Porch(PRCH) - 2022 Q4 - Annual Report

PART I Item 1. Business This section outlines the company's business operations, market strategies, revenue generation, regulatory landscape, human capital, and comprehensive risk factors Company Overview Porch Group operates as a vertical software company focused on the home services and insurance industries - Porch Group provides software and services to approximately 30,900 home service companies, using these relationships to gain early access to homeowners for cross-selling services like insurance and moving[22] - The company operates through two primary segments: Vertical Software and Insurance[25] - The Vertical Software segment serves home services companies with software, assists their customers (homeowners) with moving services, and connects them with service providers[26] - The Insurance segment offers property insurance and home warranty products through its own risk-bearing carrier (Homeowners of America), an independent agency (Elite Insurance Group), and warranty companies[27][33] Our Industry Porch Group operates within a large and fragmented U.S. home services market with an estimated total addressable market of $360.2 billion Total Addressable Market (TAM) | Service Category | TAM (in billions) | | :--- | :--- | | Contractor services | $195.0 | | Property and casualty insurance and home warranty | $149.7 | | Mover marketing | $10.8 | | Moving services | $4.7 | | Total | $360.2 | - In 2022, the U.S. housing market experienced a 17.8% decrease in existing home sales volumes, totaling 5.03 million, due to rising interest rates and economic uncertainty[52][55] - Approximately 20% of the company's revenue is directly tied to housing market transactions, mainly from moving services[56] - The online on-demand home services market is projected to grow at a CAGR of over 61% from 2022 to 2027, driven by millennial and Gen Z homeowners[62] Our Competitive Strengths Porch Group's competitive strengths are rooted in its leading software platforms providing early and unique access to homebuyers - Porch provides leading software platforms (ISN, Floify, Rynoh, etc.) to approximately 30,900 companies across various home services verticals[63][65] - The company gains early access to homebuyers through its software partners, allowing it to market services up to six weeks before a move, a significant advantage over competitors who rely on change-of-address data[66] - Porch has access to proprietary home data, such as from inspection reports, which it uses to improve pricing algorithms for homeowners insurance and predict consumer purchase decisions[69] - The company offers a comprehensive suite of services covering the entire homeownership journey, from moving to maintenance, which enhances customer value and strengthens its proposition to business partners[70] Our Strategies for Growth Porch's growth strategy focuses on leveraging software for early homebuyer access and utilizing proprietary data to enhance service offerings - Sell More Software and Gain Access to More Homebuyers: Increase software customers organically and through acquisitions, upsell additional modules, and increase the percentage of partners granting consumer access[74][75] - Increase Revenue per Homebuyer: Improve the digital shopping experience, increase engagement through the Moving Concierge service, and introduce high-margin services like solar installation[74][75] - Expand Insurance and Warranty Offerings: Grow its insurance carrier (HOA) from 21 states, add more carrier partners, and leverage proprietary data for better underwriting[74][76][78] - Mover Marketing: Utilize early access to homebuyers to offer targeted discounts and promotions on behalf of other companies[79] - Geographic Expansion: Focus on expanding insurance operations across more U.S. markets, with potential for future international expansion[80] Revenue Porch Group generates revenue through Insurance, Vertical Software subscriptions, and transaction fees, with Insurance being the largest and fastest-growing segment 2022 Revenue Breakdown | Revenue Stream | Revenue (in millions) | % of Total Revenue | | :--- | :--- | :--- | | Insurance and Warranty | $121.0 | 44% | | Software and Subscription Services | $72.8 | 26% | | Move-related and Post-move Services | $82.1 | 30% | - The Insurance segment is the company's largest and fastest-growing revenue stream, with most revenue being recurring as customers renew policies annually[82] - The Vertical Software segment generates revenue from monthly or annual SaaS fees and B2B2C transaction fees from move-related services, which are seasonal and concentrated in Q2 and Q3[85][86] Government Regulation Porch Group is subject to extensive and evolving regulations across data privacy, marketing, real estate, and state-level insurance laws - The company is impacted by complex and evolving data privacy laws such as the California Consumer Privacy Act (CCPA) and California Privacy Rights Act (CPRA)[99] - Marketing activities are governed by laws including the Telephone Consumer Protection Act (TCPA) and the CAN-SPAM Act[100] - The insurance business is highly regulated at the state level, with oversight from individual state departments of insurance and adherence to National Association of Insurance Commissioners (NAIC) model laws[103][104] - The insurance carrier (HOAIC) is subject to Insurance Holding Company regulations, requiring registration and reporting to its domicile state's (Texas) insurance department[106] - The company must comply with NAIC financial solvency ratios and risk-based capital requirements to monitor financial health and ensure adequate capital[109] Human Capital Management Porch Group employs approximately 1,800 individuals, fostering a decentralized, values-driven culture focused on employee development and DEI - As of