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spk02: Good afternoon, everyone, and thank you for participating in Forge Group's second quarter 2022 conference call. Today, we issued our second quarter earnings press release and related Form 8K to the SEC. The press release can be found in our investor relations website at ir.forgegroup.com. Joining us today are Matt Ehrlichman, Forge Group's CEO, Chairman, and Founder, Marty Heiminger, Forge Group's CFO, Matthew Nagel, Forge Group COO, and Joshua Steffen, VP and Group GM for our inspection real estate team. 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. As today's discussion included an including responses to your questions, reflects management views as of today, August 9th, 2022. We do not undertake any obligations to update or revise this information. Additionally, we'll make forward-looking statements about our future financial or business performance or conditions, business strategy and plans, and anticipated impacts from pending or completed acquisitions based on current expectations and assumptions. These statements are subject to risk and uncertainties which could cause actual results to differ materially from these forward-looking statements. We encourage you to consider the risk factors described in our SEC filings for additional information. We'll 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 measure discussed during this earnings call. As a reminder, this webcast will be available for replay shortly after the conclusion of this presentation on the investor relations section of the company's website at ir.forgegroup.com. And the slide presentation will follow the presenter's commentary and can also be found on the website. Today, in addition to covering second quarter 2022 results, updated 2022 guidance, and KPIs, Joshua Steffen, GM of our inspection and real estate software division, will join us to provide an update on our progress in the home inspection industry and several near and long-term strategic initiatives. And with that, I'll turn the call over to Matt Ehrlichman, chairman, CEO, and founder of Forge Group.
spk04: Matt? Thank you, Emily. Good afternoon, everybody.
spk07: Thanks for joining us for our second quarter 2022 earnings call. We had an exciting second quarter at Porch Group and reported revenues of $70.8 million, a 38% increase from the same period last year. Despite inflationary headwinds and a 14% year-over-year housing market decline through June 30th, worse than what we had originally anticipated, we're continuing to grow nicely. As we've stated, given our current strategy and strong recurring revenue, We expect to continue to grow rapidly right through a harder housing market, setting ourselves up well for the future. In Q2, our teams made great progress with integrations and SOX internal control work. Our insurance business continued to expand, including in the three new states. We released new software modules, such as in the title industry, and we completed a bolt-on acquisition of a home inspection software company, which I anticipate will be the final M&A deal for the foreseeable future. Josh will provide more of an update on this acquisition later. So a few thoughts before I pass the baton. I want to start by acknowledging the continued pressure in the stock market for Porch and other growth software, insurance and housing related companies like ours. We certainly understand the shift that's happened in the market environment toward an increasing focus on near term EBITDA profitability. We're continuing to make thoughtful decisions designed to create long-term shareholder value, but with acknowledgement of this new market reality. We're very confident in our strategy and the progress we're seeing. I love our team and what's ahead for Porch. As has been disclosed previously and given my conviction, I personally have purchased a meaningful amount of Porch stock over the last several months, as have other directors on our board and members of management. The most timely update for today is that we have executed a mutual termination agreement on the acquisition of CSE insurance, effective immediately, with the CSE parent company, Covea. While we're disappointed that we won't be working with this team at CSE, given the current economic and regulatory environment, and given the importance of the capital light aspect of our business model, we're confident that this is the correct path forward. The capital markets have hardened since we first announced this acquisition agreement in Q3 2021, and the cost of capital has increased. Our management team is now able to consider other attractive ways to deploy the approximately $50 million of capital previously allocated to the CSC acquisition. Note, we will continue to operate in California, but now solely via our insurance agency. Our plans to bundle auto insurance with homeowners insurance in 2022 will be delayed past this year, as we had planned to leverage CSE's auto products to launch rapidly. Given our confidence at the time of signing the CSE acquisition that it would be closed by the middle of 2022, we have included the revenue from both the CSE business and revenue synergies from bundling auto insurance within HOA into our previous 2022 financial guidance. And so as a result of removing this from guidance and other factors we'll discuss, we are adjusting both our full-year revenue and EBITDA targets for 2022. So you can see here the updated guidance on slide six. So that's adjusting our full-year 2022 revenue guidance from $320 million to $290 million, which would represent 51% year-over-year growth. We now expect adjusted EBITDA to be negative $30 million for the year, assuming no severe weather events. Removal of CSE and corresponding auto insurance revenue represents the majority of these adjustments. Also included in our updated guidance is the latest forecast declines in the housing market, a reduction in spending on new growth initiatives, including the elimination of approximately 80 open roles in order to pull forward our adjusted EBITDA profitability. And lastly, it also includes one-time SOX control and testing-related costs in the mid single-digit millions this year. We've seen really good progress to date and are ahead of where we had anticipated related to the second half of 2023 profitability guidance we communicated last quarter. So with the increase in unrestricted cash by approximately $50 million, given the CSE termination, It reinforces the opportunity to strategically deploy capital for the benefit of shareholders. We're continuing to look at this very closely and continue, including both share or convertible note repurchase opportunities and more, and looking to do that and consider that at the right time and in the right manner to create the most value. In the meantime, we'll continue to focus our energies on what we can control, which is execute and building our business and demonstrating over time with performance how the company should be valued. And we believe, and I believe, the long-term value of our business will be significant. As we fully roll out the app to inspection consumers, and as we embed insurance into our mortgage software Flowify, we expect to gain more access to many more homebuyers to grow our business of insurance, warranty, and more. As we expand our