we see a year where the model worked well and our teams executed yet again. We navigated industry complexity, delivered value for customers and partners, and took a meaningful step forward in translating the underlying earnings power of SelectQuote into visible cash flow.
Now let me turn to slide 4 and how SelectQuote is driving value and cash flow through our ongoing effort to maximize operating efficiency. As part of our fiscal 2027 planning process, we identified more than $30 million of annualized run-rate expense improvement across the business. Importantly, these benefits are the result of a combination of actions including AI- and technology-enabled efficiencies, process improvements, organizational rightsizing, and prudent cost management.
Today I'd like to double-click on a few of the technology-enabled efficiencies we're capturing. As you know, SelectQuote was founded with a clear view that technology and information are critical for operating efficiency and the value we deliver to our customers. Our investments in technology and data increasingly help us improve both efficiency and customer outcomes across the business. We are deploying AI-enabled enrollment support tools that help us flex capacity with demand.
This ensures we preserve valuable agent talk time and allow our highly trained live agents to do their most valuable work. We've also streamlined agent workflows through sales-assist technology and will expand the use of AI-powered quality assurance tools to review and coach our agents. We're also automating revenue generation processes and leveraging internally developed technology to increase efficiency within both our Senior and pharmacy businesses.
These initiatives reduce manual work, improve scalability, and help generate meaningful cost savings while optimizing the high level of service our customers expect. Additionally, as discussed on our 3Q call, during fiscal 2026 we built, deployed, tested, and are now leveraging our new custom-built pharmacy management system. This system not only enables streamlined day-to-day pharmacy operations, but also provides the technical infrastructure we need to continue to process more scripts through our new state-of-the-art Olathe, Kansas facility.
In this facility, we are already recognizing around 30% efficiency gains on shipments relative to our two legacy locations. This is yet another way we are meeting the market. Given that the U.S. healthcare system demands increasing efficiency, you can see that with the improvement in our Kansas facility. The challenge for most operators in our industry has been trying to balance speed and efficiency with services that fit the individual customer and drive value.
There are some that do one or the other, but in our view only SelectQuote succeeds at both. These initiatives build on a long history of incremental operational improvements across the company. While the over $30 million of savings reflects actions already taken or underway, we believe our technology platform positions us to capture incremental savings over the next several years. As automation, data analytics, and workflow optimization become increasingly embedded across our operations, we are seeing that technology is allowing us to further unlock the value of our core asset.
The success you see in both our Senior and Healthcare Services businesses begins and ends with real conversations between real people. We have a long track record of these conversations and earning the trust of America's seniors, which gives us unmatched insights into their needs. We firmly believe our scale and, increasingly, our technology are exceptionally valuable assets that will continue to broaden our competitive advantage and allow us to meet the needs of America's seniors as they navigate the complex healthcare environment.
These factors are not only allowing us to serve them better, but also powerfully contribute ongoing leverage to our cash flows. With that, let me turn the call to our CFO, Ryan Clement, to review our financials.
Ryan Clement (Chief Financial Officer)
Thanks, Tim. I will begin on Slide 5 with our consolidated financial results for the fourth quarter and fiscal year 2026. As Tim mentioned, our results reflect strong execution across the business and continued progress against our goal of driving profitable cash flow for the full year. Revenue totaled $1.62 billion, up 6% year over year and within our guidance range. Adjusted EBITDA was $109 million, finishing well ahead of our guidance range of $90 to $100 million.
Most importantly, the business made substantial progress on operating cash flow, which we will touch on later. For the fourth quarter, revenue was $322 million compared to $345 million in the prior year. Adjusted EBITDA increased to $12 million compared to $3 million last year. That fourth quarter improvement reflects the operating discipline we have emphasized throughout the year, including actions to improve efficiency, manage costs, and focus resources behind the areas of the business with the clearest path to durable cash generation.
The key message is that SelectQuote exited fiscal 2026 with a more efficient operating model and a clear path to expanding cash flow. Again, in fiscal 2027, we remain focused on profitable growth, not simply top-line growth, and we are managing the business with that framework in mind. Before I detail our segments, let me first call out SelectQuote's improvement in operating cash flow on Slide 6. As Tim noted, we realized a $44 million year-over-year improvement, which was driven by progress within each of our divisions.
