EverQuote, Inc. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020; comparisons are with Q1 2019 unless otherwise noted. EverQuote operates an online insurance marketplace and earns revenue by selling consumer referrals to insurance providers. Amounts below are in U.S. dollars; financial statement figures are in millions unless stated otherwise.
Financial performance
| Metric | Q1 2020 | Q1 2019 | Change / context |
|---|---|---|---|
| Revenue | $81.4 | $52.2 | +55.8% |
| Cost of revenue | $5.3 | $3.7 | 6.6% of revenue, versus 7.0% |
| Gross profit / margin | $76.0 / 93.4% | Not stated | Calculated from reported revenue and cost of revenue |
| Operating loss | $(1.7) | $(4.6) | Operating margin improved to -2.0% |
| Net loss | $(1.4) | $(4.4) | Basic and diluted loss per share: $(0.05), versus $(0.17) |
| Adjusted EBITDA | $3.8 | $(1.3) | Non-GAAP; 4.7% of revenue |
| Operating cash flow | $3.9 | $(3.5) | Improved year over year |
| Investing / financing cash flow | $(0.9) / $1.4 | $(0.7) / $0.2 | Investing was primarily property, equipment and capitalized software; financing was option exercises |
Sales and marketing was $66.5 million, or 81.7% of revenue, compared with $44.6 million, or 85.4%. Research and development was $6.5 million (7.9% of revenue) and general and administrative expense was $4.7 million (5.8%). Stock-based compensation was $4.5 million, up from $2.8 million.
Variable marketing margin, defined by the company as revenue less advertising expense and not as a profitability measure, was $23.8 million, or 29.3% of revenue, versus $13.9 million, or 26.5%. Advertising expense rose to $57.5 million from $38.4 million.
Liquidity and balance sheet
- At March 31, 2020, cash and cash equivalents were $50.5 million; cash, cash equivalents and restricted cash were $50.7 million. Current assets were $93.3 million and current liabilities $42.0 million.
- The company had no borrowings outstanding under its revolving credit facility and reported $11.0 million available. The facility was secured by substantially all assets, subject to covenants, and its availability was extended to May 2020; the filing states an expiration date of May 15, 2020.
- Management expected cash and cash equivalents, without relying on the credit facility, to fund operating expenses and capital expenditures for at least 12 months from issuance of the financial statements.
- Total liabilities were $43.0 million; the filing reports no outstanding revolving debt at quarter end.
Changes and operating drivers
- Quote requests increased 79.7% to 7.392 million. Management attributed revenue growth primarily to higher quote-request volume from increased advertising and improved traffic acquisition; it also reported a decline in revenue per quote request, without giving a clear value.
- Automotive revenue rose to $67.6 million from $45.0 million; other insurance vertical revenue rose to $13.7 million from $7.2 million. Automotive represented about 83% of Q1 revenue.
- Direct channels generated 93% of revenue, unchanged from Q1 2019. Management describes direct distribution as generally offering higher referral pricing and better data feedback than indirect distribution.
- Accounts receivable increased to $35.7 million from $32.2 million. Customer concentration remained material: one customer represented 24% of Q1 revenue and 15% of quarter-end receivables.
Outlook, risks and contingencies
- Guidance: The filing provides no specific numerical revenue, earnings or cash-flow guidance. Management expects sales and marketing expense to rise in the near term in absolute dollars and as a share of revenue, with a longer-term expectation of lower relative expense as the business scales. It expects research and development and general and administrative expenses to increase in the near term. Management said it believes revenue per quote request may decline in the near term and increase over the long term.
- COVID-19: Management said the pandemic had not materially adversely affected Q1 financial results, but its continuing effects were uncertain. The filing discusses possible disruption to consumer traffic, provider demand, operations and cash flows, as well as cybersecurity and workforce risks from remote work. Management also believed pandemic-related carrier profitability could encourage online customer acquisition; this was an expectation, not a reported result.
- Legal matters: The company agreed to a $4.75 million settlement of IPO-related securities claims, subject to court approval scheduled for June 11, 2020. It expected approximately $3.6 million of insurance reimbursement and had recorded the settlement liability and receivable. A Colorado putative class action filed April 29, 2020 alleges violations of the Telephone Consumer Protection Act; the company disputes the claims and intends to defend them.
- Tax contingency: A state tax assessor requested uncollected sales taxes. The company disputes that its services are taxable there; potential exposure was estimated at approximately $1.5 million including interest and penalties, and no liability was recorded because a loss was not deemed probable.
- Concentration and execution risks: A substantial portion of revenue depends on auto insurance and a major customer; provider arrangements are generally short term and providers may reduce spending or leave. The business also depends on paid advertising and online traffic, and faces competition, regulatory and privacy obligations, and uncertainty about COVID-19 effects.
- Other items: The company reported an accumulated deficit of $108.5 million and a history of operating losses, despite positive adjusted EBITDA in Q1. It expected to adopt lease accounting in 2021 and anticipated material right-of-use assets and lease liabilities. No material change in disclosure controls was reported; management concluded disclosure controls were effective.
Key facts for investors to verify
- Whether quote-request growth and advertising spend translate into durable revenue and improved revenue per quote request, margins and GAAP profitability.
- The extent of revenue exposure to the largest customer and auto insurance, and whether provider demand and direct-channel economics remain stable.
- Post-quarter COVID-19 effects on consumer traffic, insurer marketing budgets, operations and cash generation.
- Final court approval and insurance recovery for the $4.75 million securities settlement, and developments in the Colorado TCPA case and state sales-tax inquiry.
- Status and terms of the credit facility after its stated May 2020 expiration, along with the company’s liquidity relative to continuing losses and substantial stock-based compensation.