Earnings Call Transcript - PRCH Q1 2022

Operator, Operator

Good afternoon, everyone. And thank you for participating in Porch Group’s First Quarter 2022 Conference Call. We issued our first quarter earnings press release today and furnished our related 8-K to the SEC. The press release can be found on our Investor Relations website at ir.porchgroup.com. Joining us today are Matt Ehrlichman, Porch Group’s CEO, Chairman and Founder; Marty Heimbigner, Porch Group’s CFO; Matthew Neagle, Porch Group’s COO; and Adam Kornick, President of our InsurTech Division. Before we go further, I would 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, including in response to your questions, reflects management’s view, as of today, May 10, 2022, only. We do not undertake any obligations to update or revise this information. Additionally, we will make forward-looking statements about our future financial or business performance or conditions, business strategy and plans and anticipated impacts from pending or completed acquisitions based on current expectations and assumptions. These statements are subject to risks and uncertainties, which could cause our actual results to differ materially from those forward-looking statements. And we encourage you to consider the risk factors described in our SEC filings for additional information. On today's call, we will reference both GAAP and non-GAAP financial measures. For reconciliation of non-GAAP measures to most comparable GAAP measures discussed during the earnings call, please refer to today’s earnings press release. To submit a question during today’s presentation, please log into the webinar and submit it through the chat function. Management will do its best to take all questions within the allotted time. As a reminder, this webcast will be available for replay shortly after the conclusion of this presentation on the Investor Relations section of the company’s website at porchgroup.com. The slide presentation will also follow along with the presenter’s commentary and can be found on the company’s website. Today in addition to covering first quarter 2022 results, 2022 guidance, and KPIs, the team will provide a deep dive into our Insurance business. And with that, let me turn the call over to Matt Ehrlichman, CEO, Chairman and Founder of Porch Group. Matt?

