Porch Group, Inc. — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023; unaudited. Comparisons are with Q1 2022 unless noted. Porch operates Vertical Software and Insurance segments.
Financial performance
| Metric | Q1 2023 | Q1 2022 | Change |
|---|---|---|---|
| Revenue | $87.4 million | $63.6 million | +37% |
| Operating loss | $(38.5) million | $(28.7) million | Loss widened |
| Net loss | $(38.7) million | $(9.3) million | Loss widened |
| Loss per share, diluted | $(0.41) | $(0.10) | — |
| Adjusted EBITDA (non-GAAP) | $(21.9) million | $(10.4) million | Loss widened |
| Net cash used in operations | $(22.0) million | $(15.4) million | Cash use increased |
Revenue less cost of revenue was $36.1 million, down 5.9% from $38.4 million. Cost of revenue was 59% of revenue versus 40%; operating loss was approximately 44% of revenue versus 45%. The filing does not present a conventional gross-margin measure.
Insurance revenue rose 101% to $58.7 million, driven by higher warranty sales, insurance renewals, increased per-policy premiums and lower reinsurance ceding. Vertical Software revenue fell 17% to $28.6 million, reflecting a 26% year-over-year decline in industry home sales. Segment Adjusted EBITDA was $(7.2) million for Insurance and $(0.4) million for Vertical Software; Corporate and Other was $(14.3) million.
Balance sheet and liquidity
- At March 31, cash and cash equivalents were $179.4 million, restricted cash was $14.8 million, and investments were $93.1 million. Cash, cash equivalents and restricted cash totaled $194.2 million, down $34.5 million during the quarter.
- Current assets were $575.8 million and current liabilities $516.9 million. These totals include substantial insurance-related balances, including $292.8 million due from reinsurers and $246.5 million of deferred revenue.
- Debt carrying value was $435.8 million; aggregate debt principal was $444.2 million. This included $425 million principal on 0.75% convertible notes due 2026, plus advance funding, a term loan and other notes.
- Operating cash outflow was $22.0 million; investing outflow was $5.1 million; financing outflow was $7.3 million. Financing cash use included $5.6 million of share repurchases.
- Management said March 31 cash was sufficient for operations, planned capital expenditures, working capital and debt service for at least 12 months, while noting possible future capital needs and uncertainty about obtaining financing on acceptable terms.
Material changes and notable developments
- Insurance segment growth was offset by weaker Vertical Software activity and higher costs. Cost of revenue more than doubled, mainly due to increased insurance claims associated with reduced reinsurance ceding and the RWS warranty acquisition.
- Insurance net losses and loss adjustment expenses were $42.9 million versus $13.3 million. The company reduced its prior-year loss estimate by $0.6 million.
- Porch recorded a $2.0 million impairment charge on intangible assets in Vertical Software. Goodwill was not impaired, but reporting-unit fair value exceeded carrying value by less than 5% for Vertical Software and less than 10% for Insurance.
- On April 20, 2023, after quarter-end, Porch issued $333 million principal of 6.75% secured convertible notes due 2028, issued at 95% of par. It used proceeds to repurchase $200 million of 2026 notes and repay the $9.7 million HOA term loan, plus interest and fees. The filing says the transaction’s balance-sheet and income-statement impact could not then be estimated. As of April 30, $225 million of 2026 notes remained outstanding.
- The new 2028 notes carry significant restrictions, including a requirement to maintain at least $25 million of unrestricted cash. They are secured by a first-priority lien on substantially all assets of Porch and certain domestic subsidiaries.
Outlook, risks and contingencies
- Management cited higher interest rates, tight existing-home inventory and affordability challenges; existing-home sales declined more than 26% year over year in the quarter. Inflation and housing-market weakness could pressure revenue, costs and margins.
- Porch continued its shift to 50% reinsurance ceding and did not renew certain higher-risk policies. It filed an application to form a Texas reciprocal exchange; regulatory approval and acceptable terms are not assured.
- The company reported approximately 376,000 insurance and warranty policies in force and said its insurance operations span 22 states. Texas accounted for about 60% of Insurance segment insurance-related revenue, creating geographic concentration.
- Goodwill impairment remains a risk if operating performance, market conditions or valuation assumptions worsen. Investment securities had $5.4 million of gross unrealized losses, primarily attributed to interest-rate movements; management did not consider them credit-related impairments.
- Disclosure controls and procedures were deemed ineffective at March 31 because of a previously reported material weakness in internal control over financial reporting. Remediation is underway, but management gave no assurance it will succeed.
- Twelve TCPA-related proceedings remain at an early stage; an unfavorable outcome is reasonably possible, but the company could not estimate a loss range. The filing says it was not aware of proceedings expected to have a material adverse effect.
- No specific forward financial guidance was provided. Management described growth initiatives, including Porch Warranty, software enhancements and a new fixed-price moving product.
Important facts for investors to verify
- Whether the April 2023 refinancing improves liquidity and debt-service capacity after accounting for the new notes’ 6.75% coupon, discount, fees and covenants.
- Whether the lower reinsurance cession results in sustainable Insurance growth or further increases claims volatility and capital needs.
- Whether housing-market weakness continues to reduce Vertical Software revenue and whether the segment returns to positive adjusted EBITDA.
- Progress in remediating the material weakness and the effect of any subsequent control findings or restatements.
- Changes in goodwill impairment headroom, Texas reciprocal approval status, reinsurance recoverables and potential TCPA litigation exposure.
- Potential dilution from convertible notes, equity awards and acquisition-related contingent shares; the filing listed numerous securities excluded from diluted loss per share as antidilutive.