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spk06: afternoon everyone and thank you for participating in Forge Group's third quarter 2022 conference call. Today we issued our third quarter earnings press release and related Form 8K to the SEC. The press release can be found in our investor relations website on ir.forgegroup.com. Joining us here today are Matt Ehrlichman, Marty Heiminger, Forge Group's CFO, Matthew Nagel, Forge Group's COO, Adam Kornick, President of our Insurance Division, and Malcolm Connor, VP and Group GM of our Warranty Division. Before we go any further, I'd like 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 our forward-looking statements. Today's discussion, including responses to your questions, management's views as of today, November 8, 2022. We do not undertake any obligations to update or revise this information. Additionally, we will 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 risks and uncertainties, which could cause our actual results to differ materially from these forward-looking statements. We encourage you to consider the risk factors described in our SEC filings for additional information. We will reference both GAAP and non-GAAP financial measures on today's call. Please refer to today's press release for reconciliations of non-GAAP measures to the most comparable GAAP measures discussed during this variance 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. The slide presentation will follow the presenter's commentary and can be found on the website. Today, in addition to covering third quarter 2022 results, updated full year 2022 guidance, and KPIs, Adam Kornick is here to provide an overview of the third quarter insurance results, and Malcolm Connor will join us to provide an update on our warranty business. And with that, I'll turn the call over to Matt Ehrlichman, CEO, Chairman, and Founder of Forge Group. Matt?
spk10: Thank you, Emily. Appreciate it. Good afternoon, everyone. Thank you for joining us for our third quarter 2022 earnings call. Certainly, 2022 has been a volatile year for what we've seen with the stock market, housing market, atypical weather, and inflation impacts on insurance costs. At the same time, this has been a year of focused work by the porch teams, and the progress made leaves me more confident than ever about what's ahead. Based on the quality of our team's work this year, we should have continued our strings of beats and raises. However, given the headwinds we'll discuss here today, we have adjusted our financial guidance for 2022. I'll start first with the challenges. So first, while we do not sell our own insurance products in Florida, Hurricane Ian, which was one of the largest storms this country has seen, did flow through South Carolina, which is our second largest state in terms of gross written premium. Hurricane Ian and an increased number of summer weather events drove losses out of our insurance division in the quarter. Inflation further impacted gross losses and resulted in a Q3 2022 gross loss ratio of 74% at homeowners of America, which is substantially higher than the historical Q3 results. I'll note in a moment how this has created an opportunity around future pricing for homeowner policies that we expect to drive growth and profitability going forward. Second on the list of challenges, the housing market continued to decline more than industry groups like the National Association of Realtors or NAR had forecasted. So for the third quarter, existing home sales declined over 22% on a year-over-year basis, a result of the continuous rise in interest rates. This is significantly higher than what was predicted at the beginning of the year, falling further than what was forecasted at the end of the second quarter. We've noted that much of our business is not impacted by the housing market, and you can see this based on how our business continues to grow nicely. However, we are seeing slower growth in move-related services and certain portions of our B2B software revenue. Third, due in part to the degree of drop in our stock price and the market changes over the last nine months, We are taking a non-cash goodwill and intangible impairment charge of $57 million this quarter. Marty will touch more on this later. So in total, because of these impacts, we're updating our full year 2022 revenue guidance to $275 million, which will be 43% year-over-year growth or 23% pro forma growth using the same methodology as we've used in the past. Additionally, with the incremental insurance claims costs and weather seen this quarter, we are updating adjusted EBITDA guidance to negative $48 million for the year. Now let's flip over and talk about the successes. We're entering the fourth quarter in a strong financial position with over $276 million in cash at quarter end, $16 million of which is restricted. Some of the most important and impactful initiatives that will contribute to the results in the future for our business have lined up very nicely for us. So first off, we continue to be confident in becoming adjusted EBITDA profitable starting in the second half of 2023 and ongoing thereafter. Matthew's going to share some additional detail on this important milestone here shortly. Second, in part due to our higher claims costs, insurance pricing increases have been approved. in our two largest states. So Texas of 25% increases and South Carolina of 35% increases. These start at each customer's next renewal with the following 12 months then showing higher recognized revenue. The higher prices are expected to aid in the profitability, certainly of our insurance business in 2023 and ongoing, as well as likely adding tailwinds to overall company revenue growth. Third in the list of successes, our teams are making real progress on initiatives that we expect will allow us to operate a more capital-efficient P&L at our insurance division. By exploring options like a reciprocal structure or deepening relationships with our key reinsurance partners, both of which Adam will touch on later, we're optimistic about the potential to further improve capital efficiency and significantly reduce or eliminate volatility over time. And fourth, execution around key initiatives continues to be strong. So during the quarter, we made the Porch app accessible across a broader inspection consumer base. Consumers so far are delighted with the tool we've built here, and we believe this product will be impactful over time. So even though the stock market continues to experience significant volatility over the next several quarters, we're convicted in getting to profitability in the near term and are excited about what's ahead for the company. As such, and as we announced just earlier today, our board has authorized management to spend up to $15 million, which is approximately 10% of our market capitalization, on repurchases of common stock or convertible notes. We'll assess which will provide the best returns for long-term shareholders, and you can find more on our new repurchase plan in today's press release in Form 8K. Before handing the call over to Marty to go through our financial performance in more detail, let me first reiterate our company strategy and priorities briefly. Looking here at slide seven, Borch provides software and services to select strategic verticals to help companies grow. By doing so, we generate B2B recurring software revenue, as well as gain early and ongoing access to home buyers who we help with key services such as homeowners insurance and warranty. Starting at the top of slide eight, Our company priorities have been consistent throughout the year. One, sell vertical software to more companies where we become deeply embedded. Two, provide key services and consumer experiences in our software products to get in front of more consumers. Three, extend our experiences, our digital tools, our app to consumers with the aim to be their partner for their home and increase our B2B2C transactions. Four, grow our insurance and warranty businesses both rapidly and profitably, including launching new products, new geographies, and furthering our capital-line approach. Five, build out our data platform and leverage Porch's unique insights to improve pricing for our insurance and warranty products. And finally, our priority for M&A continues to be the integration, SOX controls, and growth of past acquisitions. Lastly here, I'm excited to welcome some new members to our team. As we announced last week, Sean Tabak, who joins us with 20 plus years of experience across the industry, will start tomorrow as our new CFO. Huge thanks to Marty for his time in this role and for helping with the transition. In addition, Nicholas Graham started a month ago as the GM of our moving division. Nicholas had previously led the hot wire business at Expedia Group for a number of years. Finally, we also welcome two new independent board members this quarter. Amanda Rierson, and Camila Velasquez, who bring with them extensive experience in insurance, home services, and vertical software. Very excited to have you all on board. With that, I'll turn it over to Marty Heimbinger to discuss Q3 in greater detail. Marty?
