EverQuote, Inc. — Q3 2022 Form 10-Q
Reporting period: Three and nine months ended September 30, 2022. Financial statements are unaudited. Amounts below are in millions of dollars unless stated otherwise.
Business context
EverQuote operates an online marketplace connecting insurance shoppers with insurance providers, primarily by selling consumer referrals; it also earns commissions on policies sold. Automotive insurance remained the largest vertical, representing about 85% of Q3 revenue and 81% of nine-month revenue.
Key financial metrics
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Revenue | $103.2 | $107.6 | $315.8 | $316.4 |
| Operating loss | $(6.6) | $(7.8) | $(16.1) | $(13.5) |
| Net loss | $(6.5) | $(5.3) | $(15.9) | $(11.0) |
| Adjusted EBITDA | $2.0 | $2.7 | $5.8 | $14.1 |
| Variable marketing margin (VMM) | $31.8; 30.8% of revenue | $32.4; 30.1% | $99.2; 31.4% | $96.7; 30.5% |
Q3 cost of revenue was $5.9 million, or 5.7% of revenue. Advertising expense was $71.4 million in Q3 and $216.6 million for the nine-month period. Adjusted EBITDA and VMM are non-GAAP measures; VMM is revenue less advertising expense and is not a measure of profitability.
At September 30, 2022, cash and cash equivalents were $36.6 million, accounts receivable was $40.4 million, total assets were $163.8 million, total liabilities were $56.6 million, and stockholders’ equity was $107.2 million. Commissions receivable totaled $38.4 million, of which $28.2 million was classified as long-term.
For the first nine months, operating activities used $10.9 million of cash, investing activities used $3.2 million, and financing activities provided $15.7 million. Cash increased by $1.5 million, to $36.6 million. Operating cash use included a $14.8 million increase in other assets and a $4.9 million increase in accounts receivable.
Material changes versus comparable periods
- Q3 revenue declined 4.0% year over year. Automotive revenue fell $1.5 million and other-vertical revenue fell $2.8 million. In both areas, lower referral revenue was partly offset by higher commission revenue.
- Nine-month revenue was nearly flat, down 0.2%. Automotive revenue decreased $3.3 million, partly offset by a $2.7 million increase in other verticals.
- Q3 net loss widened by $1.2 million, while the nine-month net loss widened by $5.0 million. Nine-month adjusted EBITDA declined by $8.2 million.
- Nine-month sales and marketing expense rose 2.8%, mainly reflecting increased personnel and DTC-related costs; research and development expense fell 9.7%, while general and administrative expense rose 15.5%.
- Commission revenue grew as referral revenue weakened. The share of revenue from indirect channels increased to 15% in Q3 from 11% a year earlier; direct channels accounted for the balance.
Outlook, risks and unusual items
- Management expected Q4 2022 revenue to decline sequentially, as anticipated automotive referral revenue declines were expected to outweigh higher commission revenue. It cited reduced auto-carrier marketing spend amid inflation-driven claim severity and Hurricane Ian; a major carrier had begun returning to more normalized spending in August.
- Management expected cash on hand to fund operating expenses and capital expenditures for at least 12 months from issuance, excluding credit-facility availability. The company had incurred ongoing losses and warned that additional spending on its DTC agency, employees, and technology could increase costs.
- In July 2022, the company amended its Western Alliance Bank facility: the revolving line increased from $25 million to $35 million and was extended to July 2025, with access to a term loan of up to $10 million. No revolving borrowings were outstanding at quarter-end; the filing does not report a term-loan draw. Borrowings are secured by substantially all company assets and subject to covenants; the company reported covenant compliance.
- Insurance-provider agreements are generally short term, and provider spending can change with little notice. Two customers represented 30% and 10% of Q3 revenue; one customer represented 29% of accounts receivable and commissions receivable at quarter-end. Automotive concentration and the accuracy of commission lifetime-value estimates are material business risks.
- A $4.8 million nine-month credit to acquisition-related costs reflected a decrease in estimated contingent consideration for prior acquisitions, driven mainly by lower revenue forecasts and also by the stock-price decline. This credit benefited reported operating results.
- The company raised $15.0 million in a February private placement to Recognition Capital, an entity controlled by its chairman and co-founder, in exchange for 1,004,016 Class A shares.
- Management concluded disclosure controls were ineffective because of material weaknesses in IT controls over access, program changes, and data used in automated revenue calculations. The weaknesses had not caused a financial-statement misstatement; remediation was underway, and management expected remediation by December 31, 2022.
- The filing says a state tax assessor completed an audit with no additional taxes due, but separately describes potential uncollected sales-tax exposure of approximately $1.5 million, including interest and penalties, if the company does not prevail on its position. Management did not believe other ordinary-course legal matters would have a material effect.
Important facts for investors to verify
- Whether auto-insurer marketing budgets and referral pricing recover, and how that affects revenue and Q4 trends.
- Customer concentration, short-term provider relationships, and any changes in major customers’ spending or accounts-receivable collections.
- Commission revenue assumptions, policy renewal and cancellation experience, and collection timing for the $38.4 million commissions receivable balance.
- Cash burn, operating cash flow, DTC investment requirements, and any borrowing under the amended credit facility.
- Progress and sustained effectiveness of the planned internal-control remediation, particularly revenue-related IT controls.
- Status and possible financial impact of the disclosed sales-tax exposure and other legal or regulatory matters.
- The effect of the contingent-consideration remeasurement credit on comparability of operating results and adjusted EBITDA.