insurance operations into more states, as we use more of our proprietary data to price more effectively and find ways to make our insurance products even more capital light, we believe we can build one of the fastest growing and most advantaged insurance companies. We really are just getting started. For those new to Porch, slide seven outlines our unique strategy that I'll hit on quickly. We provide software and services to select strategic verticals to help companies grow. And by doing so, we generate B2B recurring software revenue, as well as gain early and ongoing access to homebuyers who we help to improve their homeownership journey and generate consistent revenues with their purchase of important services such as insurance and warranty. Starting from the top of slide eight, our priorities for 2022 remain the same as presented at the end of the first quarter. One, sell vertical software to more companies or core go to market where we become deeply embedded. Two, embed key services and consumer experiences into our software products in a variety of ways to get in front of more consumers and increase our B2B2C transactions, which leads to three, extending our experiences, our digital tools and our app to consumers. The more we can support homeowners with our unique services, the happier they are with their experience. Four, continue to grow our insurance and warranty businesses both rapidly and profitably and continue in launching new products and in new geographies. Five, continue to building out our data platform and leveraging Porch's unique insights to improve pricing for our insurance and warranty products. And then lastly, related to M&A, our focus over the next year will be on the continued integration and growth of past acquisitions. So with that, I'll turn it over to Marty Heinbigner, our CFO, to discuss our second quarter results. Marty, to you.
spk00: Thanks, Matt, and good afternoon, everyone. Starting things off with our second quarter financials, you can see here on slide 10 the year-over-year comparison of our results. For the second quarter of 2022, Porch Group reported revenues of $70.8 million, a 38% increase from the prior year's $51.3 million. Our seasonality looked different than years past, and we saw a strong ramp occurring between May and June instead of the April-May ramp we have seen historically. Overall, June financial results look strong, and we feel good about how we are set up for the balance of the year. In particular, in April and May, we saw fewer consumers hiring movers and optional service, while our core services, such as insurance and home warranty, continued to perform well. Margins at the revenue less cost to revenue margin and adjusted EBITDA loss margin levels were 60% and negative 20% respectively, compared to the prior year's 62% and negative 20%. As a reminder, our second quarter results reflect expected higher insurance loss costs in Q2 due to typical seasonal weather patterns, primarily in Texas, which was in line with our expectations. as well as a pull forward of certain one-time SOX-related expenses. Moving to slide 11, you can see our vertical software segment results for the quarter on the left-hand side. We reported 42.8 million in revenue, an increase of 25% from the prior year, most of which is B2B software fees as we provide software to more companies, the balance of which is transactional revenue we generate from the increased volume of consumers we meet from the companies we serve. Adjusted EBITDA margins for this segment are 14%. On the right-hand side, you can see that our insurance business continues to grow quickly. Our insurance segment reported revenues of $28.0 million for the quarter, a 66% increase from the prior year. This year over year increase reflects contributions from the warranty operations acquired in the prior 12 months and growth in our insurance operations as we add more policies, holders in more states and increase prices. Adjusted EBITDA for this segment was a negative 18% in the second quarter compared to negative 15% in the prior year. As I mentioned, typically the second quarter is where our HOA insurance business has a higher volume of claims. which increases the cost of revenue and thus lowers adjusted EBITDA margins. This year's margins were impacted by a number of small weather events that took place in the quarter. In contrast to 2021, we did not see any severe weather events that would impact reinsurance renewals or pricing in 2023, which is the good news as we look ahead. I'm moving to slide 12, you can see our updated guidance for the full year 2022. As Matt said, this adjusted revenue guidance of $290 million now excludes the CSD acquisition. And related assumed revenue synergies from launching bundled auto insurance mid-year 2022, with our unrestricted cash now approximately $50 million higher. Not moving forward with the CSE acquisition was a cause of nearly the entire change in these adjustments to guidance. Also, in comparison to what we originally forecast, this updated guidance now assumes a more conservative year over year decline in existing home sales for the balance of the year, in line with the most updated market data. As a reminder, we expect home sale declines to continue to impact only a minority of our revenue Insurance warranty and much of our B2B software is largely insulated. Even with a depressed housing market, our updated guidance will still reflect a 51% year-over-year revenue growth in 2022. We are excited about what this means for the long-term success of the business. In terms of profitability, I would also note that we are being more selective in our new growth investments while focusing on internal efficiencies in order to drive to adjusted EBITDA profitability faster in 2023. We feel optimistic and even ahead of where we expected versus our H2 2022 profitability guidance from last quarter. We will continue to work with a focus on this timeline as we know tipping over into adjusted EBITDA profitability will be a catalyst for our business. Adjusted EBITDA loss guidance for 2022 has been adjusted from 26.5 million loss to a 30 million loss, given the pulldown in revenue and expected profitability from the auto insurance business. And finally, I would note that we previously guided to a gross written premium annualized run rate at the end of 2022 year to incorporate the impact of CSE. We will now switch to guiding the gross written premium year over year, which is now 520 million. As you can see from slide 12, our revenue contributions by business segment also remain unchanged. We expect 40% of total revenue to come from insurance and the balance from our vertical software segment. Note that 70% of our revenue is expected to come from recurring revenue business segments like B2B software fees and insurance. After factoring in slowing growth investments to drive faster near-term profitability and a more conservative estimate of the housing market. We now expect vertical software revenues of 175 million in 2022, a 28% increase year over year. Now without incremental M&A or assumed auto insurance synergies, insurance revenues are expected to be 115 million in 2022, an increase of 108% from the prior year's 55 million. And with that, I'll turn it over to Matthew Nagel our Chief Operating Officer to discuss our operating segment KPIs.