spk01: Thanks, Matt, and good afternoon, everyone. I will start off with our third quarter financials, which you can see here on slide 11. Third quarter revenue increased 20%, from prior year to 75.4 million, driven primarily by our insurance and warranty businesses and contributions from acquisitions made over the last year. Year to date revenue is 208.7 million, an increase of 48% from the prior year. As Matt mentioned, Q3 revenue is lower than our expectations due to there being fewer home sales than anticipated at the start of the quarter. Our vertical software segment reported 44.5 million in revenue, a 5% increase from prior year. This segment includes our move related transaction revenue, which is most impacted by the volume of home buyers. Our insurance segment reported revenues of 30.9 million for the quarter, a 51% increase from the prior year. With upcoming insurance pricing increases rolling through, We expect this portion of our business to continue to grow nicely. Company revenue, less cost revenue margin was 56%, and adjusted EBITDA loss margin was negative 17%, compared to the prior year's 69% and positive 1%, respectively. Higher cost of revenue was caused by an increase in insurance claims costs, primarily due to inflation, and atypical weather events in Q3, including Hurricane Ian, which made landfall in South Carolina on the last day of the quarter. The change in adjusted EBITDA was due almost entirely from this increase in insurance claims costs. Finally, when you review our GAAP financials, you will notice we recorded a non-cash, goodwill, and intangible impairment of $57 million in the third quarter. This included 39.4 million goodwill impairment at our insurance segment, driven by the disruptions in the equity markets, specifically for property and casualty insurance companies, largely due to recent weather-related catastrophe events, and a 17.7 million intangible impairment at our vertical software segment. We determined that this impairment was appropriate considering the current macroeconomic environment and the continued deterioration in our equity market. It's important to note this is a non-cash charge without no impact to our business and no relation to our core underwriting operations. In slide 12, you can see our updated 2022 guidance. Top line revenue has been adjusted from 290 million to 275 million and adjusted EBITDA from negative 30 million to approximately negative 48 million for the year. Again, on a full year basis, same story. Of the 18 million expected change in adjusted EBITDA, the largest impact was atypical weather, including Hurricane Ian, and inflationary pressures on claims costs, which has contributed 15 million to this change. And slower than expected revenues due to the housing market contributed an additional 3 million. This guidance includes us assuming Q4 will continue to demonstrate inflationary pressure on insurance claims costs, continued steep declines in home purchases, and typical lower Q4 weather seasonality. The full change in revenue was caused by lower than expected home sales, which impacted move-related service and software revenues. You can see that revenue distribution here on slide 13. We now expect 44% of total 2022 revenue to come from our insurance segment. 27% from our B2B software and service subscription revenue, and the balance from move and post-move transaction revenue. Our insurance segment is the fastest growing part of our business, and we expect that to continue into 2023 and the foreseeable future. Long-term, our ability to profitably grow our business has not changed. We remain confident in our ability to grow while achieving our long-term 25% EBITDA margin targets. And with that, I'll turn it over to Matthew Nagel, our Chief Operating Officer, to discuss our key performance indicators for the quarter. Matthew?
