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

Hello, everyone. Thank you for joining us. My name is Rohit Kulkarni. I'm the Internet analyst here at MKM Partners, and I also lead our capital markets research efforts. I'm very excited to have a very interesting set of 2 people here. We are going to talk about SPACs and a company that recently went public through SPAC. Again, if you don't know what SPAC is, it's been around, then might as well do a quick Google search. We have Tom Hennessy of Hennessy Capital. He was on the Board of a company called PropTech, which is essentially a SPAC. He'll talk more about what it takes to do that. And then Founder and CEO of Porch.com, Matt Ehrlichman. He -- his company went through a reverse merger and is on the cusp of being a public company. So we'll talk through what the process looked like and what Porch as an investment opportunity looks like in the next year. So with that, I'll turn it over to Tom. He'll give a quick overview. And Matt has a quick slide deck on Porch.com. So we'll -- once we are done with the intros, we'll jump into Q&A. So Tom, why don't you give us a quick overview and switch it over to Matt then. Thanks for joining us, by the way.

Absolutely. And it's good to be here with everyone. Thank you for hosting us, Rohit and MKM. It's a pleasure to share our story here. I'm Tom Hennessy, Co-CEO of PropTech Acquisition Corporation, which is a SPAC. It was a SPAC that was raised at the end of November 2019. We raised around $172.5 million on the NASDAQ. And we set out to find a high-growth, exciting business that's innovating within real estate technology, either commercial or residential. And we're very pleased to have found that in Porch. And so my future partner here, Matt Ehrlichman, Founder and CEO of Porch. We're on the verge of executing and consummating the transaction where Porch will become a publicly traded company on NASDAQ. So I'm very pleased to be here with everyone today to answer any questions about SPACs and how we got to where we are today.

And my name is Matt Ehrlichman. Like Tom said, I'm the Founder and CEO of Porch. Built this company starting about 8 years ago and we launched about 7 years ago. And prior to Porch, I have been a technology entrepreneur throughout my life. So built a couple of companies prior to this one, sold one, helped to take the next one public and then wanted to go build one more company, which is Porch. I'll take a few minutes just to provide some background into the company for those that aren't as familiar with Porch and what we're building. We are a vertical software company in the home services space. So Porch provides CRM and ERP software to a variety of home services companies like home inspection companies, moving companies and others. We've innovated around the business model. So increasingly, software companies are able to monetize not only with SaaS fees, but also transactions, and that is our revenue model where we provide these companies the ability to pay us with SaaS fees and with transactions where they give us access to their consumers, to these homebuyers, and we then help those homebuyers with key services that they need for their homes, such as helping them get insurance set up for their homes, TV and Internet, moving and other really important high-value services. Porch generates most of our revenues through that B2B2C transaction revenues from this reoccurring stream of consumers. So there's nobody like us in the home services space, but it's a very similar flywheel to an OpenTable, just as an example, where they would provide software to restaurants. Through that relationship, get access to the consumer, where they monetize transactions and drive demand back to those companies. That is how Porch works. We're very fortunate in that when we help consumers with transactions, we've really focused our strategy on these high-value services where we can make $1,000 per transaction, whereas OpenTable would make $1 or so per transaction. So next, people go to Porch.com and they're not aware of the platform that we're building. You do have to go to our corporate site, porchgroup.com, to really get a sense for the ecosystem that we're building. We have a number of different brands. So for example, ISN is our brand in the inspection software space. We have a very strong market position in that vertical. 26% of all of the home inspections that happen in the U.S. are managed through our software platform. HireAHelper is our brand in the moving space where we provide moving software and demand back to moving companies. In total, we have around 11,000 companies that we provide software and services to. And truly, it is the entire ERP and CRM system that they use to run every aspect of their business, whether it's CRM, calendaring, online booking and payment processing. We've innovated around that pricing model, again, so we can generate revenues through both SaaS fees and transaction revenues. And the combination of those 2 produce very strong unit economics. We see right now over 30x LTV to CAC. When these companies provide us access to consumers, we've been able to aggregate this very large base of homebuyers that Porch has unique and early access to. So around 2/3 of all U.S. homebuyers are going through our software platform every single month. And not only do we have this reach that's very unique, but we know about these homebuyers very early. So whereas brands right now would do mover marketing after the move when consumers change their address with the USPS, Porch meets all of these homebuyers 6 or 8 weeks prior to that through our software platform, where we know early who is going to be moving into a new home so we can then help them with all of these, again, these critical services like insurance. When we deliver services for the consumer, we've gone particularly deep in select services, one of which is insurance, one of which is moving. But insurance, as an example, we have a brand called Elite Insurance Group, which allows us to be able to operate as an insurance brokerage across the country in all 50 states, where we can help consumers get their insurance set up for their new home. We work with all of these great brands, these great service providers where we help these consumers get set up with insurance, moving, TV, internet, et cetera, for their homes. We get paid by these service providers when we deliver new customers to them, and we get paid very well. So to wrap it up, as we look forward, we do expect to be able to build very large scale with Porch. Over these last 7 years, we've grown very quickly at a 50% CAGR with very high margins, nearly 80% type gross margins. And we really are just getting started and just have started scratching the surface on this massive, massive TAM that's available to us. Porch has more than a $220 billion addressable market today that will only expand as we move forward. And so not only will be able to grow very consistently with our software platform of continuing to sell software into more companies, getting access to more transactions and being able to help consumers with more and more services, but in addition to that, there's these big levers that we will pull around mover marketing, helping brands to be able to reach these consumers when they're moving; going deeper into insurance from -- going from a brokerage down the value chain as a managed general agency; and continue to take our platform into other home service verticals organically and inorganically with M&A. So with that, I'm happy to turn it back over to you, Rohit, and we can dive into questions.