Matt Ehrlichman, CEO

All right. Thanks, Walter. Appreciate it. Good afternoon, everybody. This marks Porch Group's sixth quarter so far in the public markets. Once again, we're announcing strong quarterly financial results, meeting company revenue and profit expectations. These results should give confidence and certainly have affirming our previously disclosed guidance and highlight the strong performance across the business and the continued success of our unique strategy in insurance and home services. Before we get started, I'm going to take a few minutes to share my thoughts. We'll then provide financial results and KPIs for the first quarter and later dig a little deeper into some of the initiatives that will strengthen our competitive position. In particular, Adam Kornick, the President of our InsurTech Group, is joining today to provide an update on our Insurance segment, which continues to perform well and is expected to contribute 40% of 2022 revenues. I'll pick up by noting that we are not blind to what's been happening in the market over the last five months, nor are the challenges others are seeing related to the housing and reinsurance markets. Clearly, we've gotten lumped into broad-based issues. The good news to report is, the business is performing and the strategy is working. We continue to perform against near-term expectations while simultaneously making strategic progress against this massive opportunity that's in front of us. Case in point, year-over-year, in Q1 2022, revenue was up 134% and adjusted EBITDA margins improved by a full 25 percentage points with us today affirming our full year 2022 revenue and EBITDA guidance. At the same time, we're excited to announce that we have filed and received official approval from three states to start using specific Porch’s proprietary data and pricing of insurance, with more to come. As we noted, our business is not as susceptible as others to a housing decline. Approximately 70% of our revenue this year is expected to come from B2B SaaS fees and insurance, both of which create a strong recurring revenue engine and neither of which would be expected to be impacted at a material level by shifts in the housing market. Yes, parts of our business feel the impact of the slowing housing market. And yes, we would be growing even faster if more homes were being sold. But as we said, the slowing market we've seen thus far was built into our assumptions and guidance. Given we are early in our journey with a large opportunity ahead and given our unique strategy presents many levers to drive growth, we're performing right through this slower housing market and expect to continue to do so. For those that are new to Porch, slide 6 here outlines a unique strategy to win in these large home service industries. We provide software and services to businesses in select strategic verticals to help those companies grow. By doing so, we generate B2B recurring revenue from software fees as well as gain early and ongoing access to consumers. We help improve their home buying and homeownership journey. With the consistent stream of homebuyers we generate, we create B2B2C transaction revenues by helping with the purchase of essential services. Insurance and home warranty are the services we focus on most, given that when we sell them to consumers, we can create ongoing recurring revenue and a durable relationship. Here with insurance, we operate this business in a capital-light manner, seeding the vast majority of premiums to third party reinsurers, who carry the bulk of the risk, volatility, and the capital requirements at expected risk levels, allowing us to scale both rapidly and more predictively. So starting here on the top of slide 7, our priorities for 2022 remain the same with one tweak to number six. So number one, sell vertical software to more companies, our core go-to-market; two, embed key services and consumer experiences into our software products in a variety of ways to get in front of more consumers and increase our B2B2C transactions. We've just launched insurance embedded within our Floify mortgage software, providing an entirely new and expanded home buyer audience to delight. Three, we extend our experiences, our digital tools, and our app to consumers that we get unique and early access to in order to increase conversion rates on our B2B2C transactions. We've also advanced our consumer app and intend to provide it to every homebuyer working with one of our partner inspectors. This is not only a way for us to increase conversion rates but also to get access to far more consumers. Number four, we will continue to grow our insurance business, both rapidly and profitably, including launching new products in new geographies. As you may remember, when we first acquired HOA a little over a year ago, they were operating in six states. With our most recent announcement of expansion into Nebraska and Wyoming, we now offer our own insurance products in 17 states. We're also integrating home warranty and maintenance services to create a full home protection plan. Number five, we'll continue to build out our data platform and start to leverage Porch’s unique insights to improve pricing for our insurance and warranty products. I'm excited about what Adam will cover later on here in the insurance section. Again, we filed and received approval to use its first key data in our insurance pricing in select states. At number six, a change as it relates to our M&A priority. As we discussed last quarter, given the shift in the cost of capital, the importance of prioritizing scaling our systems and the relative public to private market valuation gaps that can exist, we do view 2022 as a lighter year of M&A and one where our larger focus is going to be on the integration of prior acquisitions and financial controls over our financial reporting. Certainly, we remain excited about how our platform can accelerate growth in the right acquired companies and we would look to focus more on working capital here in the future once the market stabilizes. So with that, I'll turn it over to Marty Heimbigner, our CFO, to discuss our first quarter results. Marty?

Marty Heimbigner, CFO

Thanks, Matt, and good afternoon, everyone. As Matt mentioned, our business is performing very well and was able to report another strong quarter, putting us in an excellent position for the remainder of 2022 and keeping us on track to achieve great results for our shareholders, including breakeven adjusted EBITDA for the second half of 2023. In parallel, we have accelerated key hires across the accounting and IT organizations to address internal controls and compliance with our obligations under the Sarbanes-Oxley law. Looking at Slide 9, the year-over-year comparison of our first quarter results is impressive. For the first quarter of 2022, Porch Group's total revenue grew 134% to $62.6 million, an increase of $35.9 million from the prior year same quarter and ahead of expectations. In addition to the strong revenue performance, revenue less cost of revenue was 66%, in line with our expectations. And adjusted EBITDA margin was a negative 11%, a 25 percentage point improvement from the prior year. Adjusted EBITDA loss was approximately $7 million in Q1, a nice year-over-year improvement. Gross written premium was a healthy $102 million in Q1, which is our seasonally low quarter. We provided annual guidance about eight weeks ago when we already had good visibility into Q1. We are certainly pleased with the performance of our business so far this year and are affirming our full year 2022 guidance with revenue guidance of $320 million, up 66% year-over-year and revenue less cost of revenue, which we use as a measure of gross profitability of $210 million, up 57% year-over-year. 2022 EBITDA guidance also remains unchanged, approximately a 400 basis point year-over-year margin improvement, which produces close to negative 9% adjusted EBITDA margin and improved full year adjusted EBITDA dollar performance. We continue to invest in strategic growth initiatives as well as acquisition integrations to address our internal control environment. Because much of our cost structure is fixed and the underlying margins of our business are strong, we are able to manage the growth of these expenses and be confident in achieving our medium-term goal of breakeven for the second half of 2023 and our long-term target of 25% adjusted EBITDA margins. Additionally, we are pleased with what we expect to be our $600 million gross written premium insurance business, and we'll share more about progress here later in the presentation. Given the strong Q1, we are excited about the ongoing performance and momentum at Porch. With that, I'll turn it over to our Chief Operating Officer, Matthew Neagle, to discuss our operating segments and KPIs.

