Porch Group, Inc. quarterly report, Q3 FY2023

Porch Group, Inc. — Q3 2023 Form 10-Q

Reporting period: Quarter and nine months ended September 30, 2023; filed November 7, 2023. Porch operates Vertical Software and Insurance segments, serving home-services businesses and consumers. Unless stated otherwise, financial amounts below are in millions of dollars.

Financial performance

Metric	Q3 2023	Q3 2022	Nine months 2023	Nine months 2022
Revenue	$129.6	$77.4	$315.7	$211.8
Operating income (loss)	$0.2	$(82.9)	$(197.7)	$(143.3)
Net loss	$(5.7)	$(84.5)	$(131.4)	$(121.1)
Adjusted EBITDA (loss), non-GAAP	$8.8	$(10.9)	$(56.2)	$(36.3)
Net cash from operating activities	Not provided separately for the quarter	Not provided separately for the quarter	$74.9	$(10.4)

Q3 revenue increased 67%. Insurance revenue rose 195% to $95.2 million, while Vertical Software revenue fell 24% to $34.3 million. For the first nine months, revenue grew 49%, with Insurance up 143% and Vertical Software down 20%.
Q3 cost of revenue was 41% of revenue versus 43% a year earlier, implying gross margin of approximately 59% versus 57%. For the nine-month period, cost of revenue was 59% versus 41%, implying gross margin of approximately 41% versus 59%.
Q3 net loss narrowed substantially year over year, partly because the prior-year quarter included $57.1 million of impairment charges. Nine-month net loss increased; results included a $55.2 million goodwill impairment, a $2.0 million intangible-asset impairment, and a $41.2 million net loss on the reinsurance contract, partly offset by an $81.4 million debt-extinguishment gain.
Q3 Adjusted EBITDA improved to $8.8 million, but nine-month Adjusted EBITDA loss widened to $56.2 million. This non-GAAP measure excludes certain expenses and gains; the filing cautions it should not be considered in isolation.
Nine-month operating cash flow was $74.9 million, versus cash use of $10.4 million in 2022. The improvement included a $159.4 million cash-flow benefit from a decrease in reinsurance balances due, including $47.6 million of collateral recovered; it should not be viewed as equivalent to recurring operating earnings.

Liquidity, debt, and balance sheet

At September 30, cash and cash equivalents were $343.0 million and restricted cash was $18.7 million. Total assets were $967.4 million; total liabilities were $1,004.6 million, leaving a stockholders’ deficit of $37.2 million.
Debt principal totaled $560.1 million. This included $225.0 million of 0.75% convertible notes due 2026 and $333.3 million of 6.75% senior secured convertible notes due 2028. The 2028 Notes’ effective interest rate is 17.9%, reflecting discount and issuance-cost amortization. The notes are secured and subject to restrictive covenants, including a $25 million minimum unrestricted-cash requirement.
In April, Porch issued the 2028 Notes and used proceeds in part to repurchase $200 million of 2026 Notes and repay its term loan. Management said available cash was sufficient for operations, planned capital expenditures, working capital, and debt service for at least the next 12 months.
Investment securities had a fair value of $115.4 million and $7.6 million of gross unrealized losses, which the company attributed primarily to interest rates and did not consider other-than-temporary.

Material changes and management commentary

Management attributed Insurance growth to higher premiums per policy, warranty sales, and lower reinsurance ceding. Policies in force declined 15% year over year to 334,000 as the company did not renew policies expected to be unprofitable. Annualized premium per policy rose 38%.
Vertical Software faced a weaker housing market: management cited existing-home sales declines of 17% for the quarter and 21% for the nine-month period. Move-related revenue fell 42% in Q3 and 36% year to date.
Extreme weather increased claims costs. Management estimated Q2 weather impacts at approximately $26 million, net of third-party reinsurance; Texas hail and Hurricane Idalia affected Q3 results by approximately $8 million.
In Q2, Porch recorded a $48.2 million provision related to a reinsurance contract arranged by Vesttoo. In Q3, improved loss reserves reduced the related provision by approximately $7.0 million. Porch recovered $47.6 million of liquid collateral and is pursuing claims related to an additional $300 million letter of credit, whose validity has been challenged by advisors to the issuing bank.
HOA secured approximately $166 million in supplemental reinsurance, replacing nearly all coverage for certain catastrophic events under the terminated contract, and was released from Texas Department of Insurance supervision on November 2, 2023. Demotech had withdrawn HOA’s financial stability rating; discussions about restoration were ongoing. HOA’s statutory surplus was $53.3 million at September 30. Further coverage, recoveries, regulatory outcomes, and potential claims remain uncertain.
The Insurance reporting unit recorded a $55.2 million goodwill impairment in Q2. Vertical Software goodwill fair value exceeded carrying value by only approximately 5% at September 30, leaving the remaining balance at risk of future impairment.
No specific revenue or earnings guidance is provided in the supplied filing text. Management described priorities including improving insurance underwriting, adjusting premiums and deductibles, expanding distribution, and developing software and warranty offerings.

Risks, contingencies, and controls

HOA remains exposed to severe-weather losses, the cost and availability of replacement reinsurance, regulatory and rating-agency requirements, and uncertain Vesttoo-related recoveries. HOA remains responsible for claims even where replacement coverage is unavailable.
The 2028 Notes impose operating restrictions and are secured by a first-priority lien on substantially all assets of Porch Group and certain domestic subsidiaries. If more than $30 million of 2026 Notes remain outstanding in June 2026, 2028 Note holders may have a repurchase right that could materially affect liquidity.
Twelve TCPA-related proceedings were disclosed. The company said the litigation was at an early stage and that it could not estimate the likelihood or amount of potential loss.
Disclosure controls and procedures were deemed ineffective at quarter-end because of a previously reported material weakness in internal control over financial reporting. Remediation efforts were ongoing, with no assurance they would succeed.
Additional stated risks include housing-market weakness, inflation, interest rates, weather events, insurance regulation, and the ability to maintain capital and access financing.

Most important facts for investors to verify

Whether HOA obtains adequate additional reinsurance and whether Demotech restores its financial stability rating; assess the impact on policy renewals, capital, and operating results.
Whether Porch can recover amounts associated with the Vesttoo contract and letter of credit, and how related estimates or provisions change.
Whether operating cash flow remains positive without large reinsurance-balance movements, and whether cash remains above debt-covenant requirements.
Whether insurance underwriting results improve after weather losses and reinsurance costs, while distinguishing premium growth from the effects of reduced ceding.
Whether Vertical Software revenue stabilizes and its remaining goodwill avoids further impairment.
Progress in remediating the material weakness, and any developments in TCPA litigation or other contingencies.