spk11: Hello, everyone. I'll jump in with public KPIs and commentary. We had strong... We had, next slide, we had strong KPI performance this quarter, beginning with companies on the left. We saw a strong growth in the average number of companies in the quarter to more than 28,700, which is up 67% year over year and a nice step up from Q1 2022. Of this growth in companies, 1,500 comes from the recent inspection software acquisition. On the right, you can see we reported average revenue per company of $821 per month, lower than the prior year given fewer consumers per company due to shifts in the housing market, as well as new companies from recent M&A being smaller revenue on average, given they aren't yet integrated into the porch platform and monetization engine. Despite headwinds seen across the housing industry where companies we serve primarily operate, we believe we have substantial opportunity in front of us to drive revenue growth per company in several ways. We can sell in more B2B SaaS modules, like our recently released ISN Pay at Close or Rhino, a sheet. We can gain access to more consumers and help them with more services. And we can continue to expand our insurance offerings in a number of ways, generating more revenue in margin per customer. Let's move to slide 16. Throughout the second quarter, we continued to see strong growth. both organically and through prior year acquisitions across all types of monetized services. We recorded approximately 332,000 monetized services in the quarter, and we saw $158 per monetized service for the second quarter, a 34% increase year over year. As we continue to expand insurance offerings into more states and build out the suite of high value services we can offer to homeowners, we expect average revenue per monetized service to continue to increase over time. On slide 17, you can see our insurance business ended the second quarter with approximately 379,000 policies, and we are generating an average of $286 of revenue per policy per year. On a rolling 12-month basis, as of June 30, 2022, we had an approximately 88% retention rate at our HOA business. And with the recently announced expansions into Oklahoma, Delaware, and Indiana, we now offer our own insurance products in 20 states. I want to highlight the capital light nature of our insurance operations. Today, with our carrier business, we seed almost 90% of the premiums and risk to reinsurance partners, which means Our system remains capital light and lower volatility within expected risk levels. We continue to make progress on structuring our proprietary data to utilize it for insurance pricing, and we'll update on this progress periodically. Additionally, our management teams continue exploring opportunities to move our business to or closer to 100% capital light model. If we could do so, we believe it would be a catalyst for the business, not only because of the increased predictability and simplicity, but also higher margins. With that, I'll hand it over to Joshua for our quarterly deep dive.
spk05: Thanks, Matthew. Nice to be here with you all, and I'm excited to provide an update on some of the key metrics and progress we've made in the home inspection industry since going public. We have continued to make fantastic progress in building out our platform. We connect inspectors with a complete tool set they need to run every aspect of their business. We also provide a variety of products that help inspectors stand out. Our inspectors can grow faster by spending more time in the field completing inspections and less time on administrative tasks. Our platform offers CRM tools, calendaring functionality, online bookings, payment processing, report writing, and much, much more, giving our inspectors a reliable and scalable set of tools that help automate parts of their business to drive growth, add services, and generate more revenue. As our inspectors are loving it, and our inspectors are loving it, and continue to see much less than 1% monthly churn rate, as well as strong NPS, which I'll share momentarily. Our inspection platform now works with more than 10,000 home inspection companies and monetizes over 2.2 million inspections annually, or by our estimate, about 40% of all home inspections across the country. As a point of comparison, our last previous public data point on monetization was in early 2021 when 28% of the country's home inspections flowed through our platform. We have made a lot of progress over the past couple of years. This growth is due to the expansion of our sales and marketing efforts, introducing new products that fit a variety of types and sizes of inspectors, adding new modules that improve our value proposition, and most recently M&A. As a reminder, early in the quarter we announced the completion of our acquisition of the home warranty and inspection services business from Residential Warranty Services. which provides CRM and recall check software and inspection centric warranties to more than a thousand home inspection companies. As Matt mentioned earlier, we also completed the acquisition of Home Inspector Pro or HIP, in Q2 2022. HIP is a smaller operation, but is considered a leading inspection report writing software tool and brings approximately 1500 home inspectors of varying sizes to our total company count. We believe in addition to ISN, HIP is another leading software system used in the inspection industry. We expect this acquisition to be meaningfully accretive in 2023, once we have finalized the completion of synergy work, which includes integration into ISN, porch moving concierge, and both payment processing and pay at close. Here on slides 22 and 23, I want to provide an update on a couple of strategic initiatives we are focused on. We continue to invest in several exciting growth opportunities, including the delivery of our Porch app to all inspection customers, which is scheduled to