EverQuote, Inc. — Q2 2020 Form 10-Q
Reporting period: Three and six months ended June 30, 2020; filed August 7, 2020. EverQuote operates an online marketplace that sells consumer insurance referrals, primarily for auto insurance. Financial amounts below are in U.S. dollars; financial statement figures are unaudited.
Financial and operating highlights
| Metric | Q2 2020 | Q2 2019 | First half 2020 | First half 2019 |
|---|---|---|---|---|
| Revenue | $78.3 million | $55.7 million | $159.7 million | $107.9 million |
| Operating loss | $3.0 million | $2.2 million | $4.6 million | $6.8 million |
| Net loss | $2.8 million | $2.0 million | $4.3 million | $6.4 million |
| Adjusted EBITDA | $4.0 million | $1.6 million | $7.8 million | $0.3 million |
| Quote requests | 6.777 million | 4.519 million | 14.169 million | 8.632 million |
| Variable marketing margin | $23.5 million | $16.7 million | $47.3 million | $30.6 million |
- Q2 revenue grew 40.7% year over year; first-half revenue grew 48.0%. Growth reflected more quote requests, driven by higher advertising spend and improved traffic acquisition. Q2 quote requests rose 50.0%; first-half requests rose 64.1%.
- Automotive contributed $64.6 million of Q2 revenue and $132.2 million for the first half; other insurance verticals contributed $13.7 million and $27.4 million, respectively. Direct channels accounted for 93% of revenue in both periods.
- Q2 operating margin was approximately negative 3.8%; net margin was approximately negative 3.6%. Sales and marketing was 82.5% of revenue, versus 81.8% a year earlier. Advertising expense was $54.8 million in Q2 and $112.4 million for the first half.
- Company-defined variable marketing margin is revenue less advertising expense; it was 30.0% of Q2 revenue and 29.6% for the first half. Management cautions that this metric is not a measure of profitability. Adjusted EBITDA is also non-GAAP and excludes, among other items, recurring stock-based compensation.
- At June 30, cash and cash equivalents were $54.4 million, accounts receivable $36.5 million, current assets $94.3 million and current liabilities $38.7 million. Working capital was approximately $55.6 million; the current ratio was approximately 2.4. Total liabilities were $40.2 million and stockholders’ equity $60.6 million.
- First-half operating cash flow was positive $7.9 million, versus negative $3.8 million in 2019. Investing cash flow was negative $1.9 million and financing cash flow positive $2.3 million, primarily from option exercises. Cash, cash equivalents and restricted cash increased $8.4 million to $54.7 million.
- The balance sheet does not show a separate borrowing balance. In August 2020, after quarter-end, the revolving credit agreement was amended to provide up to $25 million, subject to borrowing-base limits and covenants; it is secured by substantially all company assets. The filing does not clearly state the amount drawn under the facility.
Material changes and notable items
- Revenue growth exceeded expense growth for the first half, and the net loss narrowed year over year. Q2 net loss, however, increased from $2.0 million to $2.8 million. Stock-based compensation rose to $10.8 million for the first half from $6.0 million.
- Management said revenue per quote request declined in other insurance verticals, partly offsetting volume growth. It expects revenue per quote request to increase over the long term but decrease in the near term.
- The company settled the IPO-related securities class action for approximately $4.75 million; insurance reimbursed $3.6 million. The court approved the settlement in June, terminating that case.
- A state tax assessor requested unpaid sales taxes. EverQuote disputes taxability; potential exposure was estimated at approximately $1.5 million, including interest and penalties, and no liability was accrued because a loss was not considered probable.
- Two TCPA putative class actions were disclosed: a Colorado telephone-call case was stayed pending a U.S. Supreme Court decision, and a nationwide text-message case was filed July 30, after quarter-end. The company says it intends to defend both and believes the claims lack merit.
- On August 3, EverQuote signed an agreement to acquire Crosspointe Insurance & Financial Services, a health insurance agency; closing was expected by the end of Q3, subject to customary conditions.
Outlook, risks and contingencies
- No specific revenue, earnings or other financial guidance is provided. Management expects cash and cash equivalents to cover operating expenses and capital expenditure needs for at least 12 months from issuance of the financial statements.
- Management reported no material adverse financial impact from COVID-19 in the first half, but said the pandemic’s future effects are uncertain. Remote work, consumer shopping behavior, insurer demand, operations and cybersecurity remain potential areas of impact. Management also suggested insurers’ profitability could support online customer-acquisition spending.
- Key business risks include reliance on auto insurance and advertising-driven consumer acquisition; customer concentration and short-term provider relationships; volatility in provider auction bids and referral economics; competition; privacy, marketing and insurance regulation; and litigation. One customer represented 19% of Q2 revenue and 21% of first-half revenue.
- The company expected to cease being an emerging growth company at December 31, 2020 and anticipated auditor attestation requirements for internal control over financial reporting. It also expected material right-of-use assets and lease liabilities upon lease-standard adoption.
Important facts for investors to verify
- Whether quote-request growth and advertising efficiency translate into durable revenue and improved GAAP profitability, particularly given the near-term expected decline in revenue per quote request.
- The amount, if any, drawn on the $25 million revolving facility, borrowing-base availability, covenant compliance and terms of the August amendment.
- Customer concentration and the impact of changes in major insurers’ spending, including whether the largest customer relationship remains stable.
- Progress, purchase terms and integration risks for the Crosspointe acquisition, including any financing, dilution or goodwill implications.
- Developments in the sales-tax inquiry and TCPA cases, and whether any liabilities or material costs are subsequently recorded.
- The effects of COVID-19 on traffic, insurer demand, operating costs and cash generation, and the company’s transition to enhanced public-company control and reporting requirements.