In Senior, we delivered strong operating results despite a challenging market backdrop. Similarly, in fiscal 2026 we generated more operating cash flow per SelectRx member than we ever have, driven by both operating scale from our Olathe, Kansas distribution facility but also from a maturing member base. Lastly, our Life insurance business, while smaller, continues to deliver strong cash flows. Turning to Slide 7, our Senior business remained highly profitable despite another dynamic Medicare Advantage environment.
Senior revenue declined 4% compared to last year, totaling $576 million. In addition to another volatile season for Medicare Advantage, part of the reduction in revenue was tied to a change in a key carrier partner's strategic marketing investment. Despite this headwind, we were still able to drive very strong margins. In fact, the Senior segment generated a 26% adjusted EBITDA margin for the full year. As Tim noted, we have now recorded four consecutive years with Senior margins in the mid-20% range, which demonstrates the durability of the business and the strength of our agent-led, technology-enabled distribution platform.
The Medicare Advantage market continues to evolve, and we expect carrier strategies and benefit designs to remain important variables. As we've said in the past, growth in our Senior business is a choice, and the engine we built is ready when the markets support a return to responsible growth. While we've started to see green shoots of a turnaround within the MA market, our expectation is that this upcoming AEP will remain dynamic. Moving to Slide 8, the Healthcare Services segment continues to generate scaled revenue and is making meaningful progress on profitability.
As previously forecasted, membership moderated in the fourth quarter to 109,000 as we continue to focus on members that receive the largest benefit from our services while producing the best unit economics. Looking ahead, we expect members to moderate again in the first quarter leading up to the AEP selling season, but to finish 2027 around 2026 levels. To be clear, demand remains very strong, but we continue to focus on driving further improvements in segment profitability.
Additionally, it is important to remember that Healthcare Services membership growth is synergistic with Medicare Advantage policyholder onboarding. As Tim noted, improvements in that market should serve as a tailwind for SelectRx membership growth in future seasons. While members remain flat year over year, in fiscal 2026 total revenue in Healthcare Services totaled $845 million, up 14% compared to full year 2025. This growth was achieved despite the impact from the Inflation Reduction Act, which went into effect on January 1st of 2026 and hit third quarter and fourth quarter of this year.
I'll touch on the implications for 2027 during my guidance commentary. Moving to the bottom of the slide, the Healthcare Services business is scaling into a more profitable operating model driven increasingly by further utilization of our Kansas distribution facility and our prescription management systems. For the full year, the business delivered $25 million of adjusted EBITDA, effectively all of which converts to cash. You'll recall that our first quarter and second quarter results were affected by the reimbursement renegotiation with one of our PBM partners, which we have called out here in the chart.
Also as a reminder, while the Inflation Reduction Act drives a material reduction in revenue, it does not materially impact EBITDA, given the geography of reimbursements to SelectRx on the P&L. The most important takeaway for this slide is that Healthcare Services exited fiscal 2026 at an annual EBITDA run rate of nearly $50 million. Although we expect EBITDA to moderate in the first quarter as we make investments in preparation for the AEP and OEP enrollment season, we feel this EBITDA performance reflects continued execution across the member base and the early contribution from efficiency initiatives across the pharmacy platform.
We are particularly focused on continued efficiency gains in our Kansas SelectRx facility as we increase utilization and continue to advance our pharmacy management system. We believe Healthcare Services can contribute even more meaningfully to profitability and cash flow over time. Turning to Life on Slide 9, the business delivered $186 million of revenue, up 8% year over year. The business generated adjusted EBITDA of $27 million for the year, which we remind everyone is highly cash efficient.
We are pleased with these results but remain measured in our outlook. While our final expense business continues to perform nicely, the term life insurance market remains competitive and customer acquisition costs are worth monitoring. As a result, we continue to focus on disciplined execution and profitable growth rather than assuming the strong trends we've seen recently will continue uninterrupted. Lastly, let me conclude with our financial outlook for fiscal 2027.
Starting with revenue, we are guiding to consolidated revenue of $1.35 to $1.45 billion in 2027, 14% below 2026 levels at the midpoint. This reduction is driven by factors in both Senior and Healthcare Services. In Senior, as we noted, we expect 2027 to be a transition year for Medicare Advantage carriers. As a result, we are being prudent with our investment with a greater focus on Senior profitability and cash flow over growth. We expect this will result in MA approved policies declining 10% to 15% year over year.
