EverQuote, Inc. — Q3 2019 Form 10-Q
Business context and period: EverQuote operates a U.S. online insurance marketplace, selling consumer referrals to insurers and agents. This unaudited report covers the three and nine months ended September 30, 2019; comparisons are with the corresponding 2018 periods. Amounts below are in U.S. dollars; financial statement amounts are in millions unless otherwise noted.
Financial and operating performance
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Revenue | $67.1 | $41.7 | $175.0 | $123.6 |
| Operating income (loss) | $(0.1) | $(3.9) | $(6.9) | $(6.8) |
| Net income (loss) | $0.2 | $(3.8) | $(6.2) | $(6.9) |
| Adjusted EBITDA, non-GAAP | $3.9 | $(1.0) | $4.1 | $(2.0) |
| Quote requests | 5.516 million | 3.044 million | 14.148 million | 9.519 million |
| Variable marketing margin | $20.9 | $12.6 | $51.5 | $35.8 |
- Q3 revenue grew 60.8% year over year; nine-month revenue grew 41.6%. Automotive generated $57.3 million of Q3 revenue and $152.1 million for the nine months. Other insurance verticals generated $9.8 million and $22.9 million, respectively.
- Q3 gross margin was approximately 94.0% (revenue less cost of revenue); operating margin was approximately negative 0.1%, compared with negative 9.4% in Q3 2018. Sales and marketing equaled 79.3% of Q3 revenue, versus 84.2% a year earlier.
- Advertising expense was $46.2 million in Q3 and $123.5 million for the nine months. Q3 quote requests increased 81.2%; nine-month requests increased 48.6%. Management attributed growth to higher advertising spend and improved traffic acquisition.
- Management said revenue growth was primarily driven by more quote requests, partly offset by lower revenue per request due to fewer average referrals per request. VMM, defined as revenue less advertising expense, is an efficiency measure and not a measure of profitability.
- At September 30, cash and cash equivalents were $41.9 million, accounts receivable $29.9 million, current assets $75.1 million, and current liabilities $31.4 million (current ratio approximately 2.4). Total liabilities were $32.6 million and stockholders’ equity $48.3 million.
- For the nine months, operating cash flow was positive $0.5 million, investing cash flow was negative $2.2 million, and financing cash flow was positive $2.1 million. Cash, cash equivalents and restricted cash increased $0.3 million to $42.2 million; accounts receivable growth used $12.9 million of cash.
- No borrowings were outstanding under the $11.0 million revolving credit line; the full amount was available. The company reported compliance with its covenants. The line is secured by substantially all assets and matures in March 2020.
Material changes versus prior periods
- Revenue growth outpaced expense growth in Q3, and the company reported modest GAAP net income after a year-earlier loss. Nine-month GAAP results remained loss-making.
- Sales and marketing expense rose 51.4% in Q3 and 36.4% for the nine months, largely reflecting increased advertising. Research and development rose 35.7% and 48.1%, respectively; general and administrative expense rose 31.5% and 87.5%, respectively, including public-company compliance, personnel and insurance costs.
- Direct channels accounted for 95% of Q3 revenue and 94% for the nine months, up from 92% and 89% in 2018. Automotive represented approximately 87% of nine-month 2019 revenue.
- Stock-based compensation was $3.3 million in Q3 and $9.3 million for the nine months, versus $2.6 million and $3.9 million in 2018. Unrecognized compensation expense was $37.0 million at quarter-end.
Outlook, risks and unusual items
- No numeric revenue or earnings guidance is provided. Management expects revenue per quote request may remain flat or decline in the near term, while expecting long-term improvement. It expects near-term sales and marketing expense to increase in dollars and as a percentage of revenue; it anticipates higher research and development spending as the platform expands.
- Management stated that cash and cash equivalents should fund operating expenses and capital expenditures for at least 12 months from the November 7, 2019 issuance date, without relying on the credit line. It noted that future capital needs depend on growth, spending and market conditions and that costs could be reduced if revenue goals are not met.
- Customer concentration is material: one customer represented 23% of Q3 revenue; two customers represented 21% and 11% of nine-month revenue. Three customers accounted for 39% of accounts receivable at quarter-end.
- Two consolidated putative securities class actions allege IPO-related misstatements concerning quote-request volume and its relationship to insurer payments. The company denies wrongdoing and intends to defend the claims; it had filed a motion to dismiss and recorded no litigation contingency reserve.
- Key risks include reliance on auto insurance and large customers, short-term provider relationships and auction bids, paid advertising and online traffic sources, privacy and cybersecurity, evolving insurance and marketing regulation (including the CCPA effective January 1, 2020), competition, and ongoing losses. The company expects adoption of the lease accounting standard to result in material right-of-use assets and lease liabilities.
- Disclosure controls were assessed as effective, and the company reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether higher advertising-driven quote volume can translate into improved revenue per request and sustainable profitability, given the reported decline in referrals per request.
- Revenue and receivables exposure to the largest insurance-provider customers, and whether those customers maintain their purchasing levels.
- Cash conversion and collection trends: receivables rose to $29.9 million, while nine-month operating cash flow was only $0.5 million.
- Developments and potential financial impact of the IPO securities litigation, including whether the motion to dismiss is granted.
- Availability and terms of the revolving credit line at maturity, and the expected balance-sheet impact of lease standard adoption.
- Potential dilution and voting-control implications of equity awards and the dual-class structure: Class B shares carry ten votes each, and insiders and other significant holders controlled approximately 90.1% of voting power at September 30, 2019.