(EDGAR Online via COMTEX) -- Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
This Quarterly Report and the documents incorporated herein by reference contain forward- looking statements as defined by the Private Securities Litigation Reform Act of 1995. These statements are based on the beliefs and assumptions of management. Although the Company believes that its plans, intentions and expectations reflected in or suggested by these forward-looking statements are reasonable, the Company cannot assure you that it will achieve or realize these plans, intentions or expectations. Forward-looking statements are inherently subject to risks, uncertainties and assumptions. Generally, statements that are not historical facts, including statements concerning the Company's possible or assumed future actions, business strategies, events or results of operations, are forward-looking statements. These statements may be preceded by, followed by or include the words "believes," "estimates," "expects," "projects," "forecasts," "may," "will," "should," "seeks," "plans," "scheduled," "anticipates" or "intends" or similar expressions.
Forward-looking statements are not guarantees of performance. You should not put undue reliance on these statements which speak only as of the date hereof. Unless specifically indicated otherwise, the forward-looking statements in this Quarterly Report do not reflect the potential impact of any divestitures, mergers, acquisitions, or other business combinations that have not been completed as of the date of this filing. You should understand that the following important factors, among others, could affect the Company's future results and could cause those results or other outcomes to differ materially from those expressed or implied in the Company's forward-looking statements:
? expansion plans and opportunities, including recently completed acquisitions as well as future acquisitions or additional business combinations;
? costs related to being a public company;
?litigation, complaints, and/or adverse publicity;
the impact of changes in consumer spending patterns, consumer preferences, ? local, regional and national economic conditions, crime, weather, demographic trends and employee availability;
? further expansion into the insurance industry, and the related federal and state regulatory requirements;
?privacy and data protection laws, privacy or data breaches, or the loss of data; and
? the duration and scope of the COVID pandemic, and its continued effect on the business and financial conditions of the Company.
These and other factors that could cause actual results to differ from those implied by the forward-looking statements in this Quarterly Report are more fully described in Part II, Item 1A of this Quarterly Report, Item 1A of the Company's Annual Report on Form 10-K for the year ended December 31, 2021 filed with the SEC on March 16,2022 and in any of the Company's subsequent SEC filings. The risks described in these filings are not exhaustive. New risk factors emerge from time to time, and it is not possible for us to predict all such risk factors, nor can the Company assess the impact of all such risk factors on its business or the extent to which any factor or combination of factors may cause actual results to differ materially from those contained in any forward-looking statements. All forward- looking statements attributable to the Company or persons acting on its behalf are expressly qualified in their entirety by the foregoing cautionary statements. The Company undertakes no obligations to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.
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Porch is a vertical software platform for the home, providing software and services to over 25,500 home services companies, such as home inspectors, mortgage companies and loan officers, title companies, moving companies, real estate agencies, utility companies, roofers and others, helping these service providers grow their business and improve their customer experience. The Company provides software and services to home services companies and, through these relationships, gains unique and early access to homebuyers and homeowners, assists homebuyers and homeowners with critical services such as insurance and moving, and, in turn, the Company's platform drives demand for other services from such companies as part of the value proposition. Porch has three types of customers: (1) home services companies, such as home inspectors, mortgage companies, and loan officers and title companies, for whom Porch provides software and services and who pay recurring SaaS fees and increasingly provide introductions to homebuyers and homeowners; (2) consumers, such as homebuyers and homeowners, whom Porch assists with the comparison and provision of various critical home services, such as insurance, moving, security, TV/Internet, and home repair and improvement; and (3) service providers, such as insurance carriers, moving companies, security companies, title companies, mortgage companies and TV/Internet providers, who pay for new customer sign-ups.
The Company sells software and services to companies using a variety of sales and marketing tactics, including teams of inside sales representatives organized by vertical market who engage directly with companies, and enterprise sales teams that target the large named accounts in each of the vertical markets. These teams are supported by various typical software marketing tactics, including digital, in-person (such as trade shows and other events) and content marketing.
For consumers, Porch largely relies on our unique and proprietary relationships with over 25,500 companies using the Company's software to provide the company with end customer access and introductions. The Company then utilizes technology, lifecycle marketing and teams in lower cost locations to operate as a Moving Concierge to assist these consumers with services. The Company has invested in limited direct-to-consumer marketing capabilities, but expects to become more advanced over time with capabilities such as digital and social retargeting.
Key Performance Measures and Operating Metrics
In the management of these businesses, the Company identifies, measures and evaluates various operating metrics. The key performance measures and operating metrics used in managing the businesses are set forth below. These key performance measures and operating metrics are not prepared in accordance with generally accepted accounting principles in the United States ("GAAP"), and may not be comparable to or calculated in the same way as other similarly titled measures and metrics used by other companies. The key performance measures presented have been adjusted for divested businesses in 2020.