spk13: Thanks, Marty. Hello, everyone. Great to be with you today. In my mind, 2022 has been an incredibly exciting and impactful year for our business. And with what has teed up for 2023, we expect another big year ahead. I want to make sure it is understood that that despite macro pressures and unusual weather impacts seen this quarter, the fundamentals of the business are strong and the team is performing well. First, I'd like to make sure our path to profitability in the second half of 2023 is clear. Let's then take a look at our quarterly KPIs. We continue to feel confident in achieving adjusted EBITDA profitability for the second half of 2023. even while assuming continued and substantial weakening in the housing market and higher insurance claims costs from continued inflation. We expect the 28 million plus year-over-year adjusted EBITDA improvement between the second half of 2022 and the second half of 2023 will be driven by a few different things. First, an anticipated $10 million H-2 improvement that will come from higher insurance pricing and lower distribution costs to agents. We have received regulatory approval, and these are being rolled through new sales and renewals as we speak. Second, there is a $10 million improvement by assuming unusual weather, including Hurricane Ian, does not happen again. And we see third quarter weather consistent with the last five years. Considering Ian is estimated to be one of the strongest storms ever to hit the U.S. mainland, we feel this is a reasonable assumption. As Matt noted earlier, our teams are focused on furthering initiatives to reduce volatility over time. Third, we anticipate $5 million in cost savings year over year, largely from G&A-related costs, such as lower SOX costs, which are significant in H2 this year. also lower D&O insurance costs, and a select set of other cost savings that have been implemented. These impacts alone bridge nearly to our target and do not require core business growth to be achieved. Given we are keeping G&A and product and technology expenses largely flat year-over-year, revenue growth incremental to the insurance price increases noted will flow through to contribution margins and further EBITDA improvement. Lastly, if anything is not on track, management would consider other cost adjustments to achieve profitability in this time period. Here on slide 16, we'll cover our public APIs. Beginning with companies on the left, we saw growth in the average number of companies in Q3 to approximately 30,950, up over 50% from the prior year's 20,419. and an 8% increase from Q2, showcasing that our teams are selling software to more companies and increasing our penetration, even in a difficult environment. Given the macro environment, we do not expect growth in average companies. We do expect growth in average companies to slow someone, especially as we anticipate seeing more sole proprietors retire or exit the industry over the next year during the slowdown. On the right, we recognize $812 in revenue per company per month in Q3, down roughly 17% from the prior year. This KPI was impacted by lower home purchase volumes, and we expect that to continue in the short term. But in the midterm, we believe there is an opportunity to grow this many times over by expanding software modules offered to companies, gaining access to more consumers, and helping with more services. like insurance and warranty. Let's move to slide 17. We saw over 318,450 monetized services in the third quarter of 2022, a decrease of 5% from the prior year. This shift was driven primarily by fewer home buyers, given the downturn in the housing market. We will expect Q4 to follow its usual seasonal low with some continued impact from the market downturn. Revenue per monetized service increased 36% to $181, up from $133. The growth in revenue per monetized service is driven by the key service we are focused on, such as insurance and warranty, which may produce even higher revenue per service ongoing. And finally, on slide 18, you can see our insurance segment continues to grow and ended the third quarter with gross written premiums of $157 million over 391,000 policies, and we are generating an average of $300 of revenue per policy per year. On a rolling 12-month basis, as of September 30, 2022, we had an approximately 88% retention rate at our homeowners of American business. Additionally, we were able to launch Florida as one of our final remaining states for our home warranty products. And we received regulatory approval to operate our homeowners of America insurance business in Alabama and South Dakota. I'll pass things off to Adam Cornett, president of our insurance division, for a few more updates on our progress here. Adam?
spk00: Thanks, Matthew. I want to provide more context on our third quarter insurance results and provide some insights on what our team is doing to offset the headwinds we face this year due to weather and inflation. Our HOA business ended the third quarter of 2022 with a gross loss ratio of 74, higher than the 41 gross loss ratio in 2021, and the approximately 30 to 40% recorded in the third quarter for the years prior to acquisition by branch. The change in the gross loss ratio was driven by several factors. First, throughout the third quarter, we were impacted by higher weather-related claims than we have seen historically. And on the last day of the quarter, Hurricane Ian made landfall in South Carolina, our second largest state. Specifically, the third quarter weather events drove a 15.4 point increase in gross loss ratio from the same quarter prior year. Inflation also impacted gross loss ratio as our average cost per claim of approximately 10% when compared to 2021 on a year-to-date basis. The balance of the increase in gross loss ratio was due to smaller weather events that occurred at higher rates than previous years. While these impacts were significant, we believe our reinsurance and underwriting strategies, which include avoiding underwriting in the state of Florida, allowed us to show relatively small losses when compared to a Hurricane Ian event that has been estimated at $40 billion to more than $60 billion of total losses. Based on the claims received in the days following Hurricane Ian's landfall in South Carolina and our expectations for IBNR incurred claims that have yet to be reported by our customers, our financials reflect our expected expenses related to this event. Despite these impacts, we currently estimate an expected full year 2022 gross loss ratio of 65% and a combined ratio of 87%. Something we feel good about is our reinsurance partners have the ability to outperform other home insurance carriers when they choose to work with us. Our teams are active in early reinsurance conversations, and while it will be another tough macro year for reinsurers, and one in which we may want to see a little bit less premium depending on pricing, we believe our historically strong performance for these partners positions us well for 2023 compared to the overall market. As Matt had previously mentioned, we are all committed to outperforming our baseline plan that has us tracking the profitability in the second half of 2023. We feel good about how we are set up here. In addition, there are several initiatives we are pursuing within the insurance division that have yet to be realized in our financial results and could increase profitability as we look ahead. For example, actuarially justified price increases have been approved in Texas and South Carolina, as Matt mentioned at the start. These price increases are effective upon a customer's renewal date or the initiation of a new policy. Since renewals are spread over the next 12 months, and policies are generally 12 months long, this means that prices will flow through over a 24-month period, providing a tailwind into future periods. As we work through the remainder of the year and into 2023, we anticipate that the impact of these pricing adjustments will be visible in our results, including growth, loss ratios, and profitability. In addition, we're interested in providing our consumers with fuller home protection by also offering home warranties. or just testing offering home warranty and insurance to consumers. With some early learnings and successes, Malcolm will share more. Finally, as Matt mentioned, we continue to explore options to improve capital efficiency and reduce volatility over time. There are several paths to doing this successfully, including a reciprocal structure, similar to USAA, Farmers, or URI, or increasing our reliance on reinsurance. We are in the exploration stage and are not certain if either path will be pursued, but certainly capital efficiency and volatility improvements would be a catalyst for the business. To wrap up here, I want to provide an update on our continuing systematic expansion of leveraging Portia's proprietary property data to improve pricing accuracy for homeowners of America customers. By utilizing this unique data in tandem with over 15 years of claims data from HOA, We've been successful in modeling, filing, and implementing new pricing. We recently received approval from five additional states, Alabama, North Carolina, South Carolina, South Dakota, and Texas, for our use of the location of water heater as a part of our pricing, bringing us to eight states of implementation. I'm excited to share the work we've been doing with other data elements. There's been continued progress in extracting data about roof material, the type of plumbing and piping, and flooring, many of which show real opportunities to customize prices for consumers with lower risks. We hope to submit filings with these new data elements before the end of this calendar year. which continues to grow its software platforms in a variety of vertical markets, such as monetizing approximately 40% of America's home inspection transactions. Insurance works closely with these teams to make sure we can provide the best experience and most accurate pricing possible for these consumers. I'll now hand the call over to Malcolm Connor, Group GM of our Warranty Division.
