EverQuote, Inc. — Q2 2018 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2018; comparative periods are the same periods in 2017 unless noted. EverQuote operates an online marketplace that sells consumer insurance referrals to carriers, agents and distributors. Financial amounts below are in millions of dollars unless stated otherwise.
Financial performance and liquidity
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Revenue | $41.1 | $30.0 | $81.8 | $61.8 |
| Cost of revenue | $2.9 | $1.9 | $5.5 | $3.6 |
| Operating loss | $(1.6) | $(1.6) | $(2.9) | $(3.1) |
| Net loss | $(1.7) | $(1.7) | $(3.1) | $(3.3) |
| Adjusted EBITDA (non-GAAP) | $(0.6) | $(0.8) | $(1.0) | $(1.5) |
| Variable marketing margin (non-GAAP) | $12.8 | $9.1 | $24.5 | $18.0 |
- Revenue grew 36.9% in Q2 and 32.5% in the first half. Automotive revenue was $35.5 million in Q2; home and life revenue was $5.6 million.
- Q2 gross profit, calculated as revenue less cost of revenue, was approximately $38.2 million, or 93.0% of revenue, versus approximately $28.1 million, or 93.7%, a year earlier. Operating margin was (3.9)% versus (5.3)%; net margin was (4.2)% versus (5.6)%.
- Sales and marketing expense rose 32.5% to $34.9 million in Q2, primarily reflecting higher advertising and marketing spend. It represented 85.0% of revenue, down from 87.8%. R&D rose 51.5% to $3.2 million; general and administrative expense rose 37.6% to $1.7 million.
- Quote requests were 3.018 million in Q2, up 2.3%; first-half requests were 6.475 million, up 9.5%. Management attributed growth in requests to increased online marketplace advertising.
- Variable marketing margin is a company-defined non-GAAP measure and is not overall profitability. It increased to 31.2% of Q2 revenue from 30.3%, and to 30.0% for the first half from 29.1%. Adjusted EBITDA also remains negative.
- Cash was $2.4 million at June 30. Current assets were $22.1 million and current liabilities $22.2 million. Operating cash use was $1.0 million and investing cash use was $1.4 million for the first half; cash increased $0.02 million after financing flows.
- Long-term debt was $7.0 million at June 30, with $4.0 million still available on the revolving credit line. The line is secured by substantially all assets, has financial covenants, and bears floating interest; the company reported covenant compliance at quarter-end.
Material changes and unusual items
- Revenue increased in both verticals: Q2 automotive revenue rose $6.6 million and home and life rose $4.5 million year over year. Management cited higher revenue per quote request and provider demand in automotive, and more quote requests in home and life.
- Cost of revenue increased faster than revenue, to 7.0% of revenue from 6.3%, mainly from higher call-center and hosting costs associated with increased volume.
- Net loss attributable to common stockholders was $28.1 million in Q2 and $40.5 million for the first half, largely because of preferred-stock redemption-value accretion of $26.4 million and $37.4 million, respectively. This accretion is distinct from the reported net loss and substantially affected loss per share.
- On July 2, 2018, after quarter-end, EverQuote completed its IPO, selling 3.125 million primary Class A shares at $18 per share and receiving approximately $48.6 million net proceeds. Existing shareholders also sold 1.5625 million shares; EverQuote received no proceeds from those sales. Preferred stock converted into 12.596 million Class B shares.
- In July, the company repaid the $7.0 million revolving-credit balance; as of July 31, the full $11.0 million facility was available. The IPO and repayment are subsequent events, not June 30 balance-sheet cash and debt positions.
Outlook, risks and contingencies
- No numerical revenue, earnings or margin guidance is provided. Management said existing cash plus IPO proceeds were expected to fund operating expenses and capital expenditures for at least 12 months from the August 10 issuance date, excluding available revolver borrowings.
- Management expects continued substantial sales and marketing investment, while anticipating that sales and marketing expense as a percentage of revenue may decline over the longer term as the business scales. It expects R&D and public-company-related G&A expenses to increase.
- Key risks include dependence on insurance providers whose agreements are short term and may end without notice; customer concentration (one customer represented 22% of Q2 revenue); reliance on paid online advertising and third-party service providers; competition; and the ability to grow beyond automotive insurance.
- Other disclosed risks include privacy, cybersecurity and regulatory compliance, particularly insurance and telephone/email marketing rules; possible public-company compliance costs; and the potential effect of variable-rate debt and lender covenants. Class B shares carry ten votes per share versus one for Class A, concentrating voting control.
- Operating lease commitments totaled $12.2 million at June 30, with leases extending through 2024. The company reported no material legal proceedings and no litigation contingency reserves; ordinary-course claims and indemnification obligations remain possible.
Important facts for investors to verify
- Whether revenue growth and higher revenue per quote request can continue without a disproportionate rise in advertising, call-center and hosting costs.
- The sustainability and economics of customer acquisition: quote-request growth was modest in Q2, and a single customer accounted for a significant share of revenue.
- Post-IPO liquidity and debt position, including the timing and effect of the July revolver repayment, covenant requirements and cash use after the offering.
- The difference between GAAP net loss and common-stockholder loss per share, including the preferred-stock accretion recorded before its IPO conversion.
- Potential dilution from outstanding options and restricted stock units, and the governance and liquidity implications of the dual-class share structure and post-IPO share sales.