Matthew Neagle, COO

Thanks, Marty, and hello, everyone. I agree we certainly feel good about how the business continues to perform and how it has performed over time, as you see here on slide 11. You can see a strong 66% year-over-year revenue growth that we set in 2022. The most significant potential areas of positive upside to this year are initiatives such as the initial integrations with Floify and the rollout of our app to consumers. Other factors that may impact our results include unusual weather, especially in Texas, which can be muted given our reinsurance strategy and also the timing of the CSE acquisition, which is assumed to remain on track for mid-2022. We feel comfortable with the current expectations of softness within the housing market that have been built into guidance and our reinsurance relationships landed largely as expected for the 2022 year. I'll first jump in and share 2022 guidance for our operating segments and then report on our KPI performance from Q1 2022. Turning to slide 12. The most valuable, strategic and recurring elements of our revenues are growing the fastest. We generate revenue from two segments. Overall, our vertical software segment is expected to produce approximately $190 million in revenue in 2022. We generate this revenue from our software through both B2B SaaS fees and transactions. The other high retention and recurring portion of our business is insurance segment revenue, which is also growing rapidly and is expected to contribute 40% of overall revenue in 2022. As one thinks about our current valuation, a few things I believe are worth a reminder. You can see here on slide 13 that approximately half of our vertical software segment revenue, or approximately 30% of overall company revenue, comes from B2B subscription fees. The monthly fees companies pay us for our software and services. This revenue stream alone is expected to near $100 million this year and is high-margin revenue. We have built or acquired and accelerated the high-quality leading software companies in large key vertical markets, with the three most important being; ISN, Floify, and Rhino. So if Porch’s only revenue stream was approximately $100 million of SaaS fees, the comps in respective multiples for that business will be quite clear and represent a substantially higher market cap. Similarly, we'll highlight insurance on slide 14. We'll recognize revenue as a percentage of gross written premiums in the mid-20% range, depending on the quarter. This contrasts with a more traditional reinsurance approach that would have us recognize the vast majority of premiums as revenue and retain more risk overall. This means our business requires less capital and would be expected to experience lower volatility with an expected risk level in our P&L than other insurance companies. Our insurance revenues become consistent, more predictable, and higher margin in this context. If our business were only an InsurTech business, the industry multiples would be clear, considering our $600 million of gross written premium, our capital-light strategy, our profitability, fast growth, and our long-term CAC and data advantages on this basis alone, valuation would also see a substantial step-up. Value will be recognized over time. In the meantime, we will continue to execute effectively and ignore the noise. Despite any near-term dislocation, and though there aren't any companies that do exactly what we do, we are certain that the software plus insurance combination is working well, should continue to scale rapidly with high margins and gives us substantial long-term advantages. You can see our unique strategy continuing to work as we turn to our KPIs. Beginning with companies here on slide 16, we saw growth in the average number of companies in the first quarter to more than 25,500, which is up from approximately 24,600 in Q4 2021. Revenue per company per month in Q1 was approximately $817 per month, up approximately 28% from the same quarter of the prior year. There is substantial runway to continue to drive growth in revenue per company as we continue to sell in more software modules to increase our B2B SaaS fees as we get access to more consumers from these companies and as we then help these consumers with more services. The opportunity here is large with many years of continuous improvement ahead. As we noted in previous calls, we expect net new company adds to continue to grow, but more slowly in 2022 versus 2021. What we saw between Q4 2021 in Q1 2022 is what we expect to be a reasonable and sustainable pace of growth during 2022. While there were no acquisitions during Q1, I would note that Q2 will include RWS, which will add approximately 1,000 companies. As you can see on slide 17, in Q1, we continued to see strong growth across all types of monetized services with us recording over 254,000 for the quarter, representing 40% year-over-year growth. We saw $176 per monetized service, a 91% increase year-over-year and a nice step-up from Q4 2022 as we continue improving our insurance sales efforts. Insurance and home warranties are our fastest-growing services with moving as the next. Let's now jump into additional disclosure related to our two operating segments. I'll take vertical software and Adam Kornick, the President of our InsurTech division, can jump in to begin updates and a deep dive into our insurance business.

