Earnings Call Transcript - PRCH Q1 2021

Operator, Operator

Thank you for participating in Porch Group’s First Quarter 2021 Conference Call. Joining us today are Matt Ehrlichman, Porch Group CEO, Chairman and Founder; Marty Heimbigner, Porch Group CFO; Matthew Neagle, Porch Group COO; and Nicole Pelley, Porch Group's VP of Product. Before we go further, I'd like to read the company's Safe Harbor statement within the meaning of the Private Securities Litigation Reform Act of 1995 that provides important cautions regarding forward-looking statements. Today's discussion may contain forward-looking statements, including, but not limited to, statements regarding Porch's expectations or predictions of future financial or business performance or conditions, business strategy and plans, and anticipated impacts from pending or completed acquisitions. Forward-looking statements are inherently subject to risks, uncertainties and assumptions, and they are not guarantees of performance. You should not put undue reliance on these statements. You should understand that forward-looking statements involve risks and uncertainties, including the items discussed under the Risk Factors in Porch's recent public filings with the SEC as such factors may be updated from time to time in Porch’s subsequent filings with the SEC, which are available on the SEC website, may cause actual performance or results or performance to differ materially from those indicated by such statements. Porch is under no obligation and expressly disclaims any obligation to update, alter or otherwise revise any forward-looking statement, whether as a result of circumstances, new information, future events or otherwise, except as required by law. In today's remarks, we'll also refer to certain non-GAAP financial measures. Definitions of these non-GAAP financial measures are available in the legal disclaimers found on Slide 2 of the presentation. Also for a reconciliation of these non-GAAP financial measures to the most directly comparable GAAP measures, please refer to the table beginning on Slide 26 of the presentation. We will also refer to such legal disclaimer for additional information. I'd like to remind everyone that the webcast will be available for replay shortly after the conclusion of this presentation on the company's website at porchgroup.com. For those of you that would like to submit a question during today’s presentation, please log into the webinar and submit it through the chat function on the same platform. Management will do its best to take questions within the allotted time. Porch Group has also made available a slide presentation that will follow on the presenters' commentary. The presentation can be found on the company's website. And with that, let me turn the call over to Matt Ehrlichman, CEO, Chairman and Founder of Porch Group. Matt?

Matthew Ehrlichman, CEO

I appreciate it, Matt. Good afternoon to everybody that is on the call. Looking at Slide 4. As many of you know by now, Porch is a leading vertical software company, and with a Software as a Service fee, plus transaction monetization engine. Our platform helps companies run and grow their businesses, and we help consumers of these software companies move and maintain their homes, with insurance being our core focus. Because we generate revenue not just with the typical SaaS fees, but also with the B2B2C transaction revenues, these small businesses like home inspectors, moving companies, and cleaning companies become very valuable to us. This allows us to invest in product development and sales to bring more of these companies into the Porch platform. I would like to start by highlighting our InsurTech division. As we're already one of the larger InsurTech companies in the industry based on gross written premium and with our growth rates and margins comparing certainly favorably. We believe we have fundamental advantages with early access to virtually CAC-free homebuyers who need insurance and the recurring stream of proprietary property data. This, in turn, can help us understand risk and pricing over time. We'll expand further on our InsurTech business later, but we are certainly in an exciting spot with our unique, durable and transformational capabilities. Last week, a few members of our customer-facing teams and designer delighted our leadership with a compilation of videos from real customers, and we thought it would be fun to share, just to give you that much more of a flavor for how we help consumers with their homes. First, each of these consumers was introduced to us from a company using our software, which means we did not need to pay marketing dollars for that introduction. Second, the more services we help a consumer with, the higher consumer satisfaction leads to higher revenue generation. And third, as we help these consumers with more services, the companies using our software become increasingly more valuable to us, which in turn allows us to sell and provide software to more of them. So before I turn it over to Marty to discuss our financials, I'd love to reiterate first just our previously laid out priorities for 2021. For us, it begins with the company. Our focus is on selling software to more companies where we become deeply embedded. This includes upselling more SaaS modules into these companies, which we will cover later in the call. Two, as more of these companies provide access to their consumers, it leads to three, more services we can provide to those consumers. The happier the consumer, the more revenue we generate. Four, we focus on insurance with these consumers. And in particular, through the acquisition of Homeowners of America, we are now a full-stack carrier and a managing general agent complemented with our existing agency. This is a key focus for us. Five, we are bringing in brands and advertisers to connect with homebuyers. Lastly, we'll selectively use strategic M&A to expand our platform. Our business is performing very well against each of these areas, and the results are strong. And with that, I'll turn it over to Marty Heimbigner, our CFO, to discuss Q1 and guidance for 2021.