In Healthcare Services, we expect revenue to be down 10% to 15%, primarily due to the Inflation Reduction Act. The IRA will create year-over-year revenue headwinds throughout fiscal 2027, including particularly noisy comparisons in the first half of the year. To reiterate Tim's comment about the platform, SelectQuote is well positioned to grow both businesses in the future, but will purposely remain disciplined in 2027 to drive profit and cash flow.
Turning to adjusted EBITDA, we are guiding to a range of $90 to $115 million for 2027. While down year over year on a dollar basis, the midpoint reflects consolidated margin expansion of about 60 basis points. We expect Senior margins will be strong, coming down from 2026 levels but remaining above our 20% target. This will be more than offset by our expectations that Healthcare Services margins will approximately double in 2027. We expect the efficiency gains to be driven by continuing to scale our pharmacy management system in Kansas as an increasingly higher percentage of our scripts are routed through this facility in 2027.
Finally, we are introducing an operating cash flow guide for the upcoming year. Despite the top-line pullback we discussed, we expect SelectQuote to approximately double operating cash flow in fiscal 2027 to $60 million plus. We also believe the business will generate free cash flow of around $50 million, which is aligned with our strategic priority to demonstrate meaningful and compounding value for shareholders. With that, let me turn the call over to Tim to drill down on that strategy before we take your questions.
Tim Danker, CEO
Thanks, Ryan. We wanted to close with additional context on our most important strategic priority: cash flow. As I mentioned in my opening, we're pleased with the durability of returns we've built into our business. This is evidenced by our performance over the past four years. In Senior, we have high conviction that our model can execute in a range of Medicare Advantage environments, and in Healthcare Services, we're excited about the inflection occurring and expect our scale to drive significant profit contribution in 2027 and beyond.
While we're pleased with the business performance, I'll reiterate that we're not satisfied with our valuation and want to be clear about our plan to drive shareholder returns. We know our credit partners see the value of our platform and our current $1 billion plus commissions receivable balance. That said, we know equity investors want to see expanding cash flow creation and lower leverage. As we show here, we believe fiscal 2027 will be another strong year following the $44 million improvement made in fiscal 2026.
As Ryan mentioned, we expect operating cash flow in 2027 to approximately double compared to fiscal '26 and for the business to generate free cash flow of around $50 million in the year ahead. What isn't shown here is how a growing base of operating and free cash flow can compound. As you know, we continue to work to optimize our balance sheet and believe we are well positioned to reduce our funding costs more meaningfully in the future. Today, our debt and preferred equity total around $800 million at a cost of approximately 12%.
We pay annual cash interest of approximately $45 million in addition to our preferred equity dividend. For illustration, every 100 basis point decrease in that overall funding cost would equate to nearly $8 million of savings that accretes to equity holders. Similarly, we expect to reduce aggregate leverage in the future, both through debt repayment and expanding EBITDA. The bottom line is we see significant value in SelectQuote and believe there is a real and observable roadmap to grow our equity and generate attractive returns for shareholders.
The North Star of our strategy is to grow our equity base through expanding cash flow. We will achieve this through operating efficiency, responsible growth, lower leverage, and reduced funding costs. Best of all, the more cash flow we create, the more cash efficient SelectQuote becomes. 2026 was a great year of inflection for our strategy, and we believe fiscal '27 presents an even greater opportunity to demonstrate our value to shareholders. With that, let me turn the call back to the operator for your questions.
OPERATOR
We will now begin the question-and-answer session. If you would like to ask a question, please press star one. To withdraw your question, please 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 the line of Ben Hendricks from RBC Capital Markets.
Your line is open. Please go ahead.
Ben Hendricks, Analyst at RBC Capital Markets
Great. Thank you very much. Just a couple questions on the Healthcare Services segment. Can you talk about any kind of Opportunities you may have to grow membership outside of kind of concurrency with the senior business? Are there opportunities? I know you guys are very focused on cross-selling those two segments, but is there an opportunity to look outside of the senior and AEP trends, kind of given the softer dynamics in MA over the next year?