Average Companies in Quarter - Porch provides software and services to home services companies and, through these relationships, gains unique and early access to homebuyers and homeowners, assists homebuyers and homeowners with critical services such as insurance, warranty and moving. The Company's customers include home services companies, for whom the Company provides software and services and who provide introductions to homebuyers and homeowners and tracks the average number of home services companies from which ? it generates revenue each quarter in order to measure the ability to attract, retain and grow relationships with home services companies. Porch management defines the average number of companies in a quarter as the straight-line average of the number of companies as of the end of period compared with the beginning of period across all of the Company's home services verticals that
Average Revenue per Account per Month in Quarter - Management views the Company's ability to increase revenue generated from existing customers as a ? key component of Porch's growth strategy. Average Revenue per Account per Month in Quarter is defined as the average revenue per month generated across all our home services company customer accounts in a quarterly period. Average Revenue per Account per Month
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in Quarter is derived from all customers and total revenue, not only customers and revenues associated with the Company's referral network.
The following table summarizes Average Companies in Quarter and Average Revenue per Account per Month in Quarter for each of the quarterly periods indicated:
2022 2022 2022 2022 Q1 Q2 Q3 Q4 Average Companies in Quarter 25,512 - - - Average Revenue per Account per Month in Quarter $ 817 $ - $ - $ - 2021 2021 2021 2021 Q1 Q2 Q3 Q4 Average Companies in Quarter 13,995 17,120 20,472 24,603 Average Revenue per Account per Month in Quarter (adjusted)(1) $ 637 $ 933 (1) $ 985 (1) $ 776 (1) 2020 2020 2020 2020 Q1 Q2 Q3 Q4 Average Companies in Quarter 10,903 10,523 10,792 11,157 Average Revenue per Account per Month in Quarter $ 484 $ 556 $ 664 $ 556
During the quarter ended December 31, 2021, the Company corrected an immaterial error that impacted revenue and cost of revenue for the three
The following tables shows the impact of this error on Average Revenue per Account per Month in Quarter:
2021 2021 2021 2021 Q1 Q2 Q3 Q4 Total Revenue (as previously reported) 26,742 $ 51,340 $ 62,769 $ 51,582 Quarterly Impact of Revenue Adjustment Recorded in Q4 - (3,400) (2,300) 5,700 Total Revenue (as adjusted) $ 26,742 $ 47,940 $ 60,469 $ 57,282 Average Revenue per Account per Month in Quarter (as adjusted) $ 637 $ 933 $ 985 $ 776 Average Revenue per Account per Month in Quarter (as previously reported) $ 637 $ 1,000 $ 1,022 $ 699
In 2021, the Company completed acquisitions of V12 Data in Q1, Homeowners of America ("HOA") and Rynoh in Q2, American Home Protect ("AHP") in Q3 and Floify in Q4, that impacted the average number of companies in the quarter.
Due to COVID-19, some small companies put their business with the Company on hold, which is reflected in a lower number of total companies in 2020 and higher average revenue per account.
Monetized Services in Quarter - Porch connects consumers with home services companies nationwide and offers a full range of products and services where homeowners can, among other things: (i) compare and buy home insurance policies (along with auto, flood and umbrella policies) and warranties with competitive rates and coverage; (ii) arrange for a variety of services in connection with their move, from labor to load or unload a truck to full-service, long-distance moving services; (iii) discover and install home automation and security systems; (iv) compare Internet and television options for their new home;
Average Revenue per Monetized Service in Quarter - Management believes that ? shifting the mix of services delivered to homebuyers and homeowners toward higher revenue services is a key component of Porch's growth strategy. Average revenue per monetized services in quarter is the average revenue generated
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per monetized service performed in a quarterly period. When calculating Average Revenue per Monetized Service in quarter, average revenue is defined as total quarterly service transaction revenues generated from monetized services.