Marty Heimbigner, CFO

Thanks, Matt. Turning now to our financial results for the quarter ended March 31, 2021. For the first quarter of 2021, our total revenue was $26.7 million compared with $15.1 million in the first quarter of 2020, an increase of 77% year-over-year. Adjusting Q1 2020 revenues for past divestitures, total revenue increased from $12.6 million in Q1 2020 pro forma, which is a 112% increase year-over-year. Our cost of revenue percentage for the first quarter of 2021 was 78%, and contribution margin was 41%, up materially from 5% in Q1 of 2020. Our adjusted EBITDA loss improved to negative $9.6 million, about $2 million better than our initial internal expectations. Q1 has historically been the seasonally lowest quarter, and we remain on track for the full year adjusted EBITDA loss margin guidance we have provided. These results would have been even better but for the cold weather crisis in Texas in February, in which fewer monetized services occurred in that part of the country. The $26.7 million in revenue in Q1 2020 was meaningfully ahead of our expectations in the $23 million public guidance we had provided. On the right-hand side of the slide, you can see that while we grew 112% year-over-year versus Q1 2020 pro forma, our growth would have been approximately 200% year-over-year if our acquisitions, Homeowners of America and V12, had occurred on January 1, 2021. As a reminder, we closed our acquisition of V12 on January 12, and Homeowners of America was closed on April 6. Given the momentum of our business, we are raising our revenue guidance to $178 million, up from $175 million in our prior guidance. This would be 147% year-over-year growth. We are reiterating guidance related to our contribution margins and our adjusted EBITDA loss margin. Given certain transaction revenue has slightly higher cost of revenue, we see Q2 and Q3 with a bit lower revenue less cost of revenue margins than the full year, but better EBITDA loss margins. For the full year, we expect approximately 72% revenue less cost of revenue. For the year, we will manage our business to a specific adjusted EBITDA loss percentage target. So as revenue continues to perform ahead of our guidance, we will use some of the additional revenue gains to fund further key investments in sales and marketing and R&D to support our continued rapid growth. The team will discuss a few of these investment areas later in this call. As demonstrated by Q1's 41% contribution margin, we are in a strong position with our 2021 margin targets. Before passing the baton, a couple of last notes. First, from a cash used perspective. Operating cash used largely aligns with our EBITDA loss with several million dollars annually of capitalized software costs and the interest expense related to our $42 million of outstanding long-term debt. As a private company prior to the SPAC merger closing, we maintained payables aged at a longer time period. And as of the end of Q1, we have now paid down and fully normalized our working capital position. Second, consistent with other companies who have gone public through SPAC, we have reacted to the accounting statement by the SEC that came out in mid-April, in which they now require recording a liability for private warrants associated with the SPAC. For Porch, at this time, all of the public warrants and 45% of the private warrants are now exercised or redeemed. I should note that the exercise of both public and private warrants has resulted in $126.8 million in equity proceeds coming to the company in Q1 and here in Q2. We'll be filing amended 2020 Form 10-K tomorrow to reflect this change and other immaterial adjustments, and then we will file our first quarter 10-Q a day thereafter.

Matthew Neagle, COO

Thanks, Marty. I'll go ahead and jump in with our public KPIs and commentary. So if you look at Slide 13, our KPIs were very strong in Q1. The average number of companies jumped to 14,000, which is up 28% year-over-year. The growth in the average revenue per company is up to $637 per month, which is a 32% year-over-year increase. The revenue per company is up because it includes both our B2B SaaS fees and additional module upsell. The number of companies is growing due to several factors: strong record software sales, we had 278 companies that joined from the V12 acquisition that we announced, and we are seeing small business owners, particularly inspectors, returning to work after receiving their COVID-19 vaccinations. We are also seeing strong growth across our monetized services. We remain very focused on high-value move-related services. In Q1, we were pleasantly surprised by the acceleration in our post-move services, which generate a lower revenue per service. This resulted in a 20% growth in total monetized services, up to 183,000 in Q1, with slight year-over-year growth in revenue per monetized service at about $92 in Q1. I will note, though, that one of our key service providers in security and home automation experienced an internal system transition that impacted conversion rates in installation for security. Given that security is a high-value service for us, this did have some impact on the revenue per monetized service in Q1. Nonetheless, we expect that average revenue per monetized service will increase over time. Now looking to Q2, we will note the completion of the HOA acquisition, which happened in early April. This will increase our revenue per monetized service because we are now deeper in the insurance value chain. Given the recurring nature of insurance, we will see the number of monetized services grow as past year consumers renew their insurance at high rates. We are excited about the early progress with the HOA acquisition. Out of the gate, it's been exciting to see us sell into HOA at a higher percentage and a higher overall customer conversion rate as we make improvements to the purchasing process for HOA.