Adam Kornick, President, InsurTech Division

Thanks, Matthew. On the right-hand side, our insurance business continues to grow rapidly and demonstrate strong margins. In Q1 2022, gross written premiums were higher at $102 million; we do remind you that Q1 is a seasonally low quarter this year and before adding RWS and CSE. Segment revenue was $27.9 million. Given our capital-light approach to insurance for predictability, revenue, margins, and retention rates are very similar to typical B2B SaaS fees, as you can see with the underlying margins. We derived much of our insurance segment revenue from insurance carrier commissions, reinsurance ceding commissions, and fees. Plus, as you see, we had strong underlying margins around 12% adjusted EBITDA margin. We are different than others in our insurance business; we are already nicely profitable despite rapid geographic expansion and product investments. HOA and warranty business were profitable pre-acquisition, and our insurance agency has privileged and lower-cost access to demand, which is typically one of the larger costs for a business like this. Fundamentally, we have a low CAC, strong underwriting that will continue to improve with our proprietary data, and given the strong underwriting history, lower volatility in capital requirements, all of which helps to create a high-margin opportunity. Here on Slide 19 with regard to our insurance-specific KPIs at the end of Q1, we approximately had 338,000 policies, and we're generating an average of $330 of revenue per policy per year. On a rolling 12-month basis as of March 31, 2022, we had an 89% customer retention rate in our insurance business. You can see we now offer our own insurance products in 17 states. We'll now dig into a few other topics related to insurance. First, an update on CSE, the California insurance acquisition we signed in the fall of 2021. We continue to work through the regulatory process and still anticipate closing likely in mid-2022. Here on Slide 21, you can see HOA's continued strong underlying underwriting performance. Note, this is looking only at our Homeowners of America carrier and MGA. Our agency is not included here as they sell policies and receive distribution commissions without any underwriting. Over the past five years, we have performed favorably compared to the broader homeowners industry, with an average 68% loss ratio versus the industry's 70%. This includes the challenging year that Texas underwriters saw in 2021. The state that currently represents the majority of our carrier premiums, where the overall Texas industry saw a 106 loss ratio in 2021. There are a couple of data points to see how well we have performed in underwriting over time. First, we continue to have broken out the attritional loss ratio, which is all non-lever and non-catastrophe claims. You can see in the light blue that the performance here has been consistently exceptional, averaging 20% over the last five years. Separately, looking back at the prior full year from 2017 to 2020, our average loss ratio was 60% versus the U.S. industry average of 70%. These figures are industry-wide comparisons where we show very well. I would note that if you look at some of the faster-growing tech-enabled platforms, we can pay even more. And the reason we believe our capital-light model is attractive, even with a high loss environment across the industry in 2021, our insurance segment still recorded a 16% positive adjusted EBITDA margin. As we continue to expand, our underwriting results will be less tied to Texas via geographic diversification. As we continue to gather more proprietary data, our pricing accuracy will only continue to improve. Our solid historical underwriting performance is important to maintaining our favorable relationships with our insurance partners, and one of the reasons we have performed as well as we have in our annual renewals in a difficult macro backdrop. Let's turn to slide 22 for an update on our capital-light model and the 2023 VA transfers. We are proud of our long-term partnerships with our metrics. As you can see here on slide 22, over the prior three-year period from 2019 to 2021, we see over 91% of our clients' renewals. We strive to provide access to a profitable underwriting business for our insurance plans, and this has allowed us to rapidly grow our business without the same need for capital we have as we retain premiums in line with the broader industry. While 2021 was a challenging last year globally for the insurance initiative, we were well positioned for national carriers. Given the better-than-the-industry underwriting results discussed in the previous slides, we have maintained good relationships with reinsurers and our overall 2022 reinsurance remains strong. Our reinsurance program generally renews on January 1 and April 1 of our share in excess of loss relationship, respectively. In total, for 2022, we are retaining approximately 12% to 14% of premiums, more than the previous year, given the reinsurance market. This is building our expectations and what we had assumed in 2022 