begin rolling out more broadly at the end of Q3 2022. We want to make the Porch app the app to help consumers move and manage their home. And our inspection data will help us make the app a unique and powerful tool for homeowners. Our inspectors spend three to four hours in the home and record all sorts of detail about the home, such as appliance model numbers, roof and furnace condition, and key areas that need repair. We can pull that data into the app so the homeowner has all of the important details and to-dos at their fingertips. Our plan right now is to offer the app at the point of inspection download as the primary way to access the full inspection report, details about systems and appliances in their home, and ready-made to-do lists of important repairs. And with the acquisition of RWS completed, we can now offer consumers a recall check alert to let them know if there's a future issue with appliances and systems in their home. Strategically, this helps us in three ways. Going from getting introduced to a subset of consumers to being able to get in front of all consumers, being able to help consumers with more services through another touchpoint, and extending the relationship with consumers over time. Our platform helps inspectors look good to their customers. Certainly the consumer app and our moving concierge help with this, but so does a new product pay at close. We have seen good early adoption of this product as inspectors start to see how interested real estate agents and consumers are to be able to not pay for their inspection upfront, but roll it into the cost of closing. Importantly for inspectors, by offering this, they are seeing between 20 and 60% increase in revenue per inspection by allowing cash-strapped consumers to purchase more of their add-on services. Since the introduction of this module at the end of 2021, we have seen virtually no churn once onboarding is complete, and these inspectors are seeing good growth as they attract more agents and more consumers. Before I wrap up, I would like to take a broader look at our vertical software companies, including Flowify in the mortgage space and Rhino in the title industry. And of course, ISN and Home Inspection, all of which are showcased here on slide 24. These industry leading offerings help small and medium sized home services companies grow and run their businesses more efficiently. Because of our SaaS fee plus transaction monetization model, these companies are particularly valuable to us. As such, we have strong unit economics, which allow us to continue investing in sales, marketing, product, and technology to drive growth, despite the headwinds seen throughout the mortgage and title industries. It is evident that our investments across our platform result in happy customers, demonstrated by our MPS scores of 64, 62, and 87 for ISN, Flowify, and Rhino, respectively, all significantly higher than the average SaaS company. In addition to strong customer service metrics, we continue to see low churn and strong growth in new companies across our platform. We will continue to share more on upcoming deep dives, including results of insurance integrated tightly into our mortgage software.
spk04: With that, I'll turn it back over to Matt. Thanks, Joshua. Good update.
spk07: I appreciate it. Certainly proud. We've been able to already aggregate approximately 40% of home inspections being monetized across our platform, which is huge upside ahead as we get introduced to more of these consumers to help make their move easy, provide more modules to these companies, and continue to create advantages in insurance pricing. Overall, we're pleased with our performance throughout the first half of the year. Our focus at 4-H Group is to produce significant long-term value and continue to grow revenue and margins rapidly on our way to becoming a truly great generational company. While it would have been great through the CSE acquisition to provide our own insurance products in California and launch auto insurance this year, we will continue to operate our agency and look for opportunities to add a bundled auto solution in the future. Simply, we believe the most important thing to do with the approximately $50 million would-be purchase price is to retain it so if and when it's time to take advantage of the market, we have ample firepower. We believe 2022 will continue to be an exciting time with several catalysts ahead, including the integration of insurance into Flowify, full rollout of the consumer app like Joshua talked about. Our teams will continue to explore options to move our insurance segments to an even more capital light insurance system and opportunities to accelerate our path to EBITDA profitability. As we move into the second half of this year in 2023, I'm excited to demonstrate very clearly that our strategy is working organically. And while M&A has been and will be successful for us, it is additive to our engine. We'll share more on that as we finish up the year. With that, the management team will now take your questions. Emily, can you please open up the line for Q&A?
spk02: Thank you. We have approximately 30 minutes for questions. We'll start by taking questions from Porch's sell-side analysts and attempt to respond to any other questions that have been submitted through the analyst chat as time permits this afternoon. And our first question coming in today is from Corey Carpenter with JPMorgan. Corey?
spk06: Hey, Matt. Thanks for the questions. I had two. Just first, could you expand a bit on how you're thinking about potentially redeploying that $50 million of capital? You've mentioned prioritizing stock and convert buybacks and preserving it, but what about other options like maybe accelerating the geographic expansion of homeowners in America, even potentially to California? Maybe I'll wait. I'll let you answer that, and I'll come back with my follow-up.