Matthew Ehrlichman, CEO

Thanks, Matthew. Yes, I want to add some additional color on Q2 and what we're seeing. I want to note, though, set expectations, we do not plan on providing quarterly guidance going forward, just annual guidance. However, as we've listened to investors and in light of market volatility in the SPAC market, I do believe it's appropriate to provide more details this quarter. To date, in Q2, we are trending north of $45 million in revenue. Adjusted EBITDA loss is trending to be better in Q2 versus Q1. The business is ramping nicely and as anticipated. We are seeing a strong increase in both monetized services and revenue per monetized service. Now that we can lead with HOA in certain states and generate significantly more revenue per insurance sale, we are seeing north of $120 per monetized service in Q2 and significantly higher monetized services, due to HOA and seasonality of our software companies and conversion rate improvements.

Matthew Neagle, COO

As that revenue per company increases, the lifetime value of that company goes up, which means unit economics improve, giving us the ability to invest more into sales and marketing and product development so that we can continue to grow the number of companies, and subsequently, the number of monetized services.

Matthew Ehrlichman, CEO

That flywheel is critical for understanding how we will continue to drive robust growth. Our InsurTech division remains the core transactional monetization on top of our software platform, and our experience for the consumer with various services creates a high satisfaction experience. Given insurance is the most valuable service in the home and it’s recurring, we have significant advantages related to insurance operationally that help us build a massive InsurTech business. Now I would like to ask Nicole Pelley, VP of Product at Porch, to jump in with a few updates.

Nicole Pelley, VP of Product

Thanks, Matt, and hello, everyone. As Matt said, I lead Product for Porch, including our central platforms like our data platform and consumer experience. The strength of our software companies is pivotal for our consistent stream of B2B SaaS revenues and low-cost access to consumers when they're most valuable. Let me walk you through the updated NPS Scores across our companies to provide visibility into how strong our platform is. As you can see, the scores largely speak for themselves. Both companies and consumers love what we're doing. I'd like to highlight the latest NPS Score from ISN of 75 and the latest NPS Score from consumers who purchase insurance, which is also 75. We're proud of the experiences we're creating, and we're excited because we're just getting started. One of the areas of our software strategy that's not well understood is that even when companies choose to get our core software for free in exchange for providing us customer access, we can still rapidly grow B2B SaaS revenues by adding and upselling additional modules. A few examples of the modules we offer today include our report writing software. Most inspectors use our CRM and ERP software, and we now have the ability to also sell in a module that helps them with their inspection report generation.

Matthew Ehrlichman, CEO

Regarding payment processing, inspections and the other industries we serve are high-ticket size transactions, making payment processing a significant and high-margin opportunity as we drive towards online payments and credit cards.

Nicole Pelley, VP of Product

Having 40% contribution margins in 2021 and 41% already in Q1 has allowed us to aggressively invest in product while still showing significant improvements in adjusted EBITDA loss margin. Our teams are focusing on product advancements across our vertical software to ensure we maintain a competitive edge. Our InsurTech investments and data platform investments are integral; we are creating intelligence from our unique property data to enhance our pricing, underwriting, and purchasing experiences for insurance. Within the next couple of years, we expect our own insurance product to be available across the majority of the country, fundamentally changing how easy it can be to get the best insurance.

Matthew Ehrlichman, CEO

Thank you, Nicole. We feel very positive about how Q2 and 2021 is shaping up. We have this predictable business with deep competitive moats and numerous levers to drive growth into this massive market that we're targeting. The strong revenue and margin growth demonstrate the potential of our business model.