Awesome, awesome. Before I jump into Q&A, Tom, do you want to just address like what is the process in terms of raising this SPAC? And why are you focused on real estate technology? I understand you are in the process of doing repeat SPAC as well, and just walk through the life cycle of this SPAC of your first one and why real estate technology and kind of -- then we'll go into the second SPAC as such.

Sure. And I'd be happy to. So why a SPAC focused on, PropTech, real estate technology. So I and my partner, Joe Beck, come from a traditional real estate investment background. We worked at one of the largest institutional investors in the world, Abu Dhabi Investment Authority. And while we were there, we identified that real estate has the largest asset class when you combine commercial clusters, so commercial office buildings, for example, industrial apartments and residential single-family homes where Matt and Porch are focused primarily. It's almost a $50 trillion asset class in the U.S. It's the largest asset class, and it's poised for disruption. It's illiquid, opaque, fragmented, it's a tech laggard. And increasingly, entrepreneurs are recognizing the opportunity in this space, like Matt and others, that are innovating in and around real estate technology. And where there's good ideas and high-growth companies, capital flows accelerate and follow. And so that leads to adoption within real estate. So now you're seeing large institutional owners, developers, operators increasingly focused on tech to implement into their portfolio to drive value, to drive NOI and yield. And so as my partner and I, Joe, identified increasingly as these companies grow, like Porch, they'll need to find an alternative path to either the public markets to stay private longer and so they have a number of different options. And we think a SPAC is just another option for this business. Certainly, Porch evaluated a traditional IPO and we think there's merits to accelerating that process to get public sooner and really execute and grow quickly as a public company. And I think that was one of the key attributes that resonated with Matt and the team. And so we set out with this thesis focused on PropTech. We were -- we believe we're the first ones focused on this category, in SPACs, back in -- 1 year ago. And the process is to go out, find an underwriter, a bank, to help you raise the capital, introduce you to public investors that want to invest in a high-growth company. And so those are the investors that participate in the IPO of our SPAC. And many of those investors are now going to become investors in Porch because they transition and follow along the SPAC to the journey of Porch becoming public. And so that entire process of raising the SPAC through agreeing on a deal with Porch and the shareholders, which happened in July, we announced the deal. And now here, next week, we'll close the deal with Porch. It takes about a year. It can be quicker, it can be longer, but for us, it will take about a year. And we're very pleased that come December 24, Matt and his executive leadership team and all the employees and shareholders of Porch will be ringing a virtual bell on NASDAQ next year -- next week. So we're very excited to see that.

Wow, congratulations. I didn't realize that it was so imminent. Congrats on that, Matt, and interesting day to go public on the 24th of December.

I guess switching over to you, Matt, in terms of the why. Why a SPAC and why not to traditional IPO? As a founder, CEO, you're essentially having a very big question here. You have been doing this for the last 7, 8 years. You're thinking what the company could become over the next decade. And so just walk me through your thinking here. As in why SPAC and why not traditional IPO or even you could have decided to stay private longer?

Yes. Good question. Candidly, it wasn't the plan 1 year, 1.5 years ago. Frankly, we weren't even that cognizant of the SPAC being a path for us in our consideration set. If you were to ask me 1.5 years ago, I would have said traditional IPO would have been the path, similar to what I did with the previous company that I was involved in. When we met Tom and Joe and PropTech, it took several months, I think, of just meetings and education and just kind of really understanding the mechanism and the pros and cons that a SPAC provides. At the end of the day, the reason we decided to go down this path is that it does make good sense, really tied to what Tom mentioned, which is time to market. We're able to get public really a full year earlier than if we had gone with a traditional IPO. And not only that, we're able to couple a pipe along with this process to be very well capitalized. And so we started off and we're going to do a $50 million pipe, but we ended up having around $300 million in orders. And so we upsized it to $150 million pipe led by great long-term fundamentals where we can really be selective about the right types of investors and shareholders to be able to have as part of this company and the journey, Wellington and great folks like this. And so for us, that puts us in a spot where we can now be public a full year earlier: very well capitalized, we'll have $200 million-plus of cash, without any debt and that puts us in a very strong spot. And the reason the math ends up making sense for us, the reason that can create value, is we have a very strong M&A pipeline. We have 150 active companies in our M&A pipeline, but 7 that are at or near the bottom of the funnel that represent $180 million in revenue at less than 2x revenue multiples. And so for us, being able to go and take advantage of those opportunities, to be able to bring those companