EverQuote, Inc. — Q1 2019 Form 10-Q
Business context and period: Unaudited results for the three months ended March 31, 2019, compared with Q1 2018. EverQuote operates a U.S. online insurance marketplace and earns revenue by selling consumer referrals to insurers, agents and indirect distributors.
Key financial metrics
| Metric | Q1 2019 | Q1 2018 |
|---|---|---|
| Revenue | $52.2 million | $40.7 million |
| Operating loss | $4.6 million | $1.2 million |
| Net loss | $4.4 million | $1.3 million |
| Adjusted EBITDA, non-GAAP | $(1.3) million | $(0.4) million |
| Operating cash flow | $(3.5) million | $(0.8) million |
| Capital expenditures | $0.7 million | $0.7 million |
- Revenue grew 28.2% year over year. Automotive revenue was $45.0 million; home and life revenue was $7.2 million.
- Cost of revenue was $3.7 million, or 7.0% of revenue, versus $2.6 million, or 6.4%. Sales and marketing was $44.6 million (85.4% of revenue); research and development was $4.7 million; general and administrative expense was $3.8 million.
- Variable marketing margin (revenue less advertising expense) was $13.9 million, up 24.5%; it represented 26.5% of revenue versus 27.3% a year earlier. Management cautions that this metric is not a measure of profitability.
- Quote requests rose 19.0% to 4.113 million. Direct channels contributed 93% of revenue, up from 86%.
- Cash and cash equivalents were $37.7 million at March 31, down from $41.6 million at year-end. Current assets were $64.9 million and current liabilities $27.3 million. The company had no revolving-credit borrowings and $11.0 million available under its facility; it reported covenant compliance.
- Total liabilities were $28.5 million; the filing reports no outstanding debt at quarter-end. Operating cash use increased, principally reflecting the net loss and an $8.4 million increase in receivables, partly offset by higher payables and accrued liabilities.
Material changes and management commentary
- Revenue growth reflected more quote requests, driven by increased advertising, and higher revenue per quote request associated with greater provider demand.
- Advertising expense increased $8.8 million to $38.4 million. Management says it expects sales and marketing expense to rise near term in dollars and as a percentage of revenue, with a potential longer-term decline in percentage terms as scale and technology efficiencies improve.
- Research and development and general and administrative expenses rose 79% and 123%, respectively, primarily from hiring, stock-based compensation, professional fees and public-company costs. Stock-based compensation totaled $2.8 million, versus $0.6 million.
- Management expects revenue per quote request could remain flat or decline in the near term, while it believes it may increase over the long term. It expects to continue investing in marketing, product development and technology. No specific revenue, earnings or cash-flow guidance is provided.
- Management believes existing cash will fund operating expenses and capital expenditures for at least 12 months from the May 10, 2019 issuance date, excluding available credit. The company has a history of losses and may continue to incur losses; it says costs could be reduced if revenue goals are not met.
- The company adopted ASC 606 in Q1 2019 using the modified retrospective method; adoption had no material financial-statement impact. It expects adoption of the new lease standard in 2020 to result in material right-of-use assets and lease liabilities.
Risks, contingencies and unusual items
- Two purported shareholder class actions filed in New York in February 2019 allege securities-law violations related to IPO disclosures about quote-request volume. The cases were moving toward consolidation; the company denies wrongdoing and intends to defend them. No litigation reserve was recorded.
- Customer concentration is significant: two customers represented 19% and 11% of Q1 revenue. The filing identifies short-term provider relationships, auction pricing, advertising-channel dependence and auto-insurance exposure as material business risks.
- Operating lease commitments totaled $14.0 million at March 31, 2019. The revolving facility is secured by substantially all company assets and includes financial and other covenants.
- Class B shares carry ten votes per share versus one vote for Class A. The filing states that directors, executives and holders of more than 5% collectively held approximately 89.3% of voting power as of April 30, 2019.
- Q1 2018 common-stockholder loss included $11.0 million of preferred-stock accretion; therefore its $1.42 loss per share is not directly comparable with Q1 2019’s $0.17 loss per share.
Important facts for investors to verify
- Whether quote-request growth and provider demand can support revenue growth without further reducing variable marketing margin or profitability.
- Whether customer concentration, particularly the largest customers, changes and whether providers sustain referral spending and auction bids.
- Receivables collection, operating cash use and the company’s stated 12-month liquidity outlook.
- Developments in the IPO-related securities litigation and any resulting costs or business effects.
- The impact of stock-based compensation, future lease accounting, and the company’s dual-class voting structure on shareholders.