Porch Group, Inc. annual report, FY2022

Porch Group, Inc. — FY 2022 Form 10-K

Reporting period: Fiscal year ended December 31, 2022. This is an annual filing, not a standalone Q4 report; quarterly figures below are unaudited. Porch operates two segments: Vertical Software, serving home-service businesses and consumers, and Insurance, comprising its carrier, agency, and home-warranty businesses.

Financial performance and liquidity

Metric	FY 2022	FY 2021
Revenue	$275.9 million	$192.4 million
Operating loss	$177.0 million	$83.4 million
Net loss	$156.6 million	$106.6 million
Net loss per diluted share	$1.61	$1.14
Net cash used in operating activities	$17.7 million	$34.8 million
Adjusted EBITDA loss (non-GAAP)	$49.6 million	$24.0 million

• Revenue less cost of revenue was $168.4 million, or approximately 61% of revenue, versus $133.7 million, or approximately 69%, in 2021. Cost of revenue rose to 39% of revenue from 31%.
• Revenue grew 43%; management attributed approximately $63 million of the increase to acquisitions, with the remainder from post-acquisition and organic growth.
• Vertical Software revenue was $154.9 million, up from $137.2 million. Insurance revenue was $121.0 million, up from $55.3 million. Insurance represented 44% of total revenue versus 29% in 2021.
• Segment Adjusted EBITDA was $14.7 million for Vertical Software, down from $20.7 million; Insurance recorded a $5.5 million loss versus $9.0 million of positive Adjusted EBITDA in 2021. Corporate and Other costs were $58.8 million.
• Q4 unaudited revenue was $64.1 million and net loss was $35.5 million.
• At year-end, cash and cash equivalents were $215.1 million, restricted cash was $13.5 million, and total assets were $1.05 billion. Cash and cash equivalents were down from $315.7 million at the prior year-end.
• Debt principal was $451.1 million, including $425 million of 0.75% convertible notes due 2026, $15.7 million of warranty premium advance funding, and a $10 million term loan. Management said available cash was expected to fund operations, planned capital expenditures, working capital, and debt service for at least 12 months.
• Current assets were $610.6 million and current liabilities $515.6 million. The balance sheet includes $299.1 million of reinsurance balances due and $270.7 million of deferred revenue.
• Operating, investing, and financing cash flows were respectively negative $17.7 million, negative $79.7 million, and positive $1.2 million. Investing outflows included $38.6 million for acquisitions, $52.5 million for investments, and $8.1 million for internally developed software, partly offset by investment maturities and sales.

Material changes and unusual items

• Net loss increased by $50.0 million year over year. FY 2022 included $61.4 million of impairment charges: $43.7 million of Insurance goodwill and $17.7 million of Vertical Software intangible assets; there were no comparable impairment charges in 2021.
• Insurance claims and loss-adjustment costs increased amid severe weather, including Hurricane Ian and Winter Storm Elliott, and inflation-related claims-cost pressure. Cost of revenue increased 83% to $107.6 million.
• The company acquired Residential Warranty Services in April 2022 for $38.8 million, with additional Florida and California operations subject to approvals and expected to close in 2023 for approximately $2.4 million, subject to adjustments.
• Porch repurchased 2.39 million shares in Q4 for $4.4 million under a program authorizing up to $15 million of stock or convertible-note repurchases through June 30, 2023. It reported buying another 1.40 million shares for $3.1 million in Q1 2023.
• The filing restated 2022 interim financial statements for errors in accounting for ceded reinsurance losses, along with other immaterial errors. The restatement did not affect reported cash; the annual statements are presented as audited.

Outlook, risks, and contingencies

• The filing provides no specific forward-year revenue or earnings guidance. Management cited ongoing investment in consumer experience, the app and digital platform, data infrastructure, software modules, insurance expansion, and internal controls.
• Management identified a difficult housing environment: existing-home sales fell approximately 18% in 2022 amid higher interest rates, affordability challenges, and tighter inventory. About 20% of company revenue is directly related to housing transactions.
• Key Insurance risks include catastrophe exposure, claims inflation, reserve-estimation uncertainty, reinsurance availability and counterparty risk, and state approval and capital requirements. Two reinsurers accounted for 45% of Insurance reinsurance receivables in aggregate at year-end.
• Porch planned to seek Texas approval for a reciprocal exchange to conduct its underwriting business through a new structure. Approval, terms, launch, and potential expansion remain uncertain.
• Management reported ineffective disclosure controls and ineffective internal control over financial reporting at December 31, 2022. The material weakness involved IT general controls at Homeowners of America and dependent business-process controls. The auditor issued an adverse opinion on internal control, while giving an unqualified opinion on the financial statements. Remediation is planned and remains to be demonstrated.
• Twelve TCPA-related proceedings were pending; an unfavorable outcome was described as reasonably possible, but the potential loss range could not be estimated. The wage-and-hour class action settlement was finalized in 2022. Porch prevailed in the Kandela arbitration and obtained a judgment, but reported that the judgment had not been paid.

Most important facts for investors to verify

• How much revenue growth is sustainable organically, apart from acquired businesses, and whether the housing slowdown continues to weaken transaction-linked revenue.
• Whether Insurance underwriting results, catastrophe claims, loss reserves, and reinsurance recoverables develop as expected, including the concentration among reinsurers.
• Whether cash generation improves and whether cash, restricted funds, debt service, and warranty advance-funding obligations support the company’s stated liquidity outlook.
• Whether the HOA IT-control material weakness is remediated, and whether future filings show reliable controls and consistent accounting after the interim restatement.
• Regulatory progress and economics of the proposed reciprocal exchange, as well as outcomes of the TCPA litigation and recovery of the Kandela judgment.
• Potential dilution from convertible notes, equity awards, and acquisition-related contingent shares; the 2026 Notes’ initial conversion price is approximately $25 per share.