Porch Group, Inc. (NASDAQ:PRCH) Q1 2023 Earnings Call Transcript May 11, 2023

Lois Perkins: Good afternoon, everyone and thank you for participating in Porch Group’s First Quarter 2023 Conference Call. Today, we issued our first quarter earnings release and related Form 8-K to the SEC. The press release can be found on our Investor Relations website at ir.porchgroup.com today. Joining me here today are Matt Ehrlichman, Porch Group’s CEO, Chairman and Founder; Shawn Tabak, Porch Group’s CFO; Matthew Neagle, Porch Group’s COO; and Nicole Pelley, SVP of Product and Technology. Before we go further, I’d like to take a moment to read the company’s Safe Harbor statement within the meaning of the Private Securities Litigation Reform Act of 1995, which provides important cautions regarding forward-looking statements.

Today’s discussion include responses to your questions, reflects management’s views as of today, May 10, 2023. We do not undertake any obligations to update or revise this information. Additionally, we will make forward-looking statements about our expected future financial or business performance or conditions, business strategy and plans, including the pending application for the mix change. Based on current expectations and assumptions, these statements are subject to risks and uncertainties, which could cause our actual results to differ materially from these forward-looking statements. We encourage you to consider the risk factors described in our SEC filings as well as the risk factor information in these slides for additional information.

We will reference both GAAP and non-GAAP financial measures on today’s call. Please refer to today’s press release for reconciliations of non-GAAP measures to the most comparable GAAP measures discussed during this earnings call. As a reminder, this webcast will be available for replay along with the presentation shortly after this call on the company’s website at ir.porchgroup.com. And with that, I will turn the call over to Matt Ehrlichman, CEO, Chairman and Founder of Porch Group. Over to you, Matt.

Matt Ehrlichman: Thanks, Lois. Good afternoon, everybody. It hasn’t been long since we last spoke in March. And in that time, the business has progressed nicely, which we look forward to discussing with you today. Overall, the Q1 2023 operating environment is not dissimilar to what we experienced in Q4 2022. The home service and insurance industries faced home sales and weather headwinds. And as expected, we were impacted by them as well. As the insurance industry and weather trends evolve, it creates not only a growing homeowners insurance market, but the substantial opportunity and we are well-positioned to become a leader given our unique demand in data advantages. I am pleased to have Nicole join us today to talk through advancement from this last quarter in some of these areas.

So moving to Slide 6 to review the high level financials. In the first quarter, revenue grew 37% to $87 million, with solid revenue growth in our warranty and homeowners insurance businesses. Q1 2023 adjusted EBITDA loss was $22 million. The underlying business is performing well. However, as expected and built into our 2023 plan, the reinsurance market has hardened. While our April 2023 renewals were successful, given our strong relative past performance, excluding the impact of reinsurance market, Q1 profitability would have increased by approximately $15 million in our insurance segment. As a reminder, we rely on reinsurance to both mitigate weather risk and to offset a portion of the capital requirements associated with operating a homeowner’s insurance carrier.

So while our insurance business saw strong and profitable gross performance, in fact, a 97% gross combined ratio in 2022 by our carrier entity, the reinsurance costs weighs on our net results until our premium price increases have flowed through all policyholders. We believe the impact of reinsurance is transitory and the market dynamics will improve over time as it has in the past. And if not, Porch and really all other carriers will continue to raise prices and ensure these increased costs are fully loaded into what s offered to consumers. Margins in the industry were challenged in 2022 because of weather and expected to be compressed in 2023 because of the reinsurance markets until price catches up. But to highlight capabilities and performance, we think it is helpful to note not only that our insurance business was profitable on a gross basis, but also show how our insurance business compared to the rest of the homeowners insurance carriers in 2022.

I mentioned last quarter the HOA was the fastest growing homeowners carrier through the third quarter 2022 as measured by gross written premium. AM Best has now released our full year 2020 report ranking 50 different homeowners insurance peers based on direct written premium growth. I am happy to share that we ended the year ranked third. Importantly though, in addition to growing rapidly, we demonstrated a leading gross combined ratio. And so as you can see in the bottom chart on the slide, the AM Best market share report shows gross combined ratio of HOA in 50 PURE Carriers in 2022. And here, HOA was also the third best performer. Although there are two insurers with better loss ratios, those companies had much slower growth. And this demonstrates our ability to use our unique capabilities to grow premium while also maintaining strong underlying performance.

