Porch Group, Inc. (PRCH) Earnings Call Transcript & Summary

Thanks. Hi, folks. Thanks for joining in. This is Kunal Madhukar. I'm the SMID cap internet analyst. I'm really pleased to have the CEO of Porch, Matt Ehrlichman, who is going to go through his presentation and followed by Q&A. So if you have any questions, please do post your questions. Matt, the floor is yours. Really great to have you here. Let's hear your story.

Thanks, Kunal. I appreciate it. Appreciate the opportunity to present on Porch and what we've built over the last 7 years. For those of you that are following along with the deck, I'll just reference page numbers as we go so that we can jump through and make good use of this next half an hour of time. If you'd like to go ahead and skip ahead to Slide 8. I'll take a moment and give a background on Porch and myself briefly, when we started the company and what we're building, and then we'll dive right into the Porch story. Personally, my background is as a tech entrepreneur, so I founded, I mean, I'm the CEO of Porch. This company was founded about 8 years ago. Prior to Porch, I've built a couple of companies along the way. I was the Founder and CEO of a software-as-a-services company that I'd started out of Stanford back in 2001. And had a good run, bootstrapped it and sold it for a little more than $60 million, and then built a second company up through its IPO about 9 years ago. And so coming out of that, I knew I wanted to go build one more company. Porch is my last company, with the desire being to go build something great, go build an epic legacy company that I can look back on having really made a dent in the world. At that time, I was in the process of building a home with my wife and young family. And it was -- it's a classic entrepreneur story, where I was in the process of that massive project, and it was just pervasively painful. And as you dig in, and as I dug in and learn more about the home and this category, it was just really clear that this was the space that I wanted to go and fix because the home is most people's, by far, largest asset in their life. The category and the TAM is just massive, one of the largest industries that there is, and yet it's pervasively painful. As people go through their move, for example, into a new home, it's the third most stressful time in life. As they are maintaining their home on an ongoing basis, it's incredibly difficult, much more so than renting, where everything is taken care of for you. And so as we put this forward 5 or 10 years, we know with certainty that it will change. It will just become easy. There's too much money in this industry for that not to be the case. And we've repositioned our company in a really unique way with a very, very differentiated strategy to be able to go and help bring that change. So let's dive into the Porch story. I'll be able to explain what we've built in our strategy, and we can dive into some of the details. So here on Slide 9, just talked about the story of Porch. So we launched this company almost exactly 7 years ago, and we launched it as a data-driven home services marketplace. So we're helping homeowners to get projects done by connecting them with the best contractors for their particular home based on all this very unique data that we had aggregated and organized around home projects, 100 million-plus home projects that we are aware of. That business actually grew very quickly. We ramped rapidly over those first couple of years. But there were 2 key ahas, 2 key light bulb moments that we had about 5 years ago that really led to a key pivot and have catapulted us in to where we are today. One was that, even when we would go and help the consumer with a project, we didn't see this massive step-function change in LTV even if we delighted them and really, really, really made them very happy. And as it turns out, people just don't hire that many professionals each year for their home. And so we started thinking about, okay, where are the really high LTV -- the highest LTV services for the home, things like insurance or TV and Internet or security or moving? And when are those services purchased? And almost exclusively, those services are purchased in this premove phase, as people are getting prepped for their new home. The second insight was, at that point in time, we were quite reliant on classic direct-to-consumer channels to be able to access demand. And you could just see what Google, for example, was doing, where they were just taking more and more of their organic shelf space and pushing it to paid. And their paid model is perfectly designed to be the ones who capture all of the value from paid. And so, on our perspective, in order to build -- we built a good company. But to build a truly great company that was going to be able to grow for a very, very long period of time, we wanted to make a change. And so we did that. About 5 years ago, we pivoted into what we are today, which is a vertical software platform for the home. So now, we provide software, ERP and CRM software, to a variety of home services industries, so companies like home inspection companies or moving companies, and a number of others. We provide the full end-to-end software that they use to run their business. They can pay us with typical SaaS fees, or we really encourage them