spk07: Sure. Yeah, I would say a couple thoughts, Corey, on that. One, you know, not ready to make any announcements today in terms of what we're going to go do. But we did make a note. I mean, certainly, you know, 10 months ago, you know, doing a buyback stock or convertible note was not at all on our radar. Now, clearly it's something that you have to discuss, you know, just given kind of where the market is. And so, you know, so we're discussing, clearly we want to deploy, you know, capital in the ways that are going to drive the best returns overall. And that's what we're evaluating, you know, on an ongoing basis. You know, I did also note, that we are, I would say, being really thoughtful in terms of what the additional investments we're making in new growth initiatives. We are very focused on making sure we get the business to profitability in the timeline that we had communicated in the second half of next year. And so there's certainly, obviously, initiatives that we're pushing forward, and we mentioned a number of those today. But are we going to go deploy that capital into pursuing our own insurance products in California right now? No, that wouldn't make sense for us. So we want to get the business across that profitability line. I think that then opens up a lot of opportunities for us to continue to invest.
spk06: Okay. And then just as a follow-up, could you help us a bit with where the primary areas are that you're pulling back on hiring and expenses and where we should expect that to flow through and see the benefits in the P&A?
spk11: Yeah, no, the first point I'd want to remind folks, you know, we have pretty high underlying margins. And so the game is to not scale the fixed costs as fast as the top line revenue. And so if you look back, you know, we do have, we have been able to show a significant margin improvements over time. But, you know, Corey, to your question, you know, we are constraining fixed costs. You know, Matt mentioned There's about 80 planned higher eliminations. We're being more selective in our product and technology investments. So you'll see some there. And we're also committed to keeping our corporate costs flat year over year, which is actually something we did the prior year. And then some of it too, we have certain cost centers as you think about third-party costs for SOX controls, DNO, certain G&A areas where we think we can get efficiencies over the next year that will help to drive profitability next year.
spk04: Thank you. And our next question we have coming from Jason Helfstein with Oppenheimer.
spk08: Hi, everyone. Steve here on for Jason. So just a quick question on costs in terms of wanted to know how rising costs are impacting both close rates and profitability for insurance customers. And then secondly, I know you mentioned did put on the slide a little info on the number of home inspections annually. I just wanted to get a sense of 2Q versus 1Q, if you can comment on what it looked like sequentially, and then also last year, 2Q, and if it's impacting your funnel for selling other products through that. And thank you.
spk04: Sure. I'll take that.
spk11: And Matt, you can add in if you like. I think the first question was, how are costs impacting claims or how is inflation impacting our insurance claims? You know, we will certainly have some impact as everywhere we're seeing increase in costs. The thing that I would highlight, though, is, you know, we have had a concerted effort to do premium increases across our insurance business. And so we are, you know, working aggressively to be ahead of those costs. Now, even though we're working aggressively to be ahead of those costs, some of those pricing increases do take effect over the course of the year where we may experience some of the higher claims costs immediately. So net answer, yes, some impact, but there's ways that we can mitigate that going forward. And then I think on the second question, maybe if you could repeat it, I think it related to inspections, you know, quarter over quarter.
spk08: Right, exactly. So you had put on the slide, a previous slide, the kind of the number of home inspections annually. Just wanted to get a sense of this quarter versus last quarter, if you're seeing any sort of difference in terms of the number of home inspections overall, and then, you know, kind of how that's affecting your ability to sell other products through that. Thank you.
spk05: Yeah, I can take that, Matt. Sure. You know, so we've shared in the past that the inspection industry did not see an increase in inspections at the same rate as the housing market saw a spike in home sales. And so there's a we've talked a little bit about kind of a natural hedge in the home inspection space. And the reason that this happens is that buyers may choose to waive the inspection contingency in a competitive market. And as markets cool down, home buyers have more power to get more inspections. And so what we're seeing is that some markets are starting to normalize while others are still pretty hot and competitive and thus fewer home inspections. And so Overall, given our platform expansion, we're seeing good progress on the metrics. However, it's certainly a tougher environment, and that's reflected in our guidance. And so I think it kind of goes without saying, in a more normal market, we would be growing faster. And anything you would care to add on to that, Matt?
spk07: No, I think, I think that's right. I just said to summarize, you know, that there is the natural hedge that we're seeing, you know, our inspection business is clearly growing quickly. And you look back at the last couple of years and the quarter over quarter, I mean, clearly it's growing. And then to that question, you'd ask, yes, we are able to continue to get access to more consumers and be able to help more of them with services. So continue to be able to increase conversion rates. You know, certainly that's happening. As we noted in the call, there are these opportunities to have these real step function changes in terms of the level of access we can get to consumers. And we've been spending a good amount of time there. Just before we go to the next question, I want to loop back to Matthew's answer because I think it's a good question and an important thing to note. We have been really pleased that the filings we put forward, the price increase filings for our insurance businesses that we put forward into important states have gotten approved. you know, at the levels that have been requested. But like Matthew noted, you know, the cost impact to inflation hits, you know, right away. And then the price increase, even as you have prices that you start selling at the higher price, we recognize revenue over that next 12 months. And so that will start showing up as we look forward that, you know, helps top line and bottom line as that flows through. But we are pleased with both the work our team has done to get the right pricing financing in place and the approvals.