Tim Danker, CEO
Yeah, Ben, good morning, this is Tim. Thank you for joining. I'll make a few comments and ask Bob Grant to talk to some of your specifics. But again, really pleased with the inflection point in the fourth quarter for our healthcare services business. So you can see how this business is certainly picking up steam. As you indicated, there is a very synergistic relationship between our senior platform and our healthcare services division. And given the small, kind of prudent, pullback that we're making in the senior division, given the market dynamics, that will have some pull-through impact to healthcare.
You know, our current focus is really around driving operational efficiencies and some additional technology that we think will help us prove out the doubling of margins in healthcare that we mentioned. And to your point, we're still a small piece of the market and have opportunities outside just the pure-play relationship with seniors. Bob, if you want to comment on what we are doing there, I'd appreciate it.
Bob Grant
Yeah, absolutely. So Ben, to your point, right now we have historically been and are still very focused on cross-selling, with the mild pullback in Medicare. It's why not as much growth as we would expect on the top line or membership there. However, we are very, very focused on efficiency, replacing a lot of our technology, using AI to help assist and make things much faster and smoother and drop cost per shipment out the door so that we can increase margins, especially on kind of new membership, and get there a lot quicker.
You see that really reflected in the guide and what we saw in the fourth quarter where we have nearly a $50 million run rate. I would say this year we'll really, really hone in on that. Use this kind of mild pullback in Medicare as an opportunity to really focus on the cash flow and efficiency of that business. And then yes, as we get even more efficient, it allows us to afford some CAC on the RX side of the house and really allows us to start testing and learning on kind of third parties and things like that, because there is a massive market opportunity beyond just what we do as a cross-sell within Medicare.
But it does come at a little bit of a cost, right? So as we increase that margin, it allows us again to really lean into that and find those sources and test and vet. So we're a little bit focused on both, but I would say this year it's hyper-focused on increasing that margin and cash flow efficiency.
Ben Hendricks, Analyst at RBC Capital Markets
Appreciate that. And just one more on the integration of operations through the Kansas City facility. Can you remind us where that stands in terms of penetration in your total volume, where that could go, and then ultimately what you would expect target margins for the segment to be once that's fully integrated?
Bob Grant
Yeah, we are—I'll let Ryan actually speak to the margins at the end. As far as integration, it's still a relatively small percentage of our overall volume because we're very focused on kind of our new technologies and different things within that facility. And then as of this AEP, we would expect a huge percentage of our enrollments and overall members to move to Kansas City, which, as Tim said, is far more efficient and has higher margins than our other sites.
We'll then take those learnings and retrofit our other sites to make them more efficient and better. So all those dollars too, as we decrease that cost per shipment out the door, increase those margins, it all falls to the bottom line, right? So it's a really exciting thing as we've seen the reality play out of Kansas City—as Tim says, about 30% more efficient than our other sites. So we know that there's a path there. Now it's just being very tactical on how we go and get that.
But we are very close. And again, this AEP you'll see a massive growth within the Kansas City facility. Ryan?
Ryan Clement (Chief Financial Officer)
Yeah. And with respect to the margins, obviously we're at an inflection point. We had a really great quarter. We saw the step increase in terms of margin progression, and we've talked about this coming year expecting margins to double on a year-over-year basis. Over the long term we are still expecting low double-digit EBITDA margins. That's our long-term target for this segment. Obviously efficiency gains in Kansas City and other things that are on the horizon are all part of that story.
George Sutton, Analyst
Great, thanks, guys.
OPERATOR
Your next question comes from the line of George Sutton from Craig-Hallum. George, your line is now open.
George Sutton, Analyst
Thank you. Hey guys, my first question is around the MA market. You used a few adjectives like fluid, dynamic, and volatile, but you also mentioned green shoots that you're starting to see. I wondered if you can give us an updated thought on carrier messaging that you're getting. You're obviously investing less this season, so just kind of curious, are we maintaining upside potential if the market turns? Any thoughts there would be helpful.