spk05: Malcolm.
spk14: Thanks, Adam. Happy to be here today. I'm excited to share more detail about our warranty business as we believe we are well positioned to become a leader in this space. Prior to joining Porch more than a year ago, I previously led and scaled American Waters warranty business to greater than $130 million in organic revenue over four years. I was excited about joining Porch given our unique assets that we believe provide a long-term advantage. Low-cost access to consumers, data to improve pricing, a variety of channels to sell warranties through, and a team and culture that can execute rapidly to get great work done. As you know, Porch provides homeowners with insurance and warranty offerings that fully protect the home from the roof to the service line and nearly everything in between. Where homeowners insurance covers unforeseen events like fires, escape of water, and wind damage, a home warranty protects the consumer against the natural wear and tear that your home suffers from standard usage. By integrating American Home Protect and RWS warranty brands into the porch platform, we're able to offer homeowners convenience and better financial protection. Our warranties span from specialty coverage that target a specific system in the home, a short-term 90-day inspection warranty for new home buyers, to a multi-year full home warranty. As part of PORCH, we have included maintenance services such as gutter cleaning or dryer vent cleaning at the cost of the deductible to create more value for every consumer. This has actually led to a substantial improvement in retention rates versus what American Home Protect was seeing pre-acquisition, generating strong and consistent recurring revenues for porch. Turning to slide 25, let's talk about a couple of the things we're working on. First, let's take a look at the porch home plan. By offering home insurance, home warranty, and routine handyman maintenance services, we're able to offer our customers an increased level of home protection and a more modern way to care for their home. While providing handyman services creates differentiation to help sales and renewals, providing warranty solutions alongside our insurance products allows us to tap into a large base of existing customers and insurance distribution channels as other ways to bring warranties to market. As you can see, we are uniquely building out a variety of channels to distribute our warranty products, as highlighted here on slide 26. Porch is integrated with a large base of companies in the real estate and home inspection industry. And when consumers are buying a home, it is a great time to purchase a home warranty. In addition, we've added utilities and emerging opportunities, such as along insurance and also American Home Protect's historic direct-to-consumer approach. In the utility space, we recently expanded our offerings to include electric, natural gas, water, and sewer line coverage in order to help our utility partners provide protection to best fit their customers' needs. We will have a lot more to share on our utility partnership program over time. So to wrap up, Warranty is one of Porch's fastest growing businesses, and we now have more than 40,000 members. With our multi-channel strategy and unique customer access data and customer experience, we have the incredible opportunity to become a leader across the $4.5 billion home warranty space. So with that, I'll turn it back over to Matt.
spk10: Thank you, Malcolm. Good to have you here. It was just over a year ago now that we announced our acquisition of American Home Protect. And with how quickly our warranty business is growing, it's clear to me and to us that we can better help consumers looking to protect their home. So much runway here. And we expect to continue to grow this business rapidly for a very long time. So to wrap up today's call, we would note to our long-term shareholders that we continue to ignore the short-term noise, but can come along with the stock market, being a public company. Our teams are executing, and we are at the very beginning of building a large and durable company. It's been a choppy year in a number of ways caused by the macro market, but as we look ahead into 2023, I'm excited about our ability to demonstrate clearly to the markets that our strategy is working, I can't wait to show the results that we'll produce over time. And with that, the management team will now take questions. Emily, if you can please open the line for Q&A.
spk06: Thank you. It looks like we have a little less than 30 minutes for questions here today. We'll start by taking questions from our Forge Southside analysts and attempt to respond to other questions that have been submitted to the analyst chat as time permits today. Our first question that we have on the list here today is with Dan Kernos from Benchmark.
spk05: Dan? We'll move to John Campbell with Stevens.
spk11: Hey, thanks, guys. On the insurance business, you know, the higher replacement costs, you know, the claims, they've heard everybody in the channel. uh, seems like a few quarters now. Um, it does seem like investors tend to overlook kind of that ripple effect of the higher renewal pricing. So I'm glad you guys have highlighted that, but I'm curious about how you're thinking about that tailwind just over the, you know, the next coming kind of coming quarters, you've got obviously two big price increases. And what I think, at least by our math are far and away, your two largest States. Um, I know there's some moving pieces around renewals and stuff like that, but, um, Just as you see it right now, could you maybe frame up the type of revenue lift you're maybe expecting in just those two states alone?