spk04: Great. Thank you. And the next question comes with John Campbell with Stevens. John?
spk09: Hey, guys. Good afternoon. Hey, John. Hey. Obviously, soft housing is kind of what it is. You guys aren't alone in feeling that pressure. But getting closer to that kind of sustainable point of free cash flow growth, I think that would be obviously a really important development. It kind of missed this backdrop. So I want to go back to that EBITDA inflection comment. Matt, you mentioned that you guys are ahead of schedule. Again, that really stood out to me. I'm just I'm curious if you could shed a little more light on maybe the expected timing as well as to what extent that's kind of in your control.
spk07: Yeah, well, we feel very much it's in our control to get to profitability. Just again, what Matthew had said, just to stress the point, like, you know, look back at 2021 when we last kind of talked about contribution margins. we're on 40% contribution margins, right? Which is net of all variable expenses. So the underlying margins of the business are really positive. And we have been investing aggressively, you know, for growth. Obviously at the end of 2021, okay, the world shifts, you know, a bit, and getting to profitability that much faster is important. And so there's a lot of things that we are doing, you know, limiting new hires, you know, focus on key areas that are going to drive more margin faster. But yeah, we did make a note, John, you know, certainly consciously that, you know, we communicated last quarter, you know, second half of 2023, we will be profitable. We feel like we're in a really good spot there. We're far enough away from it that, you know, we didn't need to change that milestone yet, but we feel like we're making really good progress, you know, against that goal and how 2023, you know, looks. And more to come, obviously, as we go throughout this year.
spk09: Okay, that's helpful. And then on the guidance, I want to drill down on one part. You know, in the past, you guys had said $190 million for the vertical software revenue. Obviously, housing pressure is kind of stiffening there. So you're seeing $175 now. But in that past $190, you had said at one point, I think Matthew had called this out last earnings call, but $100 million of that was the B2B SaaS revenue. I'm curious, you know, with a guide from 190 to 175, within that 175, is that 100 million kind of still steady or how's that holding up relative to the market? Sure.
spk11: Yeah. I mean, the good thing about that 100 million is it's recurring revenue with sticky software products that have very high NPS. And so I think what you're seeing is, you know, as we highlighted, there's less transactions happening in the housing market. So we have less, you know, at-bats to go and sell our services. And so, you know, we are incorporating that into future guidance. And, you know, the point I would just come back to is that even though it's a hard housing market, you know, the vertical software segment is still growing 28%. So we're still growing amidst a hard market, just not as fast as if it were a normal market.
spk07: One thing that Marty had mentioned, though, just to emphasize the point, John, is the specific service in the vertical software segment That, um, that was the biggest, you know, uh, impact from the housing market was the number of, of movers that consumers hired, you know, during the, during the second quarter. And so that really falls into that transactional revenue within that vertical software, you know, segment, that's an optional service. As things are more expensive, people didn't purchase that as much. And we just had fewer consumers that were obviously moving, you know, uh, versus what it would have been during that time. So that's on that transaction revenue side, not on that B2B SaaS side.
spk09: And Matthew, to your point, last earnings call, whether it's 90 or 100 million, that is your true SaaS revenue, recurring SaaS revenue. And putting a half of a SaaS revenue multiple on that, I think is equating to about where the stock is today. So I hear you there. All right, thanks guys.
spk07: I'll just give you just a quick follow-up to that just because you opened the door, which is I think our belief is that we are so far past the point in which the market makes any sense, because you could just look at our B2B SaaS revenue and it doesn't make any sense, just on this relatively small portion of our revenue. And so again, that's what the name of the game for us is, put our heads down, execute, go build a great business. That stuff will take care of itself over time here. We're with you guys. Thank you.
spk02: The next question comes from Justin Ages with Barenburg. Justin.
spk12: Hi, thanks for taking the questions. Just a quick first one on guidance. Given the change in acquisitions, can you help us dig down into understanding, you know, kind of quote-unquote organic growth versus not? Because it seems like with the lack of acquisitions now, a lot more is just from growing the business.
spk07: Yeah, I'm happy to take that.
spk04: So we don't report
spk07: Organic growth quarterly as part of our growth comes from accelerating the growth of past acquisitions, which we view as Porch's contribution to the business's performance. But we do provide, and we did mention last quarter, the pro forma numbers. So 2021 was $192 million in revenue. If 2021 acquisitions we'd noted over the course of last year, those had been closed January 1st, 2021. We talked last quarter about how that would have been around $220 million in revenue pro forma last year. So we'll go to 290 million in revenue this year with little M&A. So backing out RWS, you know, pulls, you know, it was around $8 million in revenue we'd noticed expected for this year. So it pulled 2022 pro formal revenue down to 282 million. So really any way you look at it, you know, it's, it's, you know, very, very solid growth even in a harder housing market, but that, that would be the data points that we've communicated previously.