Tim Danker, CEO
Hey George, appreciate you joining this morning and the question. Yeah, I think more broadly we are seeing a healing in the MA market. There has been year-over-year improvement, but there's still work to do. The payers are signaling to get to their 3% to 4% operating margin, so there's more work that needs to happen, and we expect to see a lot of discipline in the market. That's been our conversations with carriers. Their MLRs are still elevated relative to historical norms—maybe better than forecast but higher than historical—and a byproduct of that will be continuation of some level of market disruption via plan terminations and benefit pullbacks. In our conversations, it feels like—carrier dependent—they're getting towards hopefully the later innings of this recovery and a reemergence to what we would call responsible or targeted growth in plan year 2028. Certainly things around special needs plans continue to be a focus for the payers and one that we over-index to and are very aligned to. So our current plan of action, as you heard from our comments, is to match the market in terms of prudence around MA growth and continue to focus on cash flow.
That was our indication around slightly lower policy volumes. But we will continue to be opportunistic. As we see opportunities, we're nimble, and I think we've proven that over the past four years. It's been, honestly, tough sledding, and we've produced mid-20s EBITDA margins for four years. We'll be in position to do that again. We'll be in position to react to the market if there are interesting opportunities. But overall the message is a resounding enterprise-wide focus on cash flow, how that can accrete equity value to shareholders, and an improvement of our equity value.
George Sutton, Analyst
On the RX side, a couple dynamics I just wanted to ask about. First, on the pricing impacts of the IRA—just so we fully understand. I understand that went into effect in early '26, but how impactful, if you can quantify that? And then Ryan mentioned serving the customers that need us the most. What I read into that is those who have the most prescriptions and therefore are more profitable versus those who have limited needs. Can you just walk through how you're managing that relative to the growth of that segment?
Bob Grant
Yes, sorry. On the IRA and the impact of that, it's obviously trying to push down cost to the overall consumer. You know, there are some really tough dynamics on that because it puts a lot of pressure on the payers and then puts pressure on the pharmacies from a revenue perspective, but to Ryan's point, it doesn't put a lot of pressure on the pharmacies from an overall margin perspective. So the IRA, though, has introduced some things because the payers' cost for drugs has gone up so much—because they're eating a lot of that—they have changed some of the plan designs, and that's been part of some of the impact of this kind of disruption too, where they're introducing coinsurance for drugs and things like that, those things that we hadn't really seen before. So the IRA has ultimately put a lot of pressure, I'd say, in the front half of the year on the cost of drugs for consumers because of coinsurance and those things. That'll continue to be the case, and again, Ryan will talk about it. It does put pressure on our revenue, not our margins, though, which is why you see margin progression but revenue pressure.
Ryan Clement (Chief Financial Officer)
Yeah, so with respect to— I mean, the way it works, the overarching cost to the consumer comes down, but we actually do receive elsewhere in the cost of goods line item a rebate back from manufacturers. So again, the impact to the top line is more meaningful than it is on the bottom line, as you mentioned, went into effect calendar Q1. And so that's created some pressure, and certainly as we look to 2027, where you've got kind of the wraparound impact of having the full year plus 2027 IRA drugs, we expect it to be a headwind to the top line, but again, it's less significant in terms of EBITDA margin where we expect margins to actually double and are really, really pleased with the business's results and the cash generation both in 2027 but also what we see beyond 2027.
George Sutton, Analyst
Ryan, I'm just curious, what is a realistic assumption for leverage reduction? Is it simply limited to the cash flows that you generate, or are there considerations around more aggressive use of the receivables balance or segment M&A, anything like that?
Ryan Clement (Chief Financial Officer)
Yeah, I mean, I think obviously this is a key area for the business and how do we reduce our overall cost of capital. So I'd say there are a range of paths, but I think the one that's probably most prominent, obviously, is the significant progression in operating cash flow—it's our key area of focus. 2027, we've talked about 60-plus million. We're not specifically guiding to 2028, but we see increasing levels of cash flow in our multiyear forecast, and we do expect to be a cash payer in terms of the PIK, but also see a path to delevering and a lower cost of capital via a future refinancing.
Tim Danker, CEO
George, I would just add—
George Sutton, Analyst
Thank you.
Tim Danker, CEO
I would just add all those options are on the table. We absolutely want to be really clear that, to Ryan's point, we see a clear path in terms of increasing cash flow generation, natural deleveraging, a better cost of capital—all of the above that can lead to enhancements in equity value for shareholders.
George Sutton, Analyst
Perfect. Thank you, guys.