guidance. We have done this while effectively managing the cost of reinsurance and our effective fee and commission. Again, both are in line with our expectations and guidance. We believe this is different and better than the overall market because of strong historic underwriting results. Strong growth with consistently profitable performance and more underwriting advantages ahead as we utilize more of our proprietary data to create those results. As we've noted before, we did put in place pricing increases in advance of the 2022 loan, and we have not seen any change in retention rates with these indices as we continue to grow the number of consumers that we are helping with insurance and references. We feel good about the community transitions in the 2022 growth, especially in light of the challenging backdrop of reinsurance. We are confident in our ability to continue to scale our insurance operations and deliver for consumers, reinsurers, independent agents, and carrier departments. Turning to page 23, we are excited to share the product enhancements, which are now live for consumer disusing a Floify mortgage point-of-sale offering. Now, when consumers are getting loans, we have integrated homeowners insurance, making it easier for these homebuyers to improve as required. We launched the beta within the last month to provide applicants with an easy way to compare rates from multiple carriers. We are excited to help loan officers provide a better experience with a higher conversion to our customers and to continue making the home-buying process easier. As always, we first rolled out features to a subset of customers to resist stats. We've seen positive reactions from loan officers and believe this is another example of how our unique capabilities help simplify things. Lastly, here on slide 24, I want to give an exciting update on the first milestone of using Porch's proprietary property data to improve pricing accuracy for Homeowners of America customers. As discussed in the past, Porch has unique data about properties that only we have access to. We are confident this data will be able to optimize pricing to low-risk consumers and raise the price of insurance for those at higher risk. We have now successfully demonstrated that we can leverage Porch's data in non-insurance investing, file new pricing changes, and get approval from regulatory authorities. By utilizing our inspection dataset, along with 15-plus years of claims data, we were able to model, file, and implement new pricing. So far, the states of Arizona, Virginia, and Georgia have approved our use of location data as part of our pricing strategy. Our data shows that consumers located near water will incur lower fleet costs than previously estimated. We have now booked in the appropriate pricing based on location. This is only one example of the data fields that the inspection report can uncover for recent insurance underwriting. Looking ahead, we continue permitting more data and look to evaluate piping material, roof condition, system age, the number of issues identified in homes, and more. We will continue to refine our pricing models to drive profitable growth, and this is just the start of what we will be able to incorporate to create advantages in a challenging market. Winning in insurance is first and foremost about pricing accuracy, and we have a long runway ahead to continue to improve and leverage our platform. With that, I'll turn it back over to Matt.

Matt Ehrlichman, CEO

Thank you, Adam. I'm proud of the work that's happening there. It's great progress. I'll wrap up with a brief note of encouragement for our long-term shareholders to focus on the fundamentals and be patient. The current short-term equity market, in our view, is illogical. We have a business here that we expect to continue to grow revenues and margins nicely, but even more so has the opportunity to become a truly great generational company and a winner in multiple massive industries. With our unit economic advantages that we have today, we believe we'll win in providing software to key strategic home service verticals. With our expected demand and data advantages, we believe we'll be able to build one of the largest and most profitable homeowners' insurance companies over time. So looking ahead, we have sufficient cash to execute on our strategy. We have more than four years prior to the maturity of our convertible note. We're prioritizing and making excellent progress on integrating past acquisitions and ensuring that the appropriate controls are in place, and we continue to make strides toward adding strong governance, as we just announced the shareholder-friendly approach of board declassification. We'll continue to do what we've done since we've gone public: execute, make substantial strategic progress that deepens our competitive moats, and deliver solid and consistent results. We had a great Q1, and I'm fired up for the remainder of 2022. And with that, management is ready to take your questions. So, Walter, if you can go ahead and open up the line for Q&A, I'd appreciate it.