spk12: Okay.
spk07: Perfect.
spk12: Thanks for helping us try and get laid on that. And then Just one more on guidance. I know you mentioned that the vast majority of the reduction was based on no longer including CSE, but can you help us quantify macroeconomic changes versus CSE no longer being part of that? Yeah.
spk07: The, we haven't broken it down specifically. The, obviously when we go into a year, you know, we build in, you know, contingency and we, you know, CSC is, and auto insurance in particular, auto insurance is something that we are, I would say, quite excited about. So when we pull out CSC, unfortunately we don't have to just pull out the CSC revenue. We also have to pull out auto insurance, which is something that we would have layered in, you know, this year. And if you think about, you know, our over 300,000 policyholders, Based on the bundle rate we've seen with just our agency, it's a substantial opportunity for us at the right time, but that won't be this year. At this point, we'll have to pursue a different path. So we talked about the majority, the substantial majority of that change is tied to CSE and auto insurance. then you know the the balance for updating for kind of the most recent uh most recent forecasts we're using as an aside the national association of realtors you know forecast is what's built in and assumed in terms of the housing market for the backup there okay thank you very much matt your next question comes from mike grandal with northland hey thanks guys um two two questions the first one
spk03: The pay at close, that newer module, what does Porch make on a close and what's sort of the total fee opportunity? And then secondly, for Matt, Matt, on the 2.2 million inspection transactions, can you kind of give us an update how you're thinking about the monthly fee tied to those? It seems like you have a lot of pricing power at 40% versus sort of the customer referrals you're getting. What's an update there?
spk07: Sure. Joshua, do you want to take the first question? And I'll take the second.
spk05: Yeah, sure thing, Matt. Yeah, so the pricing on the pay at close module is essentially baked into the cost of the home inspection. And so it's not, you know, charged separately to the consumer. It's part of the inspection service. And the amount that, you know, of revenue that we generate, you know, per inspection where a pay it close is attached ranges from somewhere between $50 to $75. Yeah.
spk07: And so the key thing here, Mike, I would say is when we provide straight payment processing, we would make almost 1%, almost 100 basis points of economics. And when we provide pay at close, you can make, you know, 10 to 15 times, you know, more than that. And so if you think about that fee across the universe of home inspections, you can look at our current universe of home inspections or, you know, or the entire universe, that it's a meaningful, Tam, you know, a meaningful opportunity, you know, for us. And strategically, you know, if we can help to kind of really move the industry forward, it's just, you know, another reason that inspectors have to be on our platform. That's something that real estate agents and consumers are certainly going to want. It's better for them.
spk05: Yeah, it's also a really nice timing for pay at close, because as we noted in our remarks, that it's allowing home inspectors to add on additional services as part of the inspection. And so in a softer home sales environment, home inspectors are looking for ways to generate more revenue from a smaller flow of inspections.
spk07: And then, Mike, to your second question around just monetization in the home inspection industry, the thing I'd want to make clear is that when we went public a couple of years ago, we talked about monetizing with either a SAS fee or transaction revenue from the consumer. And I don't know if it's fully clear, but I would want to use the opportunity to emphasize, as we've added in more modules for these companies, that model has certainly changed to where we're monetizing consistently with both SAS fees and transactional revenue. So yes, we provide a discount to one of the software module offerings in our inspection platform in exchange for getting introduced to consumers. And we've gotten better and better at being able to help those consumers with more services. You know, the things that we're doing, you know, such as the consumer app to be able to help get an introduction to, you know, all or virtually all of those consumers is a really big opportunity because now we can monetize again with SAS fees and transaction revenue just that much more broadly.
spk04: Got it. Okay. Hey, thank you. Thanks, Mike. Your next question comes from Ryan Tomasello with KVW.
spk02: Ryan.
spk10: Hey, guys. Thanks for taking the questions. Can you provide an update just broadly on the integration efforts across the platform, you know, particularly the recent acquisitions and the progress on remediating the material weakness? And then maybe you can talk about longer-term plans for unifying the broader platform under one porch brand, if that's something that you envision longer term.
spk11: Matt, I can take the first one.
spk07: And Marty, that one is all material weakness, right?
spk11: Yeah, sure. You know, integration efforts, I would say are going very well. You know, at a broad general level, you know, we have a playbook that we use to bring on teams, get them integrated into Porch and connect them to some of our capabilities, you know, notably the, you know, our different monetization opportunities. So I think overall we're, We're excited about that. One of our recent ones that we're excited about is embedding insurance into Flowify. So Flowify is a mortgage application software where folks have to get insurance before they can close. So it's a perfect time and they're going through a checklist. And so the team's been very focused on integrating insurance into Flowify. We've already started to introduce it to some customers doing that in a controlled manner so we can learn as much as we can. But the early feedback is very encouraging. It's a good experience for both the consumers and the loan officers. So we are excited about that.
