EverQuote, Inc. — Q2 2019 Form 10-Q
Reporting period: Three and six months ended June 30, 2019; unaudited. EverQuote operates an online insurance marketplace and earns revenue by selling consumer referrals to insurance providers and distributors.
Financial and operating results
| Metric | Q2 2019 | Q2 2018 | H1 2019 | H1 2018 |
|---|---|---|---|---|
| Revenue | $55.7 million | $41.1 million | $107.9 million | $81.8 million |
| Revenue growth | 35.5% | — | 31.9% | — |
| Operating loss | $2.2 million | $1.6 million | $6.8 million | $2.9 million |
| Net loss | $2.0 million | $1.7 million | $6.4 million | $3.1 million |
| Adjusted EBITDA, non-GAAP | $1.6 million | $(0.6) million | $0.3 million | $(1.0) million |
| Quote requests | 4.52 million | 3.02 million | 8.63 million | 6.48 million |
| Variable marketing margin | $16.7 million | $12.1 million | $30.6 million | $23.3 million |
- Q2 gross profit was approximately $52.2 million, or 93.7% of revenue, compared with $38.2 million, or 93.0%, a year earlier. Operating expenses grew faster than revenue in H1, and the operating loss widened.
- Q2 auto-insurance revenue was $49.8 million; other verticals contributed $5.9 million. Auto represented about 89% of Q2 revenue. Direct channels accounted for 93% of revenue, up from 90%.
- Advertising expense was $39.0 million in Q2 and $77.3 million in H1. Sales and marketing remained the largest expense category; increased advertising contributed to higher quote-request volume.
- Stock-based compensation was $3.2 million in Q2 and $6.0 million in H1, versus $0.7 million and $1.3 million, respectively, in 2018.
Financial position, cash flow and debt
- At June 30, 2019, cash and cash equivalents were $37.1 million, accounts receivable $24.1 million, current assets $62.7 million and current liabilities $23.6 million. The current ratio was approximately 2.7.
- H1 operating cash outflow was $3.8 million, compared with $1.0 million in H1 2018; investing cash outflow was $1.6 million. Cash and cash equivalents declined $4.5 million from year-end 2018.
- No borrowings were outstanding on the $11.0 million revolving credit line, which matures in March 2020 and is secured by substantially all company assets. EverQuote reported covenant compliance at June 30.
- Management expected existing cash to fund operating expenses and capital expenditures for at least 12 months from the August 8, 2019 issuance date, excluding available revolver borrowings.
Changes, outlook and material risks
- Management attributed revenue growth primarily to increased advertising and quote requests. It noted that more quote requests also reduced revenue per request in auto, as referrals per request declined. Health and renters insurance were added in 2019 but did not contribute meaningfully to revenue.
- Management expected revenue per quote request to increase over the long term but remain flat or decline in the near term. It expected sales and marketing expense to rise in the near term, both in dollars and as a percentage of revenue, before declining as a share of revenue over the longer term. The filing provides no specific numerical earnings or revenue guidance.
- The company remained loss-making, with an accumulated deficit of $106.2 million. Two customers represented 20% and 13% of Q2 revenue; customer agreements are short-term and customers may reduce or stop purchases.
- A consolidated putative securities class action alleges that IPO disclosures concerning quote-request volume and the relationship between quote requests and insurer payments were false or misleading. The company filed a motion to dismiss; it intends to defend the claims. No litigation reserve was established.
- Other notable exposures include dependence on auto insurance and paid online advertising, auction-based insurer bids, competition, privacy and telemarketing regulation, third-party providers, and execution of newer insurance verticals. The company reported no off-balance-sheet arrangements.
- Operating leases require $13.4 million of future minimum payments as of June 30, 2019. The company planned to adopt lease accounting in 2020 and expected material right-of-use assets and lease liabilities.
- ASC 606 was adopted January 1, 2019 using the modified retrospective method, with no material reported impact. Management assessed disclosure controls as effective and reported no material quarterly change in internal control over financial reporting.
Important facts for investors to verify
- Whether revenue and quote-request growth can translate into improved GAAP profitability and operating cash flow, given advertising intensity and higher operating expenses.
- How revenue per quote request, insurer bids, referral conversion and direct-channel economics evolve, particularly as auto remains the dominant vertical.
- The durability of spending by the two largest customers and the impact, if any, of the securities litigation and its eventual resolution.
- Available liquidity and covenant compliance under the secured revolver, together with the expected balance-sheet impact of lease adoption.
- Adjusted EBITDA and variable marketing margin are non-GAAP or company-defined performance measures; compare them with GAAP results and review their definitions and reconciliations.