Again, as we mentioned, our strategy is to manage our premium growth carefully in 2023 to drive our business to profitability. As I mentioned, we have made a number of successes in the quarter. First, the insurance strategic initiatives announced in the fourth quarter of 2022 are on track. So in March, we filed the application to form the Reciprocal Exchange with the Texas Department of Insurance, which I will touch on more shortly in which we believe is key to reducing the weather volatility within our earnings. To facilitate this transition to a more efficient reinsurance system for the Reciprocal Exchange, we moved our reinsurance seeding rates to approximately 50% in January, successfully placed our excess of loss reinsurance treaties in April, continuing to further leverage our captive reinsurer to fill any reinsurance needs where it makes sense and are in the process of non-renewing approximately 37,000 of our higher risk policies.

I am happy to share that we successfully launched Porch Warranty in February. This is our own whole home warranty product that covers systems and appliances within the home. Nicole will comment on this later in the presentation. I will note the home sales industry declined 26% in Q1 year-over-year and continues to impact our software and moving services businesses. Despite this ongoing lower demand environment, our software businesses continue to iterate launching new modules and capabilities to take more share and Nicole will touch on our progress also in today’s presentation. Finally, after the quarter end, we secured a $333 million of new senior secured convertible notes that tied to a $200 million pay-down of our existing unsecured note, which is due in September 2026.

It’s a great transaction for us as it increases Porch Group’s capital by more than $100 million replacing the capital which will transfer with the Reciprocal on approval. And it also provides a 2-year maturity extension for much of our debt while maintaining the same $25 per share conversion price at the cost of a 6.75% coupon rate on the new money. Finally, I want to spend a moment to provide a reminder about our strategy to form a Reciprocal Exchange. We have been thinking through this since we first acquired HOA 2 years ago with the objective to move the insurance business to higher margins and without the volatility from direct exposure to weather. Provided we receive approval from the Texas Department of Insurance, the HOA carrier business including all its assets such as cash and investments as well as its liabilities will move to the new entity and be owned by its policyholder members.

In exchange, Porch will receive a coupon-bearing note, the terms of which will be provided following approval. We will continue to operate the insurance business such as selling the policies and managing claims processing in return for fees from the Reciprocal. This means once the Reciprocal Exchange is in place, we lose the potential upside profitability in good weather conditions. However, we do not have the same claims downside when there are frequent and severe weather events, and as a result, our revenue and profitability are steady and predictable. We are in active discussions now with the Texas Department of Insurance and still anticipate approval later in the second half of this year. I will now hand the call over to Shawn to cover our financial performance and guidance.

Over to you, Shawn?

Shawn Tabak: Thanks, Matt. Hello, everyone and good afternoon. Revenue was solid at $87.4 million in the first quarter of 2023, which is an increase of 37% over the prior year driven by growth in the insurance segment and partially offset by the software segment, which continues to be impacted by the soft housing market. As a reminder, quarter one and two typically have the highest claims costs for HOA with quarter two historically being the period with the most weather events. In the first quarter of 2023, the gross loss ratio for HOA was 79% compared to 81% in the prior year. Revenue less cost of revenue was $36.1 million, which is 41% of revenue. As Matt mentioned, the reinsurance markets have hardened as expected, which resulted in a reduction in revenue less cost revenue by approximately $15 million in the first quarter of 2023 compared to the prior year.

Our price increases, which we disclosed previously, are well underway and being rolled out, which will have a larger impact in the second half of this year given the timing of renewals for the underlying policies. Adjusted EBITDA loss of $21.9 million was in line with our expectations, a decrease from the prior year, driven by reinsurance as noted in to a lesser extent, the soft housing market impact on the software segment. Excluding the reinsurance market dynamic compared to the first quarter in the prior year, adjusted EBITDA loss would have been approximately $7 million. And finally, gross written premium was $115 million, an increase of 12% over the prior year. Moving on to revenue by segment, in the first quarter of 2023, revenue from our insurance segment was $58.7 million, growth of 101% over the prior year, driven by strong growth in our warranty business based on demand and renewals as well as HOA due to increases in premium per policy and lower reinsurance seeding.