to pay us by providing us access to their customer, to the homebuyer, who we then help with key high-value services to generate most of our revenue. So if you click to Slide 10, you'll see our flywheel. Again, we provide software to companies in a variety of home services industries. We really encourage those companies, as a method to pay for their software, to provide us access to their consumers and homebuyers. We then help those consumers with key services as their moving concierge. So we make the move very easy for them and help them with things like insurance and TV and Internet and security and moving, these really, really high-value services that are very high LTV. We generate revenue then from those service providers, from the large insurance carriers and large TV and Internet companies, large moving companies, as we help those homebuyers get those projects and services complete. We drive demand back to the companies we provide software to, to really lock them into the platform. So there's nobody like us in the home services industry. It's very similar, though, to an OpenTable model and flywheel where they would provide software restaurants through that they can access the consumer, monetize the transactions and drive demand back to those restaurants. We're very fortunate that our TAM is massively larger. And where their transactions were worth $1 at a time, our transactions are worth $1,000 at a time. Here on Slide 11, people sometimes go to Porch.com, and they don't realize that we're the largest provider of software in the home inspection industry, as an example. So Porch.com is one of our many brands. ISN is our brand in the home inspection industry, where, again, we provide software to home inspection companies. We're, by far, the largest provider of software to home inspectors. 26% of all home inspections that happened in the U.S. are managed through our software platform. So massive scale there. HireAHelper, for example, is our brand in the moving industry, where we provide software to moving companies. In total, we have 11,000 companies that we work with today that we provide software and services to. On Slide 12, you can see the level of access that these companies have provided Porch. So in total, through these 11,000 companies, Porch has 65% of all U.S. homebuyers flowing through our software each month. So incredibly large reach. A subset of the companies today pay for the software through traditional SaaS fees. A subset of these companies pay for the software by providing us access to the consumers, by providing their consumers with Porch's moving concierge solution. So that group represents 27% of all U.S. homebuyers, where we are the moving concierge with call and marketing rights to those consumers, a lot of these 11,000 companies. On Slide 13, another brand that we have is Elite Insurance Group. So even when we deliver services for consumers, we operate some different brands. We are a nationwide licensed insurance agency via Elite Insurance Group, where we could be able to quote and sell insurance to this massive group of homebuyers that we have this really unique and very early access to from those consumers through the move. Slide 14 gives a quick snapshot as to where we are as a company. So we're headquartered in Seattle with 900 full-time team members. Right now, in 2020, we expect $73 million in revenue with really unique characteristics. So first, the business has very high margin, almost 80% gross margin. Second, the business is growing very quickly. We have a 3-year CAGR of about 50% revenue growth. And then lastly, just in June, we have now ticked over from a profitability standpoint. So as the business had pressed to take our company public, we wanted to run profitable in the back half of this year. We did so a little bit early and are now profitable as of June of this year. On Slide 15, you can see the industries that we work in, where we provide software and services to these companies. So home inspection is our largest vertical that we operate in, where, again, we are, by far, the largest provider of software here, where we work in the moving space, utility space, warranty, et cetera. On Slide 16, you can see the solution that we provide to these inspection companies. So it really is the full end-to-end ERP and CRM software that these home inspectors use to run every aspect of their business, whether that's configurable dashboards, calendaring, CRM, online booking and payment processing, dispatch, routing optimization, the full tools they use to run every aspect of their business. Like I mentioned, you can see on the right side where, yes, they can pay us with typical SaaS fees for the software, or we really encourage them to pay with customer access. So now we're able to go and say, "Hey, why don't you use the best-in-class software in your industry that's built for this industry for free? And by the way, by providing the moving concierge to your consumers, you can make their move easier." Our inspection companies, when they provide that access, and that product actually get a lift in NPS, they get a 20-point lift in NPS. For us, that certainly makes sense because these companies, when they pay that way, are worth 6x more than when they're paying with typical SaaS fees. So much more valuable as we shift companies to pay with