February 2023, Porch had approximately 1,800 full-time employees and independent contractors[127] - The company utilizes a decentralized operating model, which aids in integrating acquired companies by maintaining their entrepreneurial culture while leveraging shared infrastructure[122] - Porch was certified as a Great Place to Work in 2022, reflecting its values-driven culture that fosters employee engagement and development[126] Item 1A. Risk Factors The company faces substantial risks across its business, financial, and operational domains, including competition, market sensitivity, and regulatory compliance - Business & Industry Risks: The company operates in highly competitive industries and is sensitive to economic conditions affecting the housing market, relying on strategic third-party relationships for data access[134][136][158] - Insurance Risks: The insurance business is exposed to significant losses from weather events and other catastrophes, dependent on reinsurance availability and pricing, and subject to extensive state-level regulation[153][248][281] - Financial & Reporting Risks: The company has a history of net losses and has identified material weaknesses in its internal control over financial reporting, with convertible notes potentially affecting its financial condition[214][200][321] - Cybersecurity & Data Privacy Risks: A breach of personal or sensitive user data could result in significant mitigation costs, regulatory fines, and reputational harm, subject to evolving privacy laws like the CCPA[171][297] - Acquisition Risks: The company's growth strategy depends on successfully acquiring and integrating other businesses, involving risks of failing to realize synergies, disrupting operations, and managing integration challenges[313][316] Item 1B. Unresolved Staff Comments The company reports that it has no unresolved staff comments from the SEC - None[349] Item 2. Properties The company leases various real properties in the United States and other countries to support its business operations - The company leases real properties for its operations and believes its current facilities are suitable for its needs[350] Item 3. Legal Proceedings Porch is involved in several legal proceedings, including TCPA actions, a favorable arbitration award, and a settled wage and hour class action - TCPA Proceedings: The company is a party to twelve legal proceedings alleging violations of the TCPA, with cases consolidated and in early litigation stages[351][352] - Kandela Proceeding: An arbitrator found no merit in claims by former owners of Kandela, LLC, and awarded Porch $1.4 million in legal fees and costs in July 2022[353] - Putative Wage and Hours Class Action: A class action lawsuit filed by a former employee of HireAHelper™ was settled, with final court approval obtained on August 11, 2022[354] Item 4. Mine Safety Disclosures This item is not applicable to the company - Not applicable[357] PART II Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities This section provides market and liquidity information, including common stock trading, dividend policy, and share repurchase activities - The company's common stock trades on the NASDAQ under the symbol "PRCH"[359] - The company has not paid cash dividends and does not intend to in the foreseeable future[360] Q4 2022 Share Repurchases | Period | Total Shares Purchased | Average Price Paid per Share | Approx. Dollar Value Remaining (in millions) | | :--- | :--- | :--- | :--- | | Dec 1 - Dec 31, 2022 | 2,388,756 | $1.82 | $10.7 | Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides a detailed analysis of the company's financial performance, liquidity, and capital resources for the reported periods Key Performance Measures and Operating Metrics The company tracks key operating metrics such as average companies, revenue per account, monetized services, and revenue per monetized service Key Operating Metrics (Quarterly) | Metric | Q4 2022 | Q4 2021 | | :--- | :--- | :--- | | Average Companies in Quarter | 30,860 | 24,601 | | Average Revenue per Account per Month ($) | 693 | 776 | | Monetized Services in Quarter | 212,992 | 267,683 | | Average Revenue per Monetized Service ($) | 219 | 150 | Results of Operations For 2022, total revenue increased by 43% to $275.9 million, but operating and net losses widened significantly due to impairment charges and higher costs Consolidated Results of Operations (Year Ended Dec 31) | Metric (in thousands) | 2022 | 2021 | % Change | | :--- | :--- | :--- | :--- | | Revenue | $275,948 | $192,433 | 43% | | Cost of revenue | $107,577 | $58,725 | 83% | | Impairment loss | $61,386 | $0 | NM | | Operating loss | ($177,047) | ($83,365) | 112% | | Net loss | ($156,559) | ($106,606) | 47% | - The increase in revenue was primarily driven by approximately $63 million from acquisitions made in 2022 and 2021[443] - Cost of revenue increased significantly due to acquisitions and higher insurance loss expenses from volatile weather events like Hurricane Ian and Winter Storm Elliott[444] - The company recorded a $61.4 million impairment loss on intangible assets and goodwill in 2022, which was not present in 2021[450] Segment Results of Operations Both Vertical Software and Insurance segments saw revenue growth in 2022, but Adjusted EBITDA declined due to market downturns and higher claims costs Segment Revenue (Year Ended Dec 31, in thousands) | Segment | 2022 | 2021 | | :--- | :--- | :--- | | Vertical Software | $154,915 | $137,150 | | Insurance | $121,033 | $55,283 | Segment Adjusted EBITDA (Loss) (Year Ended Dec 31, in thousands) | Segment | 2022 | 2021 | | :--- | :--- | :--- | | Vertical Software | $14,678 | $20,733 | | Insurance | ($5,499) | $9,007 | - The Vertical Software segment's Adjusted EBITDA was negatively impacted by the downturn in the housing market in 2022[465] - The