Approximately half of the revenue growth in the insurance segment was due to seeding less and the balance from the operational lens. Insurance segment revenue increased from 46% of total Porch Group revenue in the first quarter of 2022 to 67% of total revenue in the first quarter of 2023. Vertical Software revenue was $28.6 million, a decrease of 17% over the prior year due to the housing market declining 26% industry-wide year-over-year. The biggest impact of the housing market decline was on our moving services group, which continues to have these macro headwinds directly impacts its revenue. Our B2B software revenue was relatively flat year-over-year with market share growth key initiatives in pricing offsetting the housing market impacts.

At a segment level, our insurance segment adjusted EBITDA loss was $7.2 million. As Matt mentioned, the underlying contribution margin in our HOA insurance carrier increased by 500 basis points compared to the prior year, when excluding the impacts of reinsurance. The Vertical Software adjusted EBITDA loss was $400,000. Corporate expenses were $14.3 million in the first quarter of 2023, reducing to 16% of total revenue from 21% in the prior year driven by strong expense control. Now on to our outlook, today, we are reiterating the full year 2023 guidance provided 8 weeks ago. Revenue ranging from $330 million to $350 million, where we continue to expect an 18% decline in home sales for the full year 2023 with a greater impact on the difficult housing market in the first half of the year versus the second half of the year when the comps become easier.

Revenue less cost of revenue ranging from $170 million to $180 million where we have assumed a 62% gross loss ratio for the year. This assumes cat weather events will be in line with our historical averages. Any unusual catastrophic weather events in excess of our historical norms are not included in our guidance and assumption. Adjusted EBITDA loss ranging from $30 million to $40 million, where we expect on a cumulative basis, adjusted EBITDA to be profitable in the second half of the year and beyond. And finally, gross written premiums of $500 million. Shifting to the balance sheet, we ended the first quarter with $272 million of cash and investments. This includes $165 million of cash and investments in our insurance carrier HOA that we expect will transfer to the Reciprocal when approved and launched.

Excluding HOA, Porch held $107 million of cash and investments at the end of the first quarter. In addition, we held $15 million of restricted cash in relation to our warranty and captive businesses. And as Matt mentioned earlier, we are increasing the amount of excessive loss reinsurance provided by Porch’s captive to HOA, where it makes sense and can provide strong returns. To support this, we expect to hold approximately $43 million of cash to collateralize this placement and it will therefore show us restricted cash in future quarters and remain as such for the next 12 months. And finally, in the first quarter of 2023, we repurchased 1.4 million shares for $3.1 million under the existing share repurchase program. We will continue to evaluate whether to repurchase or otherwise transact in shares or notes and will do so if and when we think it is in the best interest of shareholders.

And finally, a brief update related to the issuance of our new $330 million senior secured convertible notes, which we closed in April after the end of the quarter. We are pleased with the deal, which reduces our medium-term September 2026 debt maturity from $425 million to $225 million and bolsters the balance sheet by adding $102 million of cash. These new secured notes have a coupon of 6.75% and maintain the same conversion price of $25, which was important for us to minimize future dilution for shareholders. This increased coupon payment is partially offset by approximately 5% interest we are currently earning on interest bearing cash deposits. The $330 million of the new secured notes are due October 2028. Thank you all for your time today.

And I will now hand it over to Matthew to cover our KPIs.

Matthew Neagle: Thanks, Shawn. Right, turning to Slide 18, we have introduced a slightly different look to our KPI slide here. For reference, the original slides are in the appendix, which show the KPI trend over time. The average number of companies was 30,600 in the first quarter, similar to Q4 2022 and a 20% increase in the same quarter prior year. Average revenue per company per month increased to $951, an increase of 15% from the same quarter prior year. This was driven by higher insurance premiums, generating more revenue per insurance customer, the change in our reinsurance seeding and rapid growth in our warranty business. We have 214,000 monetized services in the quarter, a small increase from last quarter. Finally, average revenue per monetized service increased to $328, an increase of 88% versus the same quarter last year.