Operator, Operator

Thanks, everyone. We have about 25 minutes for Q&A. We will start by taking Porch’s sell-side analyst. John Campbell from Stephens.

John Campbell, Analyst

Great work in the quarter.

Matthew Ehrlichman, CEO

John, good to see you.

John Campbell, Analyst

I appreciate the customer testimonials. I don't think I've seen that on the earnings call. You got to love the Zoom capability. So we really appreciate that.

Matthew Ehrlichman, CEO

Right, yes.

John Campbell, Analyst

So the growth in the average number of companies was really impressive. I'm guessing you guys probably got a little bit of a lift in acquisitions, but what main areas would you call out as the key drivers? And then I don't know if you've got this, but what it looked like organically, ex-acquisitions?

Marty Heimbigner, CFO

Sure. I mean, the thing we can focus on is the strong quarter. We were up 25% in Q4 versus Q1. One key aspect we've indicated is that we're going to invest in our go-to-market due to the attractive LTV that we have. We're starting to see some acceleration in that engine. We had record software sales across various businesses. It’s an optimistic outlook for our ability to continue to grow it.

John Campbell, Analyst

Yes. Okay. That's helpful. And then one more for me. It seems like the HOA deal is coming out of the gates impressively for you guys. If you run through some of the numbers you provided, it looks like they're annualized into a healthy growth rate. So just curious where you're seeing that strength? What gives you the optimism to raise the gross written premium guidance for the year?

Matthew Ehrlichman, CEO

We are excited about the early days with HOA. Clearly, we just finished the acquisition on April 6, not too long ago. Insurance serves as a core engine for our business. We have a large opportunity with insurance, and HOA is integral to that. We have been building an execution plan since closing, and we are now charging forward with state expansion and driving consumers into our owned insurance product. We are seeing gains now.

John Campbell, Analyst

Yes. I would imagine getting the insurance department people back in the office is helpful in getting those licenses. Good luck with that, and congrats again, guys.

Operator, Operator

Thanks, John. We'll now go to Dan Kurnos with Benchmark.

Daniel Kurnos, Analyst

So maybe just a couple of housekeeping items first. Did you talk about the contribution from V12 in the quarter just so we have a sense of maybe what was organic and what was inorganic? Also, you talked about the acceleration in post-move services, which I think is a longer-tailed goal for the company. Can you discuss what kind of services are driving that and how we should think about that? You kept your guidance the same in terms of percentages for the year, despite those being lower revenue contributions.

Matthew Ehrlichman, CEO

Sure. We don't typically break out acquired versus organic as we fully expect to grow those businesses. For V12, we layered in $20 million for the year; it isn't linear across the year, and Q1 is certainly less than Q4 for that business.

Matthew Neagle, COO

Regarding our post-move services, we've observed pleasant surprises with the acceleration growth. It tends to be broad-based, as people are spending more on home improvements, driving momentum within our services even though they provide lower revenue.

Matthew Ehrlichman, CEO

We want to keep our focus high on high-value services, especially insurance. We're seeing strong performance in Q2.

Dan Kurnos, Analyst

Got it. Fair enough. I think it was just kind of incremental to the story. Matt, again, I appreciate the Q2 color. Over the balance of the year, do you expect the typical seasonality where Q1 and Q4 are the lows and Q2 and Q3 are higher?

Marty Heimbigner, CFO

Yes. Our revenue distribution is 65% from move-related services. The best weather in the U.S. leads to higher activity in Q2 and Q3. Hence, we'd expect that seasonality.

Matthew Ehrlichman, CEO

Historically, Q1 was 15% of full-year revenue in 2019, while in 2020, it was 20%. But certainly, Q1 is the lowest, ramps up in Q2, with Q3 typically being the highest before dropping in Q4.

Daniel Kurnos, Analyst

I think it was just kind of incremental to the story. Matt, again, I appreciate the Q2 color.

Nicole Pelley, VP of Product

We continue to enhance our moving concierge to improve customer experience, building out our mover dashboard for quick quotes and service purchasing to meet consumers wherever they are.

Matthew Ehrlichman, CEO

There are systematic opportunities to add more services to consumers over time, especially with our insurance product data. This is a future focus for our strategy.

Operator, Operator

Thanks, everyone. We have about 25 minutes for Q&A. We will start by taking Porch’s sell-side analyst. John Campbell from Stephens.