Operator, Operator

Thanks, Matt. We have approximately 30 minutes for questions. We'll start by taking questions from sell-side analysts. First question comes from Jason Helfstein from Oppenheimer. John Campbell from Stephens.

John Campbell, Analyst

Can you guys hear me okay?

Matt Ehrlichman, CEO

Hey, John. How are you doing?

John Campbell, Analyst

I'm doing well, thanks for taking my questions. Matt, your team has expanded HOA into several states since the acquisition. I understand it takes some time to get established in each state, as you need to secure business and allow the recurring revenue to grow over time. We have reviewed some of the pre-Porch state filings for HOA, and in some of the states where you launched, we've seen quite impressive growth in the early stages. Are you experiencing similar results with those under your ownership? Additionally, regarding your guidance, are you factoring in any new state impacts for the full year?

Matt Ehrlichman, CEO

I'll kick it off, and then Adam will layer on top. We have made great progress with geographic expansion; it's been one of the many things that Adam and his team have focused on and executed really well. So kudos certainly to that team for going from 6 states, which is where that company has been for quite a while, to all of a sudden being now 17 states a little more than a year later, which was a good accomplishment. John, one of the things that we do is when we first launch in a state, the team has all the models in place to say, 'Hey, this is what we think is ideal pricing for this particular consumer in this particular home,' but we actually artificially start at a more conservative place. So we increase the price to make sure that we just aren't making any mistakes. As they start to get the data feedback loop in, we'll then be able to start bringing pricing down in that process; it varies by state and the amount of data that we're seeing. But give or take six months before you would really start to see much of a meaningful impact. And then to your point, as you start to sell more consumers from that space, a significant portion of our revenue you're recognizing over the course of that 12 months because it's spread out after you sell that policy. So is there significance in terms of what we're assuming for this year? I would say we're not being overly aggressive, certainly in terms of how much we're betting on new states. But I would say we're in line with what we have seen in past performance and anything else I missed that you want to lay on top of that?

Adam Kornick, President, InsurTech Division

Yeah. I think I would just sum that up by saying that we do all those things as Matt described, and we're comfortable with how that's panning out in terms of the guidance that we've given and how we're running the business. So, we feel great about that process leading to the profitable growth that we have.

John Campbell, Analyst

Makes sense. And then, Matt, just as a follow-up, I mean as much as I want you to take the gloves off and kind of fire back at the shorts on your stock, I think you've taken the right kind of professional approach. And obviously, the continued strides in the business, I think kind of speaks for itself. You're a better man than me. But if I can maybe pull you into the arena for just a minute here, what you just announced with the approval of state data, I think that's a pretty good evidence, kind of backing your long-term vision. That's clearly an angle that shorts have seen that the data is either worthless or you cannot use it. So I just maybe want to get your take, take a big step back and get your take on the extent and the type of data you're collecting on a daily basis, just to your software? And then how you envision that transforming the model over time, just as a kind of recap.

