Porch Group, Inc. — Q2 2022 Form 10-Q
Reporting period: Three and six months ended June 30, 2022. Unaudited results; dollar amounts below are in millions unless stated otherwise. Porch operates Vertical Software and Insurance businesses, serving home-services companies and consumers.
Financial performance and position
- Revenue: Q2 revenue was $70.8 million, up 38% from $51.3 million. First-half revenue was $133.3 million, up 71% from $78.1 million. Growth reflected acquisitions, post-acquisition growth and organic growth. Q2 Vertical Software revenue was $42.8 million (+24%); Insurance revenue was $28.0 million (+65%).
- Profit and margins: Q2 net loss was $26.4 million ($0.27 per share), versus $16.3 million ($0.17 per share) a year earlier. First-half net loss was $32.2 million, versus $81.4 million. Q2 operating loss was $30.8 million, versus $22.9 million; first-half operating loss was $56.1 million, versus $52.6 million. Q2 gross margin, calculated as revenue less cost of revenue, was approximately 59.6%, versus 62.0%; operating margin was approximately -43.5%, versus -44.7%.
- Adjusted EBITDA: The company reported a non-GAAP loss of $14.3 million in Q2, compared with $9.9 million, and a first-half loss of $21.3 million, compared with $19.5 million. Management attributed the deterioration primarily to macro housing conditions, higher HOA claims in Q2 and continued investment; acquisitions partly offset the decline.
- Cash flow: First-half operating cash used was $2.3 million, compared with $30.8 million. Investing activities used $38.4 million, including $32.0 million for acquisitions; financing activities used $2.0 million. Cash, cash equivalents and restricted cash declined $42.7 million to $282.1 million.
- Liquidity: At June 30, cash and cash equivalents were $271.0 million, with $11.1 million of restricted cash. Current assets were $624.8 million and current liabilities were $468.9 million. Management said cash on hand was sufficient for operations, planned capital expenditures, working capital and debt service for at least 12 months, based on its current plan.
- Debt: Debt principal totaled approximately $426.5 million, including $425.0 million of 0.75% convertible notes due 2026, $1.0 million drawn on a revolving credit line, and other notes. The RLOC had a $5.0 million limit and matures November 2022; the company reported covenant compliance at June 30. In August, it drew an additional $4.0 million on the RLOC and borrowed $10.0 million under an existing term loan, primarily to increase HOA’s capital surplus.
- Other balance-sheet items: Reinsurance balances due were $274.0 million, compared with $228.4 million at year-end; deferred revenue was $243.4 million, compared with $201.1 million. Stockholders’ equity declined to $199.0 million from $217.0 million.
Changes, outlook and material matters
- April 2022 acquisition of Residential Warranty Services (RWS) had stated consideration of $45.7 million; additional RWS operations in Florida and California remained subject to approvals. Acquisitions contributed materially to revenue growth and increased goodwill to $273.8 million.
- Operating expenses rose 37% in Q2 to $101.6 million, faster than revenue growth of 38% in dollar terms only marginally less; cost of revenue rose 46%. Management cited the larger insurance mix as a reason for higher cost of revenue as a share of sales. Selling and marketing and product and technology expenses improved as a share of revenue, while corporate hiring, audit and consulting costs, and SOX work contributed to higher general and administrative expense.
- No numerical revenue, earnings or cash-flow guidance is provided in the filing. Management described investments in software verticals, consumer experience, insurance pricing and controls, and plans to pursue operating leverage; results remain subject to the risks below.
- Subsequent event: On August 8, 2022, Porch and the seller terminated the proposed $48.6 million CSE insurance-company acquisition; regulatory applications were withdrawn.
- Controls: Management concluded disclosure controls were not effective at June 30 because of material weaknesses in internal control over financial reporting previously reported in the 2021 Form 10-K. Remediation includes systems work, added personnel and consultants, and control training; the company cautioned remediation may be costly and is not assured.
- Risks and contingencies: Management cited inflation and interest-rate conditions, possible lower consumer spending, insurance regulation, claims and reinsurance exposure, acquisitions, privacy and data risks, litigation and COVID-related uncertainty. One reinsurer represented more than 10% individually and 34% in aggregate of insurance subsidiary reinsurance receivables. Twelve TCPA-related proceedings were pending; the filing said potential loss could not be estimated. A California wage-and-hour class settlement awaited final court approval. Management did not identify a pending legal matter it believed would materially adversely affect the company.
- Available-for-sale investments had $4.6 million of unrealized losses, which the company attributed primarily to interest-rate changes and did not consider other-than-temporary impairment. Fair-value gains on earnout and private warrant liabilities materially affected reported results; these are non-cash and tied in part to the share price.
Key facts for investors to verify
- How much of revenue growth and future performance is organic versus acquired, and whether acquisitions deliver expected growth and synergies.
- HOA claims development, insurance-segment profitability, reserve adequacy and the timing and collectability of reinsurance receivables.
- Cash requirements after the August borrowings, debt and credit-line terms, and any constraints on distributions from regulated insurance subsidiaries.
- Progress in remediating the disclosed material weaknesses and establishing effective disclosure and financial-reporting controls.
- Potential dilution: the filing lists convertible notes, options, awards, warrants and earnout shares that were excluded from diluted loss per share as antidilutive.
- Final disposition and financial effects, if any, of pending litigation and the terminated CSE transaction.