We continue to focus on selling the highest value services to consumers such as insurance and warranty. Let’s now look at our insurance business KPIs. Gross written premium was $115 million, an increase of 12% year-over-year. This was produced from 376,000 policies in force in the first quarter. Annualized revenue per policy was $612, increasing 82% from $330 in Q1 2022. This was driven by increased premium per policy, lower reinsurance seeding levels and rapid growth in our warranty business. As Shawn mentioned in March, we are introducing retention on a premium basis to help demonstrate the impact of pricing increases and align our disclosure with the peer group. Premium retention is on a 12-month basis and was 107% for Q1 2023, an increase from 100% in Q1 2022 driven by increased premium per policy.

As a reminder, we have started to non-renew 37,000 high-risk policies, which will impact short-term retention rates. Overall, the insurance business had a gross loss ratio of 79% in Q1, of which 39% related to cat events. This is a little worse than our historic average with usual hailstorms and tornadoes in March above historic trends. As Matt mentioned earlier, HOA’s gross loss ratio is significantly outperforming peers. Today, Shawn has reiterated our guidance, which includes a 62% gross loss ratio assumption for the full year. As weather improves in the second half of the year, the impact of increased premium per policy changes roll through. Finally, on Slide 20, I want to quickly recap our 2023 strategic priorities. First, we will plan to continue to develop new software for the companies who use our Vertical Software and up-sell more software through bundled solutions, which Nicole will talk to shortly.

We are extending our online experiences increasing revenue per homebuyer. Between our app, recall check monitoring and other services, we are finding ways to better engage consumers to be able to help them with more services. We are improving premium per policy in our insurance and warranty offerings. We have now launched the Porch Warranty brand and expect to launch the Porch Insurance brand later this year, creating differentiated offerings for consumers. And we are focused on getting the Reciprocal structure approved moving the insurance business to a lower risk, higher margin business. Thank you all. I will now hand things over to Nicole to highlight a few key product updates.

Nicole Pelley: Thanks, Matthew and hello everyone. I lead our product and technology teams and responsible for consumer experiences and data platform and work across our businesses to help them leverage the Porch platform and accelerate their product velocity and growth rate. I will highlight today some key successes from the first quarter. First, I would like to touch on our insurance pricing models. We take our insights into properties and homebuyers, where we have insights into approximately 90% of U.S. homebuyers. In addition, we have 15 years of claims history from HOA across various insurance categories, such as water, fire and theft. All of this data feeds our risk model that is generated using machine learning and advanced pricing techniques.

Successful insurance businesses rely on how accurate their models are at predicting risk. And while there will always be losses, improving prediction accuracy allows for effective pricing, which is key. While for competitive reasons, we will not provide details on what data creates the biggest impacts, we have been able to improve our risk accuracy in key insurance risk categories by approximately 15% to 20%. This is a common way to measure accuracy in segmenting risk through pricing in our team’s experience. Anything in the high single-digits is going to be a meaningful improvement. So we are all really excited to see double-digit improvement in model accuracy. And we are just getting started. What this means is that we can charge a lower price for low risk policies, increasing our conversion of low risk policies and more accurately price high-risk policies higher, leading to either appropriate pricing and margins or lower conversion on this subset.

All of this is expected to lead to long-term profitable growth. The unique insights we have about properties includes information such as short borrowers, appliance age and model and potential issues about specific homes. This information feeds the insurance pricing model I just mentioned. We have approval in 9 states to use information on the water heater location. This has now been expanded to include other insights such as the type of roof, age and quality, the type of flooring and the type of piping and characteristics. We are pleased to have approval to use this data in three states: Arizona, Virginia and Texas. We have also submitted filings in Illinois and Nevada to use all of our insights. A key focus for the business is to continually develop new products for the companies using our Vertical Software.