customer access. In total, through this value prop, through our software being extremely sticky and through how much value of revenue we can create through our 2 payment methods, we see very strong unit economics. We have over 30x LTV to CAC, and that's a fully burdened LTV. On Slide 17, it goes into the value prop in a bit more detail here, where, again, you can see at the top where we provide the leading software for free; tools that help companies provide a better experience to their customers and get a lift in NPS, also free; and lastly, we drive demand in jobs back to their calendar. So inspector will likely to grow as a great case study of a very typical inspection company. Typically, before using Porch, they would use a whiteboard or maybe Excel or pen and paper to help organize their business. And I love this quote, "Fortune CRM has turned me from a technician to a business owner," exactly what we're trying to do. We've more than helped to double the size of this company, as we do for many, in a relatively short period of time. You can see on the right the results that are produced here where companies love us. We have 73 NPS, and we produce exceptional annual net revenue retention of 134%. And again, if you think about the leverage that we have as a business, with our innovative pricing model, we get all of the levers to grow that a traditionally priced SaaS company would, where we can have more sales reps, we can sell more companies, we can upsell modules. And obviously, it's very sticky because it's their ERP system. It's very hard for them to switch. But in addition to that, it's likely to get to do a price increase every single month. Because as companies pay us with customer access every month, we can introduce new services to the consumer, increase the conversion rate, make more money per service as we build more and more scale, and all of that makes the company more valuable. So obviously, if we were to raise an increase of monthly fee every single month, you're not going to see a 73 NPS. You're certainly going to see high churn. But we have very low churn, very high NPS because of this unique value proposition that we have. Slide 18 just shows a couple of examples of how -- when we do get access to the consumer, how we can help them as their moving concierge. So out of the inspection, homeowners just made an offer on a home, it's accepted. Home inspector is hired 90% of the time in the U.S. to be able to go out to a home and be able to spend 3 or 4 hours in the home documenting everything. So they're up on the roof, they're in the crawl space documenting all the appliances. All of that data, as an aside, flows through our software platform. So we know more about homes than anybody else does. With all of that, typically, an inspector would provide a 40 to 60-page report back to the consumer saying, "Here you go," and consumers left to then fend for themselves. Now at Porch, those inspection companies say, "Great, here's your report, and you get a moving concierge, which is complementary, part of my inspection services." We then send an e-mail to the consumer, providing a link to their self-service dashboard with all of the things coming up for their move. We say, "Hey, great. It's nice to meet you. I'll give you a call tomorrow. Click here if you don't want me to." Only 1% to 2% of people will opt out. And then we call the homebuyer in the next day and talk about their inspection, if they need any help with their inspection report. And then we chart out what's coming up over this next 6 to 8 weeks of their move. And so immediately, we'll bring in one of our licensed insurance agents to be able to quote and sell them insurance and link that back to their -- into their mortgage. Or yes, we'll -- we are able to compare all the different TV and Internet options for them, all the different moving options. Now a key point is that the consumer is not getting called or sold off as a lead, where they're called by insurance companies or moving companies or TV and Internet companies. We've done the integrations with all of the major players so that we can go ahead and be able to quote them directly, show them all the promotions and rates and packages with the local TV and Internet companies and actually book and activate service right then and there for them so they don't have to wait on hold with Comcast or whoever it might be, to make that whole process really easy for the consumer, where, in turn, that NPS accrues back to those companies that we provide software to. So let's jump ahead to Slide 20. When we give the access to consumers at the scale that we do, again, 65% of all U.S. homebuyers going through our software, 27% of all U.S. homebuyers where we are the moving concierge, timing is key here. So while every other brand gets access to these movers, when they change their address with the USPS after they move in, Porch know who these people are 6 weeks prior, often even more than that. And the key thing for us is that this creates this wide-open window when consumers make most of their major purchase decisions, where we uniquely know who these consumers are and can help them as they go through that move with all these key services they have to purchase. On Slide 21, you'll see the journey of a homeowner. Because we meet these consumers in that premove