OPERATOR
Your next question comes from the line of Stephen Koosh from Jefferies. Your line is now open. Please go ahead.
Stephen Koosh, Analyst
Hi, this is Stephen on for Dave. Thanks for taking a couple questions. So, the cash flow—wanted to start there. So the EBITDA down a little under $10 million year over year, but operating cash flow improving $30 million. Is that $40 million delta primarily a function of the slower growth in Senior, or are there other factors in play?
Ryan Clement (Chief Financial Officer)
No, I mean the primary drivers of the improved cash flow is continued progression in health care services as you expect those margins to expand. You know, we highlighted the significant progress we're seeing from our Kansas pharmacy and we expect that to continue to build upon that as we roll out the pharmacy management system that we built out. Additionally, the AI and technology efforts are also ramping nicely, which is a meaningful contributor to pretty significant anticipated cost savings, around $30 million. A lot of that's tied to kind of combination of reducing labor intensity through AI but also streamlining some of our back office functions.
So we have, as you mentioned, we have been prudent with our investment, but the vast majority of that step increase is actually driven by the healthcare services segment.
Stephen Koosh, Analyst
Okay. And then on healthcare services, I just wanted to clarify, you expect membership by the end of fiscal year 27 to be roughly flat with the end of fiscal year 26 and so is that despite, you know, sort of lower approved policies coming out of senior.
Tim Danker, CEO
That is correct. Yeah, that's correct. That's. That's correct, Stephen. We do expect to be roughly flat at the end of the year. We'll go through our normal, you know, there'll be a little bit of a pullback going into 1Q as we come off of, you know, the SEP period before ramping into AEP and OEP. Again, part of this is predicated upon the slight pullback in our senior business. But again, the real focus is what Bob was highlighting around operational efficiencies.
The introduction of new technology, the hyper focus around margin accretion, nailing down the operations, improving the cash flow and then pushing more into the scaling of the business.
Stephen Koosh, Analyst
Got it. And then maybe, maybe if I could sneak in one more on senior, your conversion rates remained really strong. It was actually above 100% this quarter. Can you, can you help us understand how that's possible? And then any impact that had on the quarter financially and then do you expect, I know you've done some work around conversion rates and trying to improve those. Do you expect the conversion rates in fiscal 27, to stay high like we've seen in the back half of fiscal 26?
Bob Grant
If you're talking about talking to sales agent conversion, is that, is that what you're speaking to? Right. Yes, I'll speak. Rates on the, on the actual policies themselves. So as far as sales agent close rates, just as a reminder, because SEP has materially changed, right. We pulled back a little bit, which was reflected in the number of policies in that quarter, year over year, due to there not being as many opportunities for a consumer to buy. When we do that, right, our best people end up taking those leads and we see higher conversion rates, which took down the estimated pressure we had on Q4 conversion rates, I would say for the next year as a percentage of our overall policies.
Core agents, which I think everybody here, that means you've been through one AEP with us, have significantly higher conversion rates. So we would anticipate AEP and OEP to have high conversion rates relative to the environment. And we should see those push, you know, and be similar to last year, maybe a little bit greater due to a greater percentage of our overall overall agent base being core agents, even though we're pulling back on policies a little bit.
So we do feel really good about where we are there and especially the force of agents that we have. Ryan, you want to talk about approval rates?
Ryan Clement (Chief Financial Officer)
Yeah. And so in terms of approvals and I think the dynamic that you were speaking to was approved policies exceeded submitted policies, which, you know, what actually allows that to happen is not all policies get approved in the first month that they're submitted. And so you have the busy OEP season and then you've got a slowing down into SEP, but there's still approvals that trickle in from the OEP season. And so that's really what drove that. But as Bob mentioned, the approval rates have been strong, the conversion rates within our agent workforce has also been strong and, you know, we're pleased with the overall performance.
Stephen Koosh, Analyst
Great, thank you.
OPERATOR
Your next question comes from the line of Michael Kupinsky from Noble Capital Markets Inc. Your line is open. Please go ahead.
Michael Kupinsky, Analyst at Noble Capital Markets
Thank you. And thank you for taking the questions. You guys have a very strong cash flow story. I can't imagine that the market couldn't recognize that at some point. Here you have 1 billion of commissions receivable and more than 60 million of operating cash flow expected this year. Can you kind of help me understand how much of the fiscal 27 cash generation is coming from the existing commissions receivable book? And more broadly, can you give us a framework for the cash you expect to generate over the next three to five years?