We want to launch a new module for each of the type of companies we work with at least once per year both to create more value for these companies and to increase revenue per company. I would like to call out three new developments across various Porch brands. First, within our flow five business unit, we are now able to offer an all-in-one solution for brokers that combines the great features of our mortgage point of sale with a mortgage loan origination system by integrated partners. In addition, we have launched two new products for mortgage companies, Closing Accelerator, which will help customers close loans faster and Customer Capture, which helps mortgage companies get more customers. With this powerful combination, we are able to provide a best in market solution.

Secondly, we have released a new report writer for inspectors. This new release provides a fully redesigned modern user interface and enhanced functionality that can serve as an all-in-one solution for small home inspection companies. Our new report writer allows inspectors to create reports faster with voice commands, media editing, and support for multiple inspectors on site. The new platform will also enable tighter integration with some of our other modules, such as payment processing and the Porch mobile app. Lastly, we have rolled out price increases within our title business alongside launching new products for these customers. This includes RynohEscheat, escheatment is a complex process that title businesses need to follow to comply with state regulations on unclaimed funds.

The module is an easy-to-use cloud based software that seamlessly integrates with bank accounts ensuring the title agents are notified of unclaimed funds and helps to facilitate the reporting process in accordance with each state’s escheatment reporting regulations. I will now shift to our work for consumers. Our app has now been rolled out to nearly all eligible ISN inspection companies. This is key to engaging additional consumers who access their inspection report by the app, the home data that is generated from that report and our recall check monitoring functions for their appliances. We then use this opportunity to cross sell other services Porch provides. We also look at how we can continue to make the moving journey simpler for both moving companies and consumers.

In our moving business, we have launched a fixed price product called Plus. This allows consumers to lock in a fixed price for their move rather than an hourly rate. This gives them confidence that costs will not build up through an already expensive period and allow us to increase our margins per customer by including more services, the third-party movers offer, such as wrapping and packing or moving permits. ISN Flex Funds is our inspection pay close module first launched last year. This product gives consumers the flexibility to roll the cost of their home inspection into their mortgage payment. Giving consumers more time to pay often increases the number of services they sign up for, such as Radon Testing, Asbestos Jack and Sewer Scope, thereby giving them more confidence in the home they are purchasing and up-selling services for our inspection businesses.

We are pleased with how this product has gained momentum and look forward to strong growth in 2023 and 2024. As Matt mentioned earlier, we launched Porch Warranty in February. We are excited by this as it’s a high-value service for consumers and will help this high margin business of ours continue to grow rapidly. This branded warranty product is being launched across multiple channels such as utilities and real estate. In addition to the traditional channels, Porch Group has access to inspectors and others, which allows us to sell warranties at a lower customer acquisition cost. We also enhanced the coverage and value consumers receive by including a variety of our handyman maintenance services to provide differentiation. Thanks, everyone.

I will now hand it back to Matt.

Q&A Session

Matt Ehrlichman: Thanks, Nicole. Thanks, guys. We will wrap up by saying first that we really are excited about the journey ahead. The team and I remain confident in our offerings and in our strategy, like many are facing market headwinds, but the team is staying focused and is executing well. We do not think the stock market accurately reflects what we are building, but that over time, they will. I am particularly looking forward to the second half of this year, during which we expect to both post positive adjusted EBITDA and launch the Reciprocal structure for our insurance businesses. These are both important moments for us and something we have been working on and looking forward to for some time. Thank you in advance for the Porch team for the great work. So with that, let’s wrap the prepared remarks. And Lois, if you go ahead, please open the call for Q&A.

A – Lois Perkins: Great. Thanks, Matt. The line is now open for Q&A. [Operator Instructions] The question one comes from Daniel at Benchmark. Go ahead, Daniel.

Operator: Next, we have Jason from Oppenheimer. Go ahead, Jason.

Operator: Next, we go to John from Stephens.

Operator: Thanks. Next, we go to Josh from Cantor

Operator: Right. Next, we go to Ryan from KBW.

Operator: Next up, we have Jason from Craig-Hallum.

Operator: Alright. Next, we have Daniel from JPM.

Lois Perkins: Great, thanks. Thank you, everyone. That concludes our time for today. We look forward to speaking you soon. You may now disconnect. Thank you.

Matt Ehrlichman: Thanks, everybody. Take care.