phase, we've been particularly focused on this move-in stage of the journey. So on services like insurance, moving, security and TV and Internet is what we offer today, over time, we'll offer things like electricity or solar or warranty. Once the consumer's in their home, we'll certainly help them on an ongoing basis with various maintenance and improvement projects. But on Slide 22, you can see just examples of these service providers that we work with. So again, we provide software to companies like home inspection companies and moving companies. They give us unique and early access to homebuyers when the consumers are more valuable than they will ever be, and then we help those consumers with these key services you see on Slide 22, getting paid from the types of brands you see on the slide. So these large insurance carriers, for example, will pay us a commission in year 1 and ongoing each year when we help a consumer get signed up with insurance; or moving, we get very large take rates; or security and TV and internet, they pay us a very large bounty because they know these customers are going to be with them for a long period of time. Once the consumer is in their home, yes, pros can create profiles on Porch. Or yes, we work with large nationwide pros. We also partner with the marketplaces that are out there. So other networks of pros like HomeAdvisor or YP or Dexter, many, many others, where we can bring those pros and put them and connect them with those consumers that are flowing through our ecosystem. If you skip ahead 2 slides, we can hit on the financials. Here, on Slide 24, you'll see how the business has been performing. Overall, we've been running right around a 50% CAGR. You can see, in 2020, we were impacted by COVID. So you can see, in terms of the growth rate, we had anticipated actually being right on our CAGR at 49% growth as we started the year. And actually, we were above that in Q1 of this year. We did get impacted between, really, mid-March and early June and fairly severely so, such that while we still grew, we grew more slowly than we anticipated, that 28% growth this year. At the end of June, though, we are just in a very, very fortunate industry where things had normalized at this point. And so now we are back on track for what we had anticipated for 2021, which, on a normalized basis, was 41% growth. Two other points I'll make on this slide. One, like I've mentioned, we're around about 80% gross margin, so very high-margin business. We've seen lots of leverage down to the contribution margin line, which factors in all variable expenses, selling and marketing to companies and then supporting the consumer. But it's really driven to where we are from an EBITDA standpoint. So as I've mentioned at the beginning, we were targeting getting to breakeven or positive EBITDA here in the back half of 2020, and we did achieve that here in June, where we are now, on a run rate basis, EBITDA positive. Slide 25 shows a breakdown of our revenues. The blue here in this pie chart is when companies pay us directly for SaaS fees. Now again, we would like the blue to go to 0. We're actively encouraging companies to move to pay us for the software by providing us access to the consumer where we then generate the green and the yellow revenues, the green being the B2B2C services that are reoccurring. We get this reoccurring stream of consumers from those companies, and we know exactly what these consumers are worth to us. The green includes the move-related services, specifically insurance and moving, security and TV and Internet. And then the yellow is that transactional revenue from those consumers when they're in their homes, so as we then help them with ongoing projects. Here on Slide 26, just a quick graph showing the impact from COVID. You can see, in mid-March, how things really just fell off a cliff, and it was very much a v-shaped recovery, both in terms of the volume of home inspections and the volume of home projects. As we skip ahead, let's take a quick look forward. Here on Slide 28, we have a very, very strong team that's anchored by really core and important values for our company that are in place to help us build something for a long period of time. Slide 29 just talks about the TAM. It's a massive category. Today, for us, we have a $220 billion addressable market, and that's without it being expanded as we introduce new capabilities. As an example, right now, in the insurance line there, we operate as an insurance agency. But as we look forward as a public company, which we will be here in Q4, we will be going deeper into insurance as a managed general agency, where we can capture more than 2x the take rates that we do today, more than doubling our addressable market in that particular area. On Slide 30, 31 and 32, we'll talk through our growth levers. So here on Slide 30, you can see the 4 boxes on the right-hand side that are the key levers we have, that we expect to be able to produce consistent 30% to 35% annual growth as we look forward. So the first 2 boxes are really about getting access to more homebuyers, so that's selling more companies our software and services. Again, given our 30x LTV to CAC, that's a very clear lever to pull. And the second lever is to -- second box is to be able to take those companies that are in our platform today