The following table summarizes our monetized services and average revenue per monetized service for each of the quarterly periods indicated:
2022 2022 2022 2022 Q1 Q2 Q3 Q4 Monetized Services in Quarter 254,249 - - - Average Revenue per Monetized Service in Quarter $ 176 $ - $ - $ - 2021 2021 2021 2021 Q1 Q2 Q3 Q4 Monetized Services in Quarter 182,779 302,462 329,359 260,352 Average Revenue per Monetized Service in Quarter (adjusted)(1) $ 92 $ 118 (1) $ 137 (1) $ 154 (1) 2020 2020 2020 2020 Q1 Q2 Q3 Q4 Monetized Services in Quarter 152,165 181,520 198,165 169,949 Average Revenue per Monetized Service in Quarter $ 93 $ 86 $ 97 $ 98
During the quarter ended December 31, 2021, the Company corrected an immaterial error that impacted revenue and cost of revenue for the three
The following tables shows the impact of this error on Average Revenue per Monetized Service in Quarter:
2021 2021 2021 2021 Q1 Q2 Q3 Q4 Service Revenue (as previously reported) $ 16,812 $ 39,102 $ 47,398 $ 34,351 Quarterly Impact of Revenue Adjustment Recorded in Q4 - (3,400) (2,300) 5,700 Service Revenue (as adjusted) $ 16,812 $ 35,702 $ 45,098 $ 40,051 Average Revenue per Monetized Service in Quarter (adjusted) $ 92 $ 118 $ 137 $ 154 Average Revenue per Monetized Service in Quarter (as previously reported) $ 92 $ 129 $ 144 $ 132
In 2021, the Company completed acquisitions of V12 in Q1, HOA and Rynoh in Q2, AHP in Q3 and Floify in Q4, which impacted the number of monetized services in the quarter.
In 2020, the Company shifted insurance monetization from getting paid per quote to earning multiyear insurance commissions, resulting in fewer monetized transactions with higher average revenue.
In March 2020, COVID-19 impacted the service volumes during the period from March until June. The impact on service volumes, largely recovered by June 30, 2020, and after adjusting for insurance monetization remains above prior year volumes.
Adoption of New Accounting Standards
We early adopted Accounting Standards Update No. 2021-08, Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers on January 1, 2022 and will apply the guidance prospectively for business combinations that occur after the adoption date. The adoption has no impact to the existing unaudited condensed consolidated balance sheets, statements of operations, and statements of cash flows.
Key Factors Affecting Operating Results
The Company has been implementing its strategy as a vertical software platform for the home, providing software and services to over 25,500 home services companies, such as home inspectors, moving companies, utility companies,
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warranty companies, etc. The following are key factors affecting our operating results in the three months ended March 31, 2022:
In 2021, the Company completed several acquisitions with an aggregate purchase price of $346.3 million to acquire companies to expand the scope and nature of the Company's services offerings, add additional team members with important ? skillsets, and realize synergies. These acquisitions included V12 Data (acquired in January 2021), HOA (acquired in April 2021), Rynoh (acquired in May 2021), AHP (acquired in September 2021) and Floify (acquired in October 2021). For a complete discussion of our 2021 acquisitions, refer to Item 8 in the 2021 Annual Report on Form 10-K.
Continued investment in growing and expanding the Company's position in the ? home inspection industry including through our core ERP and CRM software offered by ISN.
Continued investment in growing and expanding the Company's position in ? providing moving services to consumers as a result of the 2018 acquisition of HireAHelper(TM), a provider of software and demand for moving companies.
Intentionally building operating leverage in the business by focusing on ? growing operating expenses at a slower rate than the growth in revenue.
? Ongoing expansion in other software verticals related to the home and related services such as title, warranty and mortgage software.
? Investments in consumer experience to drive higher conversion rates, including investments in apps.
Investments in establishing and maintaining controls required by the ? Sarbanes-Oxley Act of 2002 ("SOX") and other internal controls across IT and accounting organizations.
? Investments in data platforms and leveraging that data in pricing optimization within insurance.
? Growth across the insurance business, including geographic expansion.
Basis of Presentation
The unaudited condensed consolidated financial statements and accompanying notes of the Company include the accounts of the Company and its consolidated subsidiaries and were prepared in accordance with accounting principles generally accepted in the United States ("GAAP"). All significant intercompany accounts and transactions are eliminated in consolidation.
The Company operates in two operating segments: Vertical Software and Insurance. Operating segments are identified as components of an enterprise about which separate discrete financial information is available for evaluation by the CODM in making decisions regarding resource allocation and assessing performance. The Company has determined that its Chief Executive Officer is the CODM.
Components of Results of Operations
The Company generates revenue from (1) software and service subscription revenue generated from fees received for providing subscription access to the Company's software platforms and subscription services across various industries; (2) insurance revenue in the form of commissions from third-party insurance carriers where Porch acts as an independent agent and commissions from reinsurers, insurance and warranty premiums, policy fees and other insurance-
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related fees generated through its own insurance carrier; (3) move-related service revenue through fees received for connecting homeowners to service providers during time of a move including movers, TV/Internet, warranty, and security monitoring providers and for certain move related services for providing select services directly to the homeowner; (4) post-move related revenue in the form of fees earned from introducing homeowners to home service professionals including handymen, plumbers, electricians, roofers etc., and for certain projects for providing select services directly to the homeowner.