spk10: Adam, do you want to take it? It's tied to your business?
spk00: Yeah, sure, of course. Jason, we don't break out at the business unit level, but I would say that While those prices were approved this year, they generally won't affect prices during the current year because it will take time to earn in. But we expect that those percentages will be fully recognized over time as new policies initiate and earn in over 12 months and then as existing policies renew. And so I think you can use that to make your assessments. And you're correct that those are our two largest needs.
spk11: Okay, and then Adam, just broadly, the incremental margins on that kind of renewal pricing, is that typically 100% flow through?
spk00: So I don't think we disclose margins by individual businesses, but we would expect to fully earn those increases as the policies renew over that period of time.
spk11: Okay. And then one more on insurance here. I don't know if you guys can help shortcut this. I just haven't had the time to run through it. But if your gross loss ratio this quarter was similar to last quarter, or maybe just kind of the industry average, what was the swing in EBITDA just in this quarter?
spk00: Matt, I don't know if we have that, do we?
spk10: Yeah, well, we did mention Q3 was obviously substantially different than Q3 last year. There's a 41% gross loss ratio in Q3 2021 and a 74% gross loss ratio for our insurance segment here in 2022, third quarter. We also noted that John, the past years, it's been 30% to 40% gross loss ratios in the third quarter. Third quarter is typically a really good quarter from a weather perspective in the regions that HOA operates. Primarily, obviously, this quarter was unique and different. I don't think we've broken down specifically, but that right there gives you enough to be able to go and certainly triangulate the total impact. Overall, though, for the second half of the year, that swing in EBITDA from where we were, our previously $30 million guidance, negative $30 million guidance, to now negative 48, almost all of that swing, $15 million of that swing is directly tied to, you know, weather, weather inflation, you know, hurricane Ian. And so that, you know, the majority of that is obviously from. Yeah. So I was looking for, thanks guys. Yep.
spk06: Thanks, John. We'll move to Jason Hellstein with Oppenheimer. Jason.
spk08: Thanks. I asked too. So I think industry forecast to just housing volume is going to, be negative through 2023 and, you know, kind of even worse than we've seen this quarter, next quarter, et cetera. So just how are you thinking about vertical software revenue and EBITDA next year? And then just second, you know, you sound very confident you can get to break even EBITDA by the middle of next year kind of through, you know, kind of whatever it takes. So if that's the case, Why not repurchase some of your convertible debt, given the large discount right now in the market and your strong cash position? Thanks.
spk10: Well, on the repurchase, let me take that first and then. Matthew, if you want to take the housing market question, that would be great. But I think, you know, Jason, last quarter we had noted that we were thinking about it and talking about, you know, repurchase options with our board. And obviously between then and now our board did approve, you know, a repurchase. So we have authorization at this point from our board for a $15 million repurchase. So we basically agreed, you know, 10% of the market cap was the right place, approximately 10% of the market cap.
spk08: I was asking about the convertible debt.
spk10: Yeah. So, so, so basically the board approved the repurchase to be either stock or convertible debt. And so now, now the question is management has discretion and we'll, you know, do the math and make sure we, you know, we make the right choices there. What's interesting is both are very attractive, you know, in our, in our mind, you know, the stock or the convertible debt, there's a break point in which the stock is the more attractive way to go versus the convertible, the convertible debt obviously is lower risk for purchase. but both we view as very attractive IRRs. So we haven't obviously disclosed, you know, now the next steps, but we're obviously sharing today that there is that authorization in place for us to be able to action against should we choose.
spk13: I can speak to the vertical software. I'll share a few points. First, you know, despite the market declining, that segment is still growing, but it does have some impact. So the second thing I would say is that as we are forecasting for next year, we are looking very closely at the industry data. And so we have already built in some decline for next year because we have been looking at the forecasts that have been coming through from the different industry groups. When we see decline, not all of our business is impacted. So keep in mind that. There are parts of our business insurance and warranty that are recurring businesses. There are parts of our vertical software businesses that are recurring. Where we do see an impact, one is there are some move-related services. And so when there are fewer movers, we do see some softening in move-related services. And then parts of our vertical software business that are transactional in nature will see some impact And what we're seeing a little bit in the mortgage industry is, you know, certain mortgage brokers may sit out or reduce the number of brokers in their business. But again, when we put together, you know, our forecast for next year, we'll build it off of, you know, what we're assuming from the industry forecast. And that assumes already decline next year.
spk10: Three more just very quick points. One, Jason, it was a 22% year-over-year decline in home sales in the third quarter. We agree with you, and that's what external folks say, which is 2023 expects continued decline. And we certainly expect material weakness to go ongoing. And so as we're planning for breakeven in the second half of next year, we are certainly assuming that being the case. And we're not assuming a rosy picture from a housing market. I do want to remind... You know, insurance segment at this point is 44% of revenue. And that is really the fastest growing part of our business. And that portion of revenue isn't materially impacted by the housing market, given the vast majority of this revenue is recurring revenue from the existing customers. And those existing customers are also moving less frequently.
spk05: So just as a reminder. Thank you. Thank you. We'll now go back to, we'll go to Mike Grundahl with Northland.
spk06: Mike?
spk15: Hey, thanks, guys. Two questions for me. Any quick update on Flowify? And Matthew, I was trying to understand, did you say that vertical SaaS revenue is is kind of expected to be down in 2023 or just the housing market in general? And that's something you're going to have to work through.