and have more and more of them pay with access to the consumer instead of the traditional SaaS fees because they generate 6x more from them when we do so. The third and fourth boxes then are making more revenue from consumers, both by engaging more of them and then generating more revenue from each of them. And you can see this on the next slide, 31. So on the left-hand side, when companies are paying us with SaaS fees, they pay a monthly fee that scales with usage. So it's worth about $4 from each of their customers. When they pay us with access, those companies, every one of their consumers, whether or not we talk to them, whether or not we actually -- they actually buy a service, on average, they're worth $25 to us. So again, those companies get a 6x increase in value when they pay us that way. On the right-hand side, while $25 is great, you can see that we're just scratching the surface. So today, we capture about 1% of the total value opportunity per home buyer. And you can see how this builds up here on Slide 32. Well, while we think we'll generate 30% to 35%-type growth rates in our existing vertical markets, there's a number of other levers that we have to pull and growth opportunities that are very significant: mover marketing, which is going to brands and helping them to direct mail consumers earlier than they can today; two, insurance, like I've mentioned, where we will go deeper in insurance. It is the highest LTV service in the home, and we have such unique access to people when they have to buy insurance. And we also have data about the home that nobody else has, given all of that inspection data to help people really get the right insurance for their home. And then lastly, we will use our M&A opportunity to be able to expand our platform into other verticals. Here on Slide 33, you can see a little more about that. We have a very robust M&A pipeline, and this is something that our team has tremendous experience with. So I personally have done over 25 buy-side acquisitions in my career. Our CFO has done more than 40 buy-side acquisitions. So right now, there's 150 companies, M&A targets that are in our pipeline. There are 7 that are deep in active negotiation. They represent over $180 million in revenue at slightly less than 2x revenue multiples. And so not only are those great strategic fits for our company and very accretive, but here on Slide 34, you can see how much value we can create there. Two examples of acquisitions we've done, where we acquired ISN in the inspection software category about 3 years ago. It was a fairly small company, $3 million or $4 million in revenue, and very slow growth. And in 3 years, we've more than 5x-ed that business. Or 18 months ago, we acquired HireAHelper, and it was flat from '17 to '18. And then in 18 months, we've more than doubled the size of that business. Taking these software companies that are building good businesses but just don't have the ability to monetize the demand and data the same way that we do, we can create a lot of value. Last 2 slides here as we wrap. So skip ahead to Slide 37. Porch has decided to go public through a SPAC. And about a month ago, a little more than a month ago, we announced a transaction and a very large PIPE. So we're merging with Property Tech Acquisition Corporation, PTAC is the current ticker symbol. Porch is currently in that process. We'll be filing our S-4 here fairly soon, and then we'd expect to be public, trading under PRCH in the fourth quarter. We did go out to raise a $50 million PIPE, and we were oversubscribed in the second morning. We upsized that to $100 million and then again to $150 million, which we did close, anchored by just great, great long-term investors like Wellington and others. We're still over 2x oversubscribed as we closed that and announced that a little more than a month ago. On Slide 38, this just really just recaps the key things that Porch brings with our unique model. So we bring the best of SaaS model, where it's predictable, very low churn and very clear go-to-market tactics to able to go sell our software to companies with really clear unit economics. But if we were to only price our software with a monthly fee, we were at a sliver of the total TAM. By pricing it with access to the consumer, we unlock what is most attractive about the market -- about data marketplace business, where we have this massive, massive TAM. And so you can see what that produces here in the middle, very high margin, very predictable and reoccurring, 30x LTV to cash, $220 billion TAM and levers to pull on both the company and consumer side. And so perhaps, I'll wrap with Slide 41. This shows here just the Rule of 40. So you can see right now, Porch is being valued at 4.4x revenue multiple. And so this is, I think, why there was so much demand from investors as we did our PIPE roadshow, is that the company has been growing very quickly, already profitable with very high margins. And you compare that with other companies, and they all know it's going to shift to the right. And what I think is going to be fun to see is how far it shifts to the right. Some believe that it actually can trade at a premium. So they're kind of typically priced fast because we have other levers to grow the business for a long period of time. So thanks very much for your time and attention.

