EverQuote, Inc. — Q3 2020 Form 10-Q
Reporting period: Quarter ended September 30, 2020; comparisons are with Q3 and the first nine months of 2019. Amounts below are in U.S. dollars; financial statement figures are rounded to millions unless otherwise noted.
Business context
EverQuote operates an online insurance marketplace and earns revenue by selling consumer referrals to insurance carriers, agents and indirect distributors. Auto insurance remains its largest business. In September 2020, the company acquired Crosspointe Insurance & Financial Services, a health insurance agency, to expand its health and Medicare offerings.
Financial performance and liquidity
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Revenue | $90.0m | $67.1m | $249.6m | $175.0m |
| Operating income (loss) | $(3.3)m | $(0.1)m | $(7.9)m | $(6.9)m |
| Net income (loss) | $(3.2)m | $0.2m | $(7.4)m | $(6.2)m |
| Adjusted EBITDA, non-GAAP | $5.2m | $3.9m | $13.0m | $4.1m |
| Quote requests | 6.291m | 5.516m | 20.460m | 14.148m |
| Variable marketing margin | $29.4m | $20.9m | $76.7m | $51.5m |
- Q3 revenue grew 34.1% year over year; nine-month revenue grew 42.6%. Auto revenue was $74.8m in Q3 and $207.0m year to date. Other verticals contributed $15.2m and $42.6m, respectively.
- Q3 operating margin was approximately (3.7)% versus (0.1)% a year earlier. Cost of revenue was 6.0% of revenue in both quarters. Sales and marketing rose to 81.8% of revenue from 79.3%.
- Advertising expense increased to $60.5m in Q3 from $46.2m and to $172.9m for nine months from $123.5m. Variable marketing margin, defined as revenue less advertising, increased 40.7% in Q3 and 49.0% year to date. The company cautions that this is not a measure of profitability.
- Stock-based compensation was $7.2m in Q3 and $18.0m for nine months, versus $3.3m and $9.3m, respectively, in 2019. Adjusted EBITDA excludes stock-based compensation and other items and should be considered alongside GAAP results.
- Operating cash flow was $13.9m for the first nine months, compared with $0.5m in 2019. Investing used $17.6m, including $14.9m for Crosspointe; financing provided $3.6m, primarily from option exercises. Cash, cash equivalents and restricted cash ended at $46.1m.
- At September 30, cash and cash equivalents were $45.9m and current assets were $94.5m versus current liabilities of $46.7m. The company reported $25.0m of availability under its revolving credit facility; the supplied filing text does not provide a clear outstanding borrowing balance.
- The amended facility with Western Alliance Bank matures in August 2022, is secured by substantially all company assets, and bears interest at the greater of 3.25% or the prime rate. It includes a minimum asset coverage covenant of 1.5 to 1.
Material changes and management commentary
- Revenue growth reflected higher auto revenue per quote request in Q3, and higher quote-request volume and revenue per request for auto over the nine-month period. Growth in other verticals was driven by increased quote requests, partly offset by lower revenue per request.
- Quote requests rose 14.1% in Q3 and 44.6% for nine months, primarily due to increased advertising and improved traffic acquisition. Direct channels generated 93% of revenue, compared with 95% in Q3 2019.
- Crosspointe purchase consideration was preliminarily valued at $16.7m: $14.9m cash and $1.8m contingent consideration. The purchase-price allocation includes $9.6m goodwill and $3.9m acquired intangible assets; valuation remains preliminary.
- Management said COVID-19 had not materially adversely affected results through September 30, 2020, but its future effects remain uncertain. The company noted potential changes in consumer shopping behavior and customer operations, while also believing the pandemic could accelerate insurers’ shift toward online customer acquisition.
- Management expects cash and cash equivalents to fund operating and capital needs for at least 12 months. It expects sales and marketing expense to rise in the near term in dollars and as a percentage of revenue, with potential longer-term efficiency gains; research and development expense is also expected to increase. No specific financial guidance was provided.
- The company expects to cease being an emerging growth company at December 31, 2020 and anticipates additional public-company reporting requirements, including auditor attestation on internal control. It also expects material right-of-use assets and lease liabilities upon adopting the lease standard in Q4 2020.
Risks, contingencies and unusual items
- Customer concentration is material: one customer represented 26% of Q3 revenue and 23% of nine-month revenue. Two customers represented 18% and 11% of accounts receivable at quarter-end. Revenue also depends heavily on auto insurance and advertising acquisition channels.
- A state tax assessor requested payment of uncollected sales taxes. EverQuote disputes that its services are taxable; potential exposure is approximately $1.5m, including interest and penalties, and no liability was accrued because loss was not deemed probable.
- The securities class action relating to the IPO was settled for $4.8m, of which $3.6m was reimbursed by insurance; court approval was final in June 2020. Two TCPA cases were resolved individually for immaterial amounts, with the company denying wrongdoing.
- Other principal risks include reliance on short-term customer arrangements and insurer bids, competition and advertising costs, privacy and cybersecurity, insurance and marketing regulation (including Medicare), COVID-19 uncertainty, acquisition integration, and the dual-class share structure. Class B shares carry ten votes each; insiders and affiliated holders controlled approximately 80% of voting power at quarter-end.
- Management concluded disclosure controls and procedures were effective as of September 30, 2020 and reported no material quarterly change in internal control over financial reporting.
Important facts for investors to verify
- Whether revenue growth and quote-request gains can be sustained without further deterioration in GAAP operating results, and how advertising returns compare with rising acquisition spend.
- The identity and ongoing purchasing plans of the largest customer, and the effect of customer concentration on revenue and receivables.
- The final Crosspointe purchase-price allocation, contingent consideration outcomes, and acquired business performance and integration.
- The status and potential financial exposure of the sales-tax inquiry, and any developments in other legal or regulatory matters.
- Actual borrowing under the credit facility, covenant headroom, and the impact of lease adoption and emerging-growth-company compliance costs.