spk10: No, the housing market in general will be down. Our vertical software segment is still growing, both in 2022 and we expect it will continue to grow in 2023. Within our vertical software segment, Mike, if you recall, our move-related services, that portion of the revenue, the transaction revenue, That's the portion that's most impacted by the housing market. It's low 20% of total revenue this year. That was around flat year over year here in the third quarter. So it's not declining as there's far fewer homebuyers, but it's not growing nearly as fast as obviously it would in a normal market. But no, the overall vertical software segment is growing. We expect that will continue to grow. And do you want to update on flow facts?
spk13: Mike, and then, you know, so for Flowify, you know, we're excited about the opportunity there because it's going to allow us to integrate insurance directly into the closing process with mortgages. And so what we have been doing, and this is what we always do, is we are rolling this out in a controlled manner. And we're doing that to ensure the experience for consumers and loan officers is great. We have been expanding the number of Flowify customers. which we have integrated insurance into the mortgage checklist and the early feedback is positive. And so we're excited about that opportunity, just that opportunity to make that, you know, insurance purchase much, much easier through the integration we have with Flowify.
spk10: And I'll just give one more brief update, which is, and you know, the team's doing a really nice job, really excited about the work that's happening there. It is harder to be a software company in you know, in the mortgage space right now. Clearly, mortgage companies, you know, are hurting and they have fewer customers, you know, than they did a year ago. But despite that, you know, we're really pleased overall with where that business is and, you know, still the opportunity that it's at.
spk15: Got it. Hey, thanks, guys, and good luck. Thanks, Mike. There's Dan.
spk06: We're going to go over to Dan Kernos with benchmarking.
spk04: Yeah, sorry, Matt, if it's a bit of a selfish question, but I've been running around because now it looks like Nicole is coming at my house. So have you guys considered that into your guidance? It also looks like it might go up the coast. So I'm wondering if that's included for Q4.
spk10: You want to take it?
spk00: Absolutely, yeah. So people who don't know, again, referring to subtropical storm Nicole that is predicted to impact the east coast of Florida. And so, you know, I'd say we are very conscious about not writing business in Florida, among other locations. We're very focused on being prudent in our reinsurance relationships and then managing our mix of risks. So I point you back to in our prepared remarks, the impact Ian had on us, given the scale it had for the overall industry. So we can't control the weather, but we can control how we prepare for it. And we feel good about the actions we've taken in those strategies many months in advance. in the anticipation of events like that, not knowing exactly when they'll occur.
spk04: All right, fair enough. I mean, I guess we'll see kind of what path it follows after it hits mainland. Matt, a couple of things, you know, a good update on sort of the data on insurance and getting it through the regulators. I know that's always been a, you know, kind of a topic focal point here. You said there was more coming. You've now given us yet more, you know, how do we think about kind of progression from here? And what do we think, you know, in terms of being able to take share on, you know, in terms of market share and being able to be aggressive with that pricing, but offset by insurance costs? Like, what do we, how do we think that kind of plays out?
spk10: I'll give a quick lesson to Adam. If you want to layer on with anything, please feel free. I just, I'm excited about the work here. Just, you know, like we've talked about before, the game of insurance, in our view, homeowner's insurance certainly is around, you know, who can access the consumer at the right time and at lower cost, and then who has unique data to build a price more effectively. And certainly that proved to be true in auto insurance over the years and built two very large, you know, companies that are very successful companies. you know, we think we have this amazing opportunity. And so we certainly have been investing aggressively. I think it's just this really systematic and consistent kind of approach to our investments there. So just pulling in more data, getting it structured, being able to use it like Adam was talking about in our filings. Now, Adam, if you want to just kind of update specifically on filings or anything that you're excited about there.
spk00: Yeah. I mean, I would say I share Matt's enthusiasm and he's a hundred percent right. I mean, it's all about that methodical approach to the teams working together, identifying data we might use, extracting it at scale, building the models, filing them, getting approval. And so we have a really clear roadmap quarter by quarter of how we do that. Um, And so I strongly believe in that, in that just each quarter we'll be able to keep moving that forward. And that really is how the game of insurance is won, is by having that more accurate pricing and just building that advantage over time.
spk10: And maybe one more quick thought, which is maybe Dan, some of your question. Some of the consumers, right, as you go through that process and you match all of our data with historic claims, Some consumers will be able to get discounts, right? And get lower, you know, lower pricing. And therefore, you will be able to grow faster in terms of being able to access more consumers that we know have better risk. Some consumers will get surcharges, right? Because it's a higher risk than others realize. And so either you may not win that piece of consumers where it was going to be bad risk anyway. you know, or you're going to win it at the appropriate price, right? So that it can still be profitable, you know, for us. And so you're going to see, you know, impacts really on both sides, both growth and margin, you know, for us. You know, I would just say we're in the early days, like we're going to, we're doing really impactful, interesting things, hot water heater location. We're excited about that alone. And that's just one piece of data. We're in the early days of how much we're going to do. And so this will just be, you know, a multi-year journey as we continue to execute, you know, and make progress there.
spk04: And the last, if I could just sneak kind of one more in, Matt, just on the app, right? I mean, I know obviously you guys have laid out a path to profitability in the second half of next year, and a lot of it doesn't include any sort of incremental insurance growth. I think we can see how you get there. But just how you're thinking about, you know, balancing, and I think I maybe asked this last time, ongoing investment in things like that, how much has already been, you know, kind of underwritten at this point, and how much you need to continue to invest in that part of the business, or do you pull back on that if things get worse? I just want people to understand, you know, kind of the underlying trajectory there.
