EverQuote, Inc. — Q2 2022 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2022. EverQuote operates an online insurance marketplace and a direct-to-consumer insurance agency, earning revenue primarily from consumer referrals and policy commissions. Financial amounts below are in millions of dollars unless otherwise noted.
Financial performance
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Revenue | $101.9 | $105.1 | $212.6 | $208.9 |
| Operating loss | $(3.8) | $(1.9) | $(9.5) | $(5.7) |
| Net loss | $(3.8) | $(1.9) | $(9.5) | $(5.7) |
| Adjusted EBITDA, non-GAAP | $1.4 | $6.6 | $3.9 | $11.4 |
| Variable marketing margin (VMM) | $33.1 | $32.8 | $67.4 | $64.3 |
| VMM as percentage of revenue | 32.5% | 31.2% | 31.7% | 30.8% |
| Operating cash flow | Not separately reported | Not separately reported | $(7.4) | $11.2 |
Q2 revenue declined 3.0% year over year; first-half revenue grew 1.8%. Automotive revenue was $81.4 million in Q2 (down from $86.4 million) and $169.1 million for the half (down from $170.8 million). Other verticals rose to $20.5 million in Q2 and $43.5 million for the half. Commissions were about 13% of revenue in both 2022 periods, versus less than 10% in 2021.
Sales and marketing expense was $87.9 million in Q2 and $184.0 million for the first half; advertising expense was $68.8 million and $145.2 million, respectively. Q2 sales and marketing was 86.2% of revenue, compared with 81.5% a year earlier. Stock-based compensation totaled $7.6 million in Q2 and $15.1 million for the half.
Liquidity, cash flow and debt
- Cash and cash equivalents were $41.3 million at June 30, 2022, versus $34.9 million at December 31, 2021. Current assets were $92.3 million and current liabilities $48.9 million.
- First-half operating cash use of $7.4 million compared with $11.2 million provided in 2021. The company cited an $11.3 million increase in other assets, principally reflecting growth in commissions receivable. Total commissions receivable increased to $34.1 million, of which $24.6 million was long-term.
- No borrowings were outstanding under the credit line at June 30. On July 15, 2022, the company amended its facility to provide a $35 million revolving line and access to a term loan of up to $10 million, subject to agreement terms and borrowing conditions. The amended facility is secured by substantially all company assets and includes financial covenants.
- Management said cash on hand was expected to cover operating and capital expenditure needs for at least 12 months from issuance, without relying on credit-facility availability.
Material changes and unusual items
- Q2 automotive revenue fell by $5.0 million, primarily because carrier referral spend declined by $10.5 million, partly offset by $5.5 million more automotive commission revenue. Other-vertical revenue increased by $1.8 million, supported by commission growth.
- Adjusted EBITDA declined substantially year over year in both the quarter and half-year. The measure excludes recurring stock-based compensation and other items and is not a GAAP measure.
- Acquisition-related expense was a credit of $3.8 million in Q2 and $4.7 million for the first half, mainly from lower estimated contingent consideration for the PolicyFuel and Eversurance acquisitions. This non-cash fair-value change benefited reported operating results.
- In February, EverQuote issued 1,004,016 Class A shares for $15.0 million in a private placement to an entity controlled by its chairman and co-founder.
Outlook, commentary and risks
- Management expected 2022 revenue to remain relatively flat or decrease slightly: anticipated commission growth was expected to be offset by lower automotive referral revenue. It also expected quarterly variation, including seasonality in health commissions.
- Management attributed pressure on auto referral demand and pricing to insurers’ higher claims severity, inflation in vehicle repair and medical costs, weaker underwriting performance, and resulting reductions in customer-acquisition spending. It expected these pressures to continue in the near term.
- The company expected near-term sales and marketing expense to increase, both in dollars and as a share of revenue, particularly as it expands its DTC agency. It also anticipated higher R&D spending as it develops its platform.
- Customer concentration remains significant: two customers represented 20% and 10% of Q2 revenue, and 17% and 11% of first-half revenue. The company also depends heavily on automotive insurance; that vertical represented about 80% of first-half revenue.
- A state tax authority requested uncollected sales taxes. EverQuote disputes that its services are taxable; potential exposure, including interest and penalties, was estimated at approximately $1.5 million and no liability was recorded because a loss was not considered probable.
- Disclosure controls and procedures were deemed ineffective due to material weaknesses in IT controls affecting revenue-related systems, including user access, program changes, and completeness and accuracy of automated revenue data. The filing said these weaknesses had not caused a financial-statement misstatement and that a remediation plan was underway.
- COVID-19 had not materially adversely affected financial results through June 30, 2022, but management cited continuing uncertainty. The filing also highlights risks from short-term provider relationships, competition for consumer traffic, privacy and regulatory compliance, and the company’s history of losses.
Most important facts for investors to verify
- Whether auto insurers’ marketing reductions and claims-cost pressures persist, and how referral revenue, pricing, and customer spend respond.
- Whether growth in commission revenue translates into cash collections, given the $34.1 million commissions receivable balance and its $24.6 million long-term portion.
- Whether operating cash use continues and whether the company achieves its stated 12-month liquidity expectation.
- The terms, borrowing-base availability, interest costs, and covenant headroom of the amended credit facility; no facility borrowing was outstanding at quarter end.
- Progress in remediating the revenue-system control weaknesses, and any effect on reporting reliability or audit oversight.
- Developments in the disputed sales-tax matter and any change in the estimated potential exposure.
- How much reported performance depends on non-cash contingent-consideration gains and stock-based compensation, and how non-GAAP adjusted EBITDA reconciles to GAAP results.