Insurance segment's Adjusted EBITDA loss in 2022 was a result of significantly higher claims costs caused by severe weather events[465] Liquidity and Capital Resources As of December 31, 2022, Porch had $215.1 million in cash, with management believing it has sufficient liquidity for the next 12 months Cash and Debt Position (as of Dec 31, 2022) | Metric | Amount (in millions) | | :--- | :--- | | Cash and cash equivalents | $215.1 | | Restricted cash | $13.5 | | Accumulated deficit | ($585.0) | | Total Debt (principal) | $451.1 | Cash Flow Summary (Year Ended Dec 31, in thousands) | Cash Flow Activity | 2022 | 2021 | | :--- | :--- | :--- | | Net cash used in operating activities | ($17,736) | ($34,777) | | Net cash used in investing activities | ($79,678) | ($263,433) | | Net cash provided by financing activities | $1,227 | $415,549 | - Management believes that cash on hand is sufficient to finance operations, capital expenditures, and debt service for at least the next 12 months[481] Item 7A. Quantitative and Qualitative Disclosures About Market Risk The company is exposed to interest rate and inflation risks, with its fixed-rate debt mitigating some interest rate volatility - Interest Rate Risk: The company's $425 million in 2026 Notes have a fixed coupon rate, limiting interest expense volatility, but its insurance subsidiary's $91.6 million fixed-income investment portfolio is exposed to unrealized losses from rising interest rates[499][502] - Inflation Risk: Operations have been negatively affected by inflation, leading to higher costs, and sustained inflation could make it difficult to mitigate these cost increases and may reduce consumer spending on home services[504] - Other Risks: The company is exposed to risks related to the availability of funding, reinsurance providers, and catastrophic weather events[506] Item 8. Financial Statements and Supplementary Data This section presents the company's audited consolidated financial statements, including an adverse opinion on internal controls - The independent auditor, Ernst & Young LLP, issued an unqualified opinion on the consolidated financial statements but an adverse opinion on the company's internal control over financial reporting as of December 31, 2022[512][513][891] Consolidated Balance Sheet Highlights (as of Dec 31) | Account (in thousands) | 2022 | 2021 | | :--- | :--- | :--- | | Cash and cash equivalents | $215,060 | $315,741 | | Goodwill | $244,697 | $225,654 | | Total Assets | $1,049,057 | $1,038,747 | | Long-term debt | $425,310 | $414,585 | | Total Liabilities | $969,704 | $821,702 | | Total Stockholders' Equity | $79,353 | $217,045 | Consolidated Statement of Operations Highlights (Year Ended Dec 31) | Account (in thousands) | 2022 | 2021 | 2020 | | :--- | :--- | :--- | :--- | | Revenue | $275,948 | $192,433 | $72,299 | | Operating loss | ($177,047) | ($83,365) | ($42,231) | | Net loss | ($156,559) | ($106,606) | ($54,032) | | Loss per share - basic | ($1.61) | ($1.14) | ($1.96) | Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure This item is not applicable to the company - Not applicable[869] Item 9A. Controls and Procedures Management concluded that disclosure controls were ineffective due to a material weakness in IT general controls at HOA, despite remediating prior weaknesses - Management concluded that disclosure controls and procedures were not effective as of December 31, 2022[870] - A material weakness was identified related to ineffective design and operation of IT general controls at the Homeowners of America (HOA) subsidiary[874][893] - A remediation plan is in place, which includes reassessing IT controls, performing ongoing training, implementing additional monitoring controls, and expanding resources[879] - The material weaknesses that were identified as of December 31, 2021 have been remediated[880][882] Item 9B. Other Information The company reports no other information for this item - None[902] PART III Item 10. Directors, Executive Officers, and Corporate Governance This section incorporates by reference information on corporate governance, executive officers, and directors from the proxy statement - Information is incorporated by reference from the registrant's definitive proxy statement for its 2023 annual meeting[905] Item 11. Executive Compensation This section incorporates by reference information regarding executive compensation from the company's definitive proxy statement - Information is incorporated by reference from the registrant's definitive proxy statement[906] Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters This section incorporates by reference information on security ownership and related stockholder matters from the company's definitive proxy statement - Information is incorporated by reference from the registrant's definitive proxy statement[907] Item 13. Certain Relationships and Related Transactions, and Director Independence This section incorporates by reference details concerning certain relationships, related transactions, and director independence from the proxy statement - Information is incorporated by reference from the registrant's definitive proxy statement[908] Item 14. Principal Accountant Fees and Services This section incorporates by reference information regarding principal accountant fees and services from the company's definitive proxy statement - Information is incorporated by reference from the registrant's definitive proxy statement[909] PART IV Item 15. Exhibits and Financial Statement Schedules This section lists all exhibits and financial statement schedules filed as part of the annual report - This section lists the financial statements, financial statement schedules (Schedule I), and all exhibits filed with the Form 10-K[909] Item 16. Form 10-K Summary The company reports no summary for this item - None[916]