spk13: Yeah, I can take that. You know, we... First thing I want everybody knows, we are taking a very cautious approach to investments. We have slowed down a lot of our investments. The app is very strategic for us long-term because it creates a lot more access to consumers and it really brings to life the data that we have. For some of you to see, it's really powerful to see what it looks like when your inspection report and all the data we have is presented in a very useful way on the app. So today we are still committed to, to building out the app. It is already live. We're actually turning it on for more and more of our inspectors. That's on a steady rollout. And the early feedback is very positive and we're getting a lot of great feedback on how we can, can improve that experience. And it will be a differentiated experience that, you know, nobody else would really be able to provide.
spk04: Awesome. Thanks so much, and keep your fingers crossed for me. Thanks, Dan. See you.
spk06: We'll go to Justin Ages of Barenburg. Justin.
spk03: Hi. Thanks for taking the questions. First, I was hoping you could give a little more color on what initiatives you're doing to reduce volatility in the insurance, just because it seems like these once-in-a-century, once-in-a-lifetime events like Hurricane Ian are happening a lot more frequently than that.
spk10: Sure. Adam, I'm sure I can tag team this. We highlighted two of those. Maybe, Adam, if you want to just kind of restate and provide any additional detail you'd like on the two things that we're working through.
spk00: So we talked about reinsurance, which I think many of you are familiar with. But I might address the other thing that was a reciprocal exchange. A reciprocal exchange is a structure in the U.S. or several brand name companies. We mentioned Farmers, Erie, USAA, there are others. And so the reciprocal change is an unincorporated entity. It would not be owned by ports. It's that it's affiliation of the policyholders or subscribers. And that reciprocal change would hold all of the underwriting, the capital, the premiums, essentially the balance sheet of the insurance. And there is a second entity that would be owned by Porch, the attorney, in fact, which would manage the business and receive a fee in return for managing it. And that entity would be staffed by the employees we have and largely run the business as we do today. But that's one of the things we're exploring. We don't know if it will happen yet. But in doing that bifurcation, we think it has the potential to reduce volatility if we decide to pursue it. Matt?
spk10: Yeah, I would just say just at a high level of the question, because I think it's a good one. We agree, and our strategy is focused on making really good choices here in terms of how we're going to manage the volatility. Adam right now is meeting with reinsurers, and that's just a core part of what we do, core partners that we operate with is to make sure that we have our business well-protected so we can run our business, reduce volatility over time, and have just consistent results.
spk03: All right. Thanks. And then the next one, as we look ahead into, you know, this softening housing market in 2023, has there been a shift in, you know, SAS versus B2B2C and what should we expect in that?
spk13: A shift from SAS to B2B2C. There's different, there's dynamics that play out in different ways. You know, so one of the, you know, we have certain vertical software businesses that do rely on transactions. So you'll see lower SAS revenue in those businesses. And then as we have fewer movers, it does have a softening impact on our, our, you know, move related services because we have less folks who are moving, going through the kind of going through the platform. But as Matt mentioned, you know, our fastest and largest, you know, key parts of our business warranty and insurance are less impacted by that. And we have a really strong recurring nature to those businesses.
spk10: I'll also just add that we've gotten better and better at moving away from, you know, what we had talked about two years ago of getting paid with either SAS fees or B2B transaction revenue and really being able to get paid with both, right? Where we get SAS fees, we've introduced more modules for these companies. We generate, you know, consistent SAS revenue from them. and continue to get access to consumers through more and more tactics. There's a variety of things we're doing, like the app, you know, like integrating insurance with Flowify and others to be able to get access to more and more consumers over time and be able to, you know, generate revenue in both ways.
spk05: All right. That's really helpful. Thank you both for the answers. Thank you. We'll go to Danny Piper with JP Morgan. Danny?
spk02: Hey, thanks for the questions. I'm on for Corey Carpenter. I just have two quick ones. On the Porch Consumer App, do you plan on transitioning it to become a main acquisition funnel over time for Porch? And then the second one is, do you plan on raising rates in any other states you write insurance policies in given the persistent inflation? Thanks.
spk13: Sure. On the Consumer App, we are certainly planning for it to be an acquisition channel for consumers. I think given the way our business is set up, we actually have a variety of different channels for us to be able to access consumers. But certainly, we think the consumer app provides some unique benefits because of the experience that we can provide. There are things that we're going to be able to do with our data to personalize that experience that nobody else is going to be able to do. So we think there's a very powerful way for us to both acquire and engage consumers. The other point that I would remind the group is, you know, the way that our ISN platform works is consumers download their app through our platform. And so we have opportunities for them to access their inspection report through the app, which we think will aid adoption and downloading of the app.
spk10: So we're excited about it remains one of our priorities. And we'll be continuing to really primarily focus for the near term. on b2b to c approach using our companies to introduce consumers as a way to download and not going direct to consumer and marketing and advertising for them we have so many consumers across so many companies and those consumers are at the ideal moment in time for us to meet them that that really is the focus of our teams is to just take full advantage of that of that opportunity adam do you want to go to the second question around rates in other states
spk00: But then we have a process. We regularly and frequently look at the indication for each state. So what are our current estimates of costs and what's our future estimate of costs, whatever the source of that cost is. And based on that process, we regularly and frequently make changes to our pricing in each state. And so we highlighted Texas and South Carolina because they're large and meaningful. But absolutely, we will charge an actually justified rate in every geography in order to be profitable.