Matt Ehrlichman, CEO

Yeah, I appreciate the question, John. As I tell the team, the best thing for us to do is just—Marty said as well—ignore the noise and execute the heck out of the business. I mean, I feel very confident in what is ahead for the company. And I think people know the business well, you can see it showing up in the results. I agree with you. I think we've talked about our insurance; the two most important things of building a very large insurance company are one, who can get access to consumers and demand at a lower cost, and obviously, we have a huge portion of the US homebuyers that are going through our systems that lowers our CAC. And then secondly is data—who can price more effectively. We haven't provided an update on our market share in the home inspection industry, but we will do that at some point here this year, because we're excited about our progress. Last update, 28% of all of the home inspections that happen in the country are flowing through our software system. It just means that we know a huge amount about properties and uniquely valuable information about properties, because the person is in the home for three or four hours documenting everything about the home. Anyone I hear these questions occasionally about whether this data is valuable? If any one of those people were to just go sit down with an insurance actuary or a data scientist that does this for a living, they would—it's almost disbelief when we tell those people that people don't think that information will be valuable because how can it not be valuable? You have 40 pages of information about a home that includes the value of the home. I think that's incredibly valuable information that we can use to be able to price more effectively. So we're excited about it. It will show up in the results over time, and we'll just continue to do our thing and execute. Adam, I think, I know you're excited about that initiative. Anything you'd want to add there as well?

Adam Kornick, President, InsurTech Division

Yeah. I think you said it well. I would say I'd like to talk less and show results more, and this is a great place to do it. So that’s my goal.

Jason Helfstein, Analyst

Yeah, hi. So first, one of the things that we're hearing with InsurTech is inflationary pressure. So maybe talk about why you think you're well-insulated from it, or how you plan to manage it? And then second, I don't know if you already covered this because I'm multitasking, but gross margins were actually down year-over-year. How much of it was the acquisitions mix versus any other factors? Thanks.

Adam Kornick, President, InsurTech Division

So Jason, I think the place to focus is HOA, given that the inflation in home values in the US is really what's driving a lot of this. So two things to think about: HOA uses the Census Constant Quality Price Index to adjust the coverage A or home value of an insured home. So as of today, that index—so publicly known index that we use—has every renewal increasing the home value by low double digits, and there's a corresponding increase in premium. So we are aware of the inflationary metric and we designed the HOA insurance products to take that into account. And in addition, HOA filed average price changes of low double-digit percentages separately from the inflation measures in 2021. So when we put those two things together, we completely agree that inflation in the US, particularly in homes, is real, but we're addressing both with the product design and with housing pricing.

Marty Heimbigner, CFO

Yes, Jason, you're correct on the revenue—less cost of revenue margin was 66% in the first quarter of 2022 versus 78% in the prior year. That primarily reflects the fact that in April of 2021, we acquired Homeowners of America. And then later in the year, in September, we acquired American Home Protect, our warranty business. So what you're seeing there is that both the claims-related expenses for the insurance business and the warranty business show up in the cost of revenue in the first quarter of 2022. When you compare to 2021, we did not have a risk-bearing entity. We just had our insurance agency business. So the prior year was more of a pure Vertical Software Company with our Agency Business. And so that explains the lower cost of revenue—less cost of revenue margin.

Adam Kornick, President, InsurTech Division

And just to reiterate, Jason, what we're seeing in Q1 is exactly what we had guided to for the year and what we had expected. So certainly nothing that was different than what we've communicated previously.

Ryan Tomasello, Analyst

Hi everyone. Thanks for taking my questions and congrats on the strong start to the year. Nice to see the reaffirm 2022 guidance, you might have such a fluid backdrop in housing. You elaborated on the different signals across the business. But can you say if your outlook for the year has changed at all in specific areas of the business—maybe with stronger trends in certain segments offsetting larger headwinds than others, if that's the case at all?

Adam Kornick, President, InsurTech Division

Yes, I can speak a little bit to that. As we said in our prepared remarks, we are seeing some impact as a result of the slowing housing market, but we had anticipated that, and we had built it into our guidance. Most—in fact, the majority—70% of our revenue are recurring from either our software or insurance. If you get deeper into, say, some of our inspection and real estate businesses, some of our pricing models there are actually well-insulated because they're on a per-seat basis, as an example. So, we'll feel it a little bit there, but overall, not enough to fundamentally change our guidance and not enough to call this as doing better than that. A lot of this was anticipated and built into our guidance for this year.

Ryan Tomasello, Analyst

Got it, and congrats on the rollout of insurance products launching data. I realize it's still early days there, but are there any initial stats or steel commentary on how that rollout is going, tax rates? And I guess what the extent of the data actually is today across the platform?

