Porch Group, Inc. — Q2 2023 Form 10-Q
Reporting period: Three and six months ended June 30, 2023. Unaudited consolidated results; dollar amounts below are in millions unless stated otherwise. Porch operates Vertical Software and Insurance segments, serving home-service businesses and consumers through software, insurance, and warranty offerings.
Financial performance and position
- Revenue: Q2 revenue was $98.8 million, up 39% year over year; first-half revenue was $186.1 million, up 38%. Insurance revenue rose to $64.3 million in Q2 from $28.4 million, while Vertical Software revenue fell to $34.4 million from $42.5 million. Insurance growth reflected higher premiums per policy, warranty sales and renewals, and lower reinsurance ceding; software declines reflected weaker home sales and moving activity.
- Profitability: Q2 operating loss was $159.4 million and net loss was $87.0 million, versus losses of $31.7 million and $27.3 million, respectively, in Q2 2022. Q2 diluted loss per share was $0.91, compared with $0.28. First-half net loss was $125.7 million versus $36.6 million. Results included a $55.2 million goodwill impairment, a $48.2 million reinsurance-related doubtful-account charge, and an $81.4 million gain on extinguishment of debt. Adjusted EBITDA loss, a non-GAAP measure, was $43.1 million in Q2 and $65.0 million for the first half, versus losses of $15.0 million and $25.4 million in the comparable periods.
- Costs and insurance performance: Q2 cost of revenue was 82% of revenue, versus 41% a year earlier; first-half cost of revenue was 71% of revenue. The insurance gross loss ratio was 120% versus 81%. Management attributed pressure to severe Texas weather, reduced reinsurance ceding, and warranty-business costs. Extreme Q2 weather was estimated to reduce Insurance segment Adjusted EBITDA by approximately $18 million, net of third-party reinsurance.
- Cash flow and liquidity: First-half operating cash use was $8.8 million, versus $4.2 million in 2022; investing cash use was $8.0 million, versus $38.4 million; financing provided $93.0 million. Cash and cash equivalents were $265.6 million and restricted cash $39.3 million at June 30. Current assets were $657.8 million and current liabilities $603.7 million. Management said cash and cash equivalents were expected to fund operations, planned capital expenditures, working capital, and debt service for at least 12 months.
- Debt and equity: Aggregate debt principal was approximately $564.0 million; debt carrying value was $432.4 million. In April, Porch issued $333 million principal of 6.75% secured convertible notes due 2028, used proceeds in part to repurchase $200 million of 2026 notes and repay a $9.7 million term loan. The 2028 notes’ effective interest rate is 17.9%. Stockholders’ equity moved from positive $79.4 million at year-end 2022 to a $36.7 million deficit at June 30, 2023.
Material changes and outlook
- Insurance revenue grew substantially, but the segment’s Adjusted EBITDA loss widened to $31.2 million in Q2 from $5.6 million a year earlier. Vertical Software revenue and segment Adjusted EBITDA also declined, to $34.4 million and $1.8 million, respectively.
- Insurance policies in force were 358,000, down 6% year over year; gross written premium was $143 million, down 1%. Annualized revenue per policy rose 81% to $517. Management cited premium increases, higher deductibles, selective nonrenewals, and improved risk pricing as underwriting initiatives.
- Management reported no formal earnings guidance in the provided filing text. It described the housing market, inflation, catastrophe exposure, reinsurance availability, and regulatory approvals as important uncertainties. The Texas reciprocal-exchange application remained under review.
Risks, contingencies, and unusual items
- Reinsurance / Vesttoo: After quarter-end, Porch subsidiary HOA terminated a reinsurance contract effective July 1, 2023, following allegations of fraud involving collateral arranged by Vesttoo. The contract covered 40% of HOA’s core book and up to approximately $175 million in a catastrophe. HOA collected $47.6 million in trust collateral; the filing recorded a $48.2 million Q2 charge to reduce the June 30 receivable to that collected amount. A required $300 million letter of credit is disputed, and the filing says bank advisors alleged it was invalid. HOA had obtained approximately $42 million of supplemental coverage and was seeking more; adequate replacement coverage is not assured. HOA remains responsible for policy claims.
- Impairment and weather: The Insurance reporting unit recorded $55.2 million of goodwill impairment. Remaining Vertical Software goodwill was also identified as at risk of future impairment. Q2 extreme weather events caused significant claims and reduced Insurance performance.
- Debt and dilution: The 2028 notes impose operating restrictions, require at least $25 million of unrestricted cash monthly, and are secured by a first-priority lien on substantially all assets of Porch and certain domestic subsidiaries. The filing describes potential repurchase and default risks. Potential share dilution includes convertible notes, equity awards, warrants, and acquisition-related contingent shares.
- Controls and litigation: Management concluded disclosure controls were not effective at June 30 because of a previously identified material weakness in internal control over financial reporting; remediation was ongoing, with no assurance of success. Twelve TCPA-related proceedings were described as early-stage; the company said it could not estimate potential losses.
Important facts for investors to verify
- Progress on enforcing the disputed $300 million letter of credit, recovery of any additional collateral, and the amount and cost of replacement reinsurance.
- Whether HOA has sufficient capital and catastrophe protection to meet regulatory, rating-agency, and claim obligations, including after severe weather.
- Insurance loss trends, renewal pricing and retention, reinsurance costs, and whether underwriting performance improves after the Q2 weather impact.
- Cash burn, compliance with the 2028 notes’ $25 million unrestricted-cash covenant, and the impact of the notes’ effective interest cost and secured terms.
- Remediation of the material weakness, future goodwill impairment risk, and developments in the TCPA litigation.