spk05: Thanks. Let's move to Josh Stigler with Canvas. Josh?
spk09: Yes, hi. Thanks for taking my question. I know it's still early stages, but I'm curious if you're seeing any early evidence that your unique data advantage is helping the business weather this turbulent macro environment better than, say, some competitors who lack similar proprietary data. Thank you.
spk10: Well, let me just quickly say a couple things, and then Adam, you're closest to it, and take the mic. A couple of things that I'm certainly proud of, you know, in this market that we're in right now for the business to look at a 65% gross loss ratio, 87% combined ratio. Those are really good results considering hurricane Ian and just, you know, what's happened, you know, in the third quarter in particular from weather perspective. And so just want to provide a credit to that team, despite, you know, the, you know, the choppiness that we saw certainly in the third quarter, whether, Like those are good results and, you know, set us up well with reinsurance relationships. One, two, you know, when you go back in that actuarial team, you know, looks at our data like hot water heater location and combines it with historic claims data. Like we're not sharing publicly for competitive reasons, like the impact that we see, but it's noteworthy. I mean, it's noteworthy. It's, you know, something that we are excited about just because that is one of many things that can cause an impact. So Adam, anything else you want to offer there?
spk00: Yeah, I think I might point you back to, I can't remember what quarter it was, but we shared some data by peril that we're able to collect, whether it was the roof and the percent of claims or the relative importance of the roof, for example, to weather claims, or it was plumbing and the importance of plumbing to the escape of water peril. I don't have it in front of me, but I know that we shared it. And so what I tell you is that's part of this very methodical approach to say we know that matters. And so what we're committed to is making progress every quarter continuing to file, to build those models and then file them. And that's probably what I would point you back to is that we're really clear-minded on how those things will lead to improvement by individual apparel that Matt talked about. And as he said, we don't share for competitive reasons some of the details, but we can see that, and it's something I am very enthusiastic about.
spk05: Looks like Josh froze. Let's move to Ryan Tomasello. Ryan will close us out for the day. Thanks, guys, for taking the questions.
spk12: Regarding the insurance price increases, can you say how you're thinking about the impact to attrition as you push those through on renewals? And on the flip side of that, if you think, you know, rising churn that we're likely to see across the industry as competitors are pushing through the same price increases, you know, is an opportunity for you guys to pick up share on the back end of that.
spk05: I can talk about that.
spk00: I mean, so I'd say, you know, we disclose our insurance segment renewal rate. And so, you know, when we raise prices, we expect that to decline. I think we've been pleased that given the overall market conditions that it has held up. But certainly if we increase prices, we do have some belief that based on elasticity, we'll see renewal go down. But then as you alluded, we believe that overall the market will have to charge for prices that are warranted, and that will lead to a stabilization and renewal, all things equal. And then as you said, that's going to drive shopping, and that's something we can benefit from. But the main thing I point you to is we disclose every quarter our insurance renewal rates, and that's the best way for you to see how we're performing as those increases are seen in renewals.
spk12: And then beyond the pieces of the vertical software segment that you've called out that have the direct sensitivity to housing and mortgage, maybe you can just speak more broadly about the sales environment across the different brands, whether you're seeing any softness or hesitancy there on the part of, I guess, largely SMB customers, given the uncertainty that's out there for next year.
spk13: Yeah, our teams are very focused on our go-to-market. We do have unique things that we can bring to our customers that other folks can't, that I think gives us an advantage. But it's still a difficult market. There's a lot of small businesses, a lot of sole proprietors who get heavily impacted when there's a significant slowdown. And so we saw pretty good growth in our average company's this last quarter. And I think we expect that pace to soften some during the slowdown.
spk05: Thanks for taking the questions. Thanks, Ryan. Good to see you.
spk06: Thanks, everyone. We only have one question here that was submitted through the analyst portal, and that is a question for Marty. Marty, could you please give us an update on the cash position of the company and maybe an update on the company's NOLs?
spk01: certainly emily we did indicate in our provide prepared remarks that we ended the quarter with 276 million of cash on hand of which 16 million of that was restricted cash in addition our homeowners of america business has a long-term and short-term and long-term investment portfolio of 162 million We believe the cash that we have on hand positions as well for our operations and the buyback of stock or convertible debt that was discussed. And with respect to our net operating loss, we're anticipating that we'll have a NOL carry forward of 374 million at the end of 2022. Great. Thank you.
spk05: And to Matt? I will close us.
spk10: didn't, didn't get the stock market question this quarter. I'm just going to give you a quick thought, which is, um, you know, we, um, continue to be convicted in what we're, what we're doing. Um, and so, you know, it is, um, uh, certainly Porches is involved in industries that have gotten impacted just broadly. Um, we're really excited about, you know, just about what the future looks like, you know, for the company. So thank you to, um, to, you know, long-term shareholders. Um, I'll, uh, Also just say thank you to everyone that joined the call here today. We appreciate the interest, ongoing interest in Porch Group. We are at the very beginning of the journey, like I said, and I do want to just shout out to the Porch team in its entirety for the continued focus, for living our values, for the great work that's happening every day, for being focused on the task at hand. Let's go build a great company and everything else is going to take care of itself. Also, a shout out in particular to Marty for the role that you played. Thank you, sir. With that, thank you all. Take care. Have a great, great rest of the day.
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