Marty Heimbigner, CFO

So, we have launched it for an initial set of customers. And as we always do, we're rolling it out in a controlled manner. We want to ensure the experience for consumers and for loan officers is great. While we don't share conversion rates publicly, we are excited about the product. Some of the things that we're hearing from loan officers, they really love the UI. They think it's a great use case, especially when borrowers need homeowners insurance as—and then there are certain segments such as our builder division, where you're working with builders who just really like doing the manual insurance stuff. And so they have found it really valuable. But it's seamlessly integrated into that experience, and so we're super excited about it.

Matt Ehrlichman, CEO

Thanks, Ryan.

Ygal Arounian, Analyst

Hey guys. Good afternoon. First, just on the reinsurance challenges and the relationships. It sounds like they're kind of coming in as expected on the renewals. But at the same time, you're hanging on to a little bit more of the underwritten premium. Just can you help us think about how that might trend were close to halfway through the year? And is that something you expect to kind of revert back to normal levels, given the environment—does it make sense to hang on to more? Just how to think about how that evolves in the second half and maybe as we get into next year?

Adam Kornick, President, InsurTech Division

Yes, absolutely. The main thing I start with is those contracts almost always for a year. So we would not expect to see variations to the end of the year of the contract. It can be from more than one year in some cases. But I'm not aware of any time on everything less than a year. So, we wouldn't see any variation there that we would expect. And then our reinsurance program includes a couple of assets co-sharing as well as excess of loss. So we use those together. So we might be seeing a little bit less of a co-share, but we're buying more excess of loss, we think that protects us. And I don't have any view on what the right design yet will be for 2020. I think that's something that we'll tackle, but we're really comfortable in the capability we have and the ability to manage that through strong partnerships and by taking advantage of those different lines.

Matthew Neagle, COO

Sure. I can speak to this. I'll start first with revenue per monetized service. It has been and continues to be a core strategy for us to focus on high-value services, most notably insurance and warranty. We've communicated we see upside in revenue per monetized service because of that strategy of really focusing on those higher-value services. So, a lot of that is just the success and the expected impact of where we have been focused on higher-value services. In terms of number of monetized services, there is certainly seasonality at work between Q4 and Q1. I don't want to say we’re seeing anything unexpected, and I would certainly expect us to see material growth in Q3. But that's—I don't know if you would add anything more to that now.

Mike Grondahl, Analyst

Hey, thanks guys. Two quick questions. One, just as it relates to the home inspection offering that you have. Are you seeing any change in activity? Any change in the per-transaction fee or kind of customer leads that you're getting for free? And in the industry, are they waiving home inspections? Are you seeing anything around that?

Matt Ehrlichman, CEO

Sure. I can speak a little bit to that. I mean some of the changes that we're seeing are we're building out additional modules. We're seeing a pretty complete solution set come together, which has just given us more opportunities to engage with inspectors. It's a good time for us to engage right before they get busy in the peak season. In certain areas, the market is still hot. Certainly, some of the leading indicators are that there's some slowdown. And so we don't yet see a fundamental change, say, in the behavior of inspectors. But we have highlighted in the past in competitive markets, sometimes it works against us because people will waive inspections. And so as the market softens, you'll see less of that. What that means is just some of the ups and downs are muted a little bit for us.

Marty Heimbigner, CFO

Yes. I would encourage you, Mike, to go to v12data.com and take a look. It’s a unique offering that we have for brands and advertisers in the market, given our knowledge of who these people are that are buying homes far earlier than anybody else. There’s some great data actually on that site in terms of impacts that we’ve seen from other advertisers and customers.

Operator, Operator

With that, I'll turn it back over to Matt to wrap up with his final remarks.

Matt Ehrlichman, CEO

I appreciate the questions. Again, it’s the Porch team, who’s looking great quarter—a great start to the year. We're just going to stay on track, do what we do. With that, again, thanks, everybody, for joining. We appreciate it. Have a great rest of the day. Take care.