Thanks, Matt. That was a very interesting story. The first question that I guess anybody would have is why go this back route?

It's a good question. I mean, I would say, it was a little more than a year ago, the Board and I -- I'm, by far, the largest shareholder of Porch, elected that we want to take the company public. And at that point, we did think we're going to take it public through a traditional IPO, as they've done previously. And so we had a checklist of things that we wanted to accomplish, like I mentioned, we wanted to go and run it breakeven or positive EBITDA in the back half of this year, get our CFO in place, a number of things like that. It was back in November this last year, we actually were approached by a different SPAC. And through those discussions, really just got educated in terms of the pros and the cons and the mechanism. And so we started talking with Property Tech Acquisition Corp., PTAC, in December of this last year. And it was very clear when we started talking to them how Porch was right down the middle of the strike zone for them, great fit for us, very aligned with our thinking for what we're going to go build this company into. And the reason that we decided to pursue that and have moved forward with it is really timing at the end of the day. So we're able to go get the company public really a full year earlier than we would have been able to with a traditional IPO. And that's a big deal for us and primarily because of that M&A pipeline that I referenced before. There is so much opportunity for us to be able to grow the business, not just inorganically but organically. And we wanted to be able to go after those M&A opportunities quickly. Being public with a public currency creates the space and opportunity for us to do that.

That's interesting, especially with the currency being so undervalued relative to comps. So help me understand one thing. If I'm the consumer, so I decide to list my home on, let's say, Zillow, where do you come into the process? And then how do you help me, as a consumer, go through the nuance of like selling the home and moving into a new home and things like that?

Yes, a great question. So if you list your home on Zillow, whatever it might be, if you're either buying or selling, and we'll typically work with homebuyers, you are going to be -- 90% of the time, in the U.S., you're hiring an inspector, right, or getting a moving company. There are all these other companies that you will work with that you'll engage with as you go through that move, getting your utility set up at your local utility. All of those companies that you will work with are access points for Porch, right? So let's assume you hire an inspection company. Well, 26% likelihood that, that inspection company uses Porch's software today. And so you'll be going through our software as you sign up for your inspection or as you download your inspection report, however it might be. And that inspector is very, very likely going to be providing you with a moving concierge as part of their service. And so we will meet you from one of these 11,000 companies that we partner with today, who we provide software and services to. Once we meet you, then our job is to be able to talk to you via this trusted source that we got introduced to from and really make what is typically very stressful, which is the move, and make it easy by finding all other things, really asking you what all the things are that are coming up that you're going to need to get set up and simply making that process very easy, by giving you those quotes, giving you those options, helping you act -- to activate, whether that's again insurance or moving or TV and Internet, whatever it might be.

Interesting. And so you definitely have very attractive gross margins, and EBITDA has just turned positive. Can you help us better understand the economics in terms of fixed versus variable cost and how that kind of flows through the business model?

Yes, sure. So Porch had, from a GMV perspective, more than $2 billion of services GMV through our platform. We recognized revenue of $73 million in revenue. We have a set of COGS that bring our gross margins to about, again, 80%. Now between our gross profit and contribution margin is all of our variable expenses. So this will include expenses like all of our sales team costs to be able to go out and sell and acquire more companies, the inspector companies, moving companies, et cetera. We have a variety of sales teams. It also includes all the marketing costs to be able to go and acquire those companies. It includes all the variable costs of support, so our account management and customer success teams, for those companies, as well as our costs to help the consumer go through the move, right? So our moving concierge team, we have a very large staff, full-time staff in Mexico. So all of those expenses roll up into our variable expenses, which bring us to that contribution margin line. Below contribution is really all of our fixed expenses. So our R&D expenses is the primary expense, really, in our company that has been driving historic losses. We've typically invested very aggressively with R&D. And while we will continue to, we will just moderate the expansion of our R&D expenses to have it be growing more slowly than our revenue growth, to make sure we show just very consistent margin expansion as we look forward.