Ryan Clement (Chief Financial Officer)
Yeah. So in terms of operating cash flow, as you mentioned, you know, strong progress in 2026, expect to build upon that in 2027 with operating cash flow exceeding, you know, $60 million. In terms of the commission receivables, obviously, you know, we've sold, you know, policies for years and have $1 billion in receivables like you mentioned, and those cash flows trickle in. When you think about kind of where we ended fiscal 26 and where we end 2027, we actually expect that commission receivables balance to be relatively flat.
So we are, you know, writing policies and replacing, you know, that balance as we are drawing down on or collecting on the prior policy sales. And in terms of future, you know, periods, while we're not specifically guiding to 2028, we are absolutely managing the business to grow operating cash flow over the long term. We have a multi year plan and we again have visibility and line of sight to, you know, stronger operating cash flow in the future that we believe will ultimately lead to refinancing and lower cost of capital.
So we are intensely focused on cash generation.
Tim Danker, CEO
And Michael, I might just add to that. I'm sorry, go ahead. Yeah, yeah. Michael, I might just add to Ryan's comment that hopefully we've made it really clear that we have a lot of conviction around the improvement in cash flow. You saw the $44 million year over year improvement. We're talking about a doubling this year. We're talking about the doubling of margins in healthcare services. So while we can't provide today, we're not here to talk about a three year outlook. That might be something we talk about in the future. All of our business lines are operating cash flow generative healthcare services. You can see the inflection point in the fourth quarter and our 50 million dollar run rate, the doubling of margins, that business is going to continue to grow and, and kick off cash flow.
Our life insurance business, we didn't spend a lot of time talking about it, but it's a very nice contributor to cash flow and a senior business that has a lot of utility around a billion dollar back book. And what we're choosing to do around, you know, being prudent this year, so more to come on that front. But we would make a point that we have a high degree of conviction and a growing cash flow base which will help the company, you know, lead to deleveraging, a better cost of capital and a lot of accretion of value to shareholders.
Michael Kupinsky, Analyst at Noble Capital Markets
Gotcha. And then, you know, obviously your, your outlook for very strong free cash flow. Has that changed your thinking around another receivable securitization?
Ryan Clement (Chief Financial Officer)
I don't know that it's changed our position. Obviously we put a tremendous amount of effort into putting the infrastructure in place in support of securitization and it's, you know, still in place, it's performing and it is a path that's available to us given our current capital structure. Like there isn't an immediate need to make a change. It is something that, you know, again we have out there as an option. Obviously, you know, one other piece though is the Medicare market dynamics, which in the last two years have been, you know, somewhat disruptive. And so at this point, I would say the probability in the short term is relatively low.
Michael Kupinsky, Analyst at Noble Capital Markets
And then with the free cash flow, just a little bit about capital allocation, I was just wondering about how you are allocating between debt reduction, addressing the preferred securities and reinvesting the business. And then is there a leverage or capital structure target that you would consider returning capital to common shareholders?
Ryan Clement (Chief Financial Officer)
Yes. So we, you know, we are obviously excited about the cash generation of the business and where we're headed. We in terms of, you know, capital allocation and what we're doing with it, delevering and high ROI investments would be kind of top of the list. And when I say high ROI investments, I'm talking ones that would, you know, further enhance the cash generation. But ultimately delevering is the key area of focus for the business and that could come in the form of cash pay on the PIK.
We do intend to cash pay in the future, but again, it could also be other forms of delevering. So we, we haven't earmarked the dollars, if you will, but certainly are focused on cash generation and ultimately delevering.
Michael Kupinsky, Analyst at Noble Capital Markets
Fair enough. Thank you. For taking my questions.
OPERATOR
We have reached the end of the Q and A session. I will now turn the call back to Tim Danker, Chief Executive Officer, for closing remarks.
Tim Danker, CEO
I want to thank you all again for your time. We really do appreciate your support. As Ryan and I 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. Thank you and have a great day.
We'll talk to you soon.
OPERATOR
This concludes today's call. Thank you for attending. You may now disconnect.
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