spk00: And Marty, you want to take the back office integration? Yes. And with respect to our internal control work, it has been and will continue to be a major focus of the company to make sure that we are doing everything possible to knit together all of our, um, acquired businesses into a, an efficient and effective system of internal control. It is a year long process that will continue to work through till year end. And actually some of it will continue into the first part of, uh, 2023. We feel we've made good, good progress on that and do want to assure, um, um, investors that our financial statements are materially correct. We put an extensive effort in making sure that financials are correct as we're working on the system of internal controls.
spk07: Yeah, and I just have to say, this team's made great progress, you know, there, as we noted in the prepared remarks. And then right on the brand question, I think it's a fun one. I We built our company, obviously, with a pretty unique strategy. Most would go out with classic direct-to-consumer channels to bring in consumers. And obviously, we've built this very sustainable, very defensible approach of embedding ourselves with companies to then get access to the consumer to help them with services. But there is this moment ahead where we will be able to rebrand our insurance property and our warranty property and our moving properties into Porch, you know, be able to have Porch really be what it is, you know, meant to be when I founded the company to be that partner for people in their home as they go through that journey with their home. And as you do that, well, obviously it then opens up a variety of additional ways that we can kind of layer in, you know, grow into the business. So it's something that, you know, we are prepping for, I would say, some of the things that we're doing now in terms of the consumer rollout. So you have this cohesive, you know, really high satisfaction experience that sticks with that consumer over time is an important part of that strategy. As we look over the course of this next year, 18 months, you know, we'll be kind of knocking off certain properties, certain brands, you know, one at a time and moving over into Porch and then able to, again, kind of benefit from the growth levers that'll be out there.
spk10: And in your prepared remarks, you mentioned exploring ways to move to this 100% capitalite insurance business. I guess, what would that look like in terms of economics? Does that change the pace at which you can grow that business? And overall, I guess, what does the trajectory and strategy and timeline look like to get there?
spk07: Yeah, it's still early, which is certainly nothing to announce at this point. We just know, I mean, you can see and In that slide we present, it shows how much we're seeding versus others. Like we really do believe in running, you know, as a very capitalized, low volatility, you know, insurance operation. We think it is the best way to create long-term value. You know, it's not reflected obviously today in the market, but we do believe it will be over time. And so there are opportunities for us, you know, whether with reinsurance or other, to be able to, you know, continue to move even more capitalized, we think. you know, again, still work out ahead of us and we'll update you on that as we go. If we could pull that off, yes, we think that it can improve margins, you know, and kind of financial profile of the business over time.
spk04: Great. Thanks for taking the questions.
spk07: Thanks, Ryan.
spk04: We have one more question from Mark Chappell with Luke. Mark? Hi, can you hear me okay? Hi, Mark.
spk01: And so, Marty, I just want to revisit your prepared remarks where you mentioned that you feel more optimistic about reaching your profitability targets next year. And given the lower than expected profitability that you expect this year now, could you just review one more time why you believe that you're going to meet your expense reduction initiatives or targets ahead of plan?
spk11: I can take that, and Marty, feel free to layer in. Headline point is we have the high underlying margins. And so then it comes down to how much are we investing in fixed costs? The two areas that I'd, you know, a couple of things that I'd point to. One is, you know, we've already had planned, 80 planned eliminations of hires. That's in product and technology. Some of that is in, you know, a focus to keep our corporate costs flat. So if you have, you know, slightly slower product and technology investments, You have corporate costs remaining flat, but the business is growing materially year over year, and you have high underlying margins that gives you profitability. There's also certain cost centers this year that we've had to put more into, notably third-party costs for SOX and D&L, both of which that we think there'll be savings next year. And then the market has put a real mindset shift on the company. And so we have a variety of initiatives, probably 10 to 12 initiatives where we have owners looking at cost efficiency savings across the business. And my experience is when everybody puts on the hat of we need to go and really look at profitability, you find a lot in the couch cushions.
spk07: And I would just add, Mark, In addition to what Matthew is talking about and driving there, the initiatives that we've talked about that will drive the top line and the bottom line are out there and are big focuses for the company. So we've talked about many of them today, but clearly these opportunities to grow the business with these very high margin incremental revenue streams. And so those are the initiatives that we're certainly prioritizing.
spk02: Thank you. We have a number of questions coming in through the analyst portal here, but one to Marty. Marty, can you give us an update on the cash position of the company?
spk00: Yes. So we ended the June quarter with $282 million in cash. And obviously, as we emphasized on this call, that $50 million of funds that we earmarked for the CSE acquisition are included in that number, and we'll be able to evaluate
spk04: alternatives for use of that cash going forward. Thank you. And that is all we have for questions, all we have time for today.
spk02: Matt?
spk07: Well, I'll just wrap us briefly and say, first, thanks to all for joining the call. I appreciate the ongoing interest in PORCH and the partnership with those that are involved. Like I said, we really are excited about how we're positioned, the progress toward profitability and what's ahead as we continue to build a truly great and enduring company. Credit to the Porch team that's out there. Let's continue to just ignore the noise, keep our heads down, do great work every single day for our customers. And with that, thank you. We will all see you soon. Take care.
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