Software and service subscription revenue primarily relates to subscriptions to the Company's software offerings across its verticals as well as marketing software and services. The Company's subscription arrangements for this revenue stream do not provide the customer with the right to take possession of the software supporting the cloud-based application services. The Company's standard subscription contracts are monthly contracts in which pricing is based on a specified price per inspection completed through the software. Marketing software and services are primarily contractual monthly recurring billings. Fees earned for providing access to the subscription software are non-refundable and there is no right of return. Revenue is recognized based on the amount which the Company is entitled to for providing access to the subscription software during the monthly contract term.
The Insurance segment offers various property-related insurance policies through its own risk-bearing carrier and independent agency as well as a risk-bearing home warranty company. Third-party insurance companies pay Porch Company's agency upfront and renewal commissions for selling their policies, reinsurers pay the Company ceding commissions when premiums are ceded from owned insurance products, and revenues are earned in the form of policy premiums collected from insureds from owned insurance products. The Insurance segment also includes home warranty revenue which mainly consists of premiums paid by warranty customers for the Company's home warranty products.
Move-related transactions revenue arises when the Company connects service providers with homeowners that meet pre-defined criteria and may be looking for relevant services. Service providers include movers, TV/Internet, warranty, and security monitoring providers. The Company earns revenue when consumers purchase services from third-party providers. For moving products where the Company manages the process of selecting the service provider and setting the price, the Company generally invoices for projects on a fixed fee or time and materials basis.
Post-move-related transaction revenue includes fees earned from introducing consumers to home service providers as well as directly to the homeowner when the Company manages the service. Revenue generated from service providers is recognized at a point in time upon the connection of a homeowner to the service provider. The Company generally invoices for managed services projects on a fixed fee or time and materials basis.
Total Costs and Expenses
Operating expenses are categorized into four categories:
? Cost of revenue;
? Selling and marketing;
? Product and technology; and
? General and administrative.
The categories of operating expenses include both cash expenses and non-cash charges, such as stock-based compensation, depreciation and amortization. Depreciation and amortization are recorded in all operating expense categories, and consist of depreciation from property, equipment and software and intangible assets.
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Cost of revenue primarily consists of insurance claims losses and loss adjustment expenses, warranty claims, third-party providers for executing moving labor and handyman services when the Company is managing the job, data costs related to marketing campaigns, certain call center costs, credit card processing and merchant fees and operational cost of SaaS businesses.
Selling and marketing expenses primarily consist of payroll, employee benefits and stock-based compensation expense, and other headcount related costs associated with sales efforts directed toward companies and consumers, and deferred policy acquisition costs ("DAC") of new and renewal insurance contracts. Also included are any direct costs to acquire customers, such as search engine optimization ("SEO"), marketing ("SEM") costs and affiliate and partner leads.
The Company capitalizes DAC, which consists primarily of commissions, premium taxes, policy underwriting, and production expenses directly related to the successful acquisition by the Company's insurance subsidiary of new or renewal insurance contracts. DAC are amortized to expense on a straight-line basis over the terms of the policies to which they relate, which is generally one year. DAC is also reduced by ceding commissions paid by reinsurance companies which represent recoveries of acquisition costs. DAC is periodically reviewed for recoverability and adjusted if necessary.
Product and technology development costs primarily consist of payroll, employee benefits, stock-based compensation expense, other headcount-related costs associated with product development, net of costs capitalized as internally developed software. Also included are cloud computing, hosting and other technology costs, software subscriptions, professional services and amortization of internally developed software.
General and administrative expenses primarily consist of expenses associated with functional departments for finance, legal, human resources and executive management. The primary categories of expenses include payroll, employee benefits, stock-based compensation expense and other headcount related costs, rent for office space, legal and professional fees, taxes, licenses and regulatory fees, merger and acquisition transaction costs, and other administrative costs.
Critical Accounting Policies and Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates, judgments, and assumptions that affect the amounts reported and disclosed in the unaudited condensed consolidated financial statements and accompanying notes. On an ongoing basis these estimates, which include, but are not limited to, estimated variable consideration for services performed, estimated lifetime value of the insurance agency commissions, current estimate for credit losses, depreciable lives for property and equipment, the valuation of and useful lives for acquired intangible assets, goodwill, the valuation allowance on deferred tax assets, assumptions used in stock-based compensation expense, unpaid losses for insurance claims and loss adjustment expenses, contingent consideration, earnout liabilities and private warrant liabilities, all of which are evaluated by management. Actual results could differ materially from those estimates, judgments, and assumptions.
At least quarterly, the Company evaluates estimates and assumptions and makes changes accordingly. For information on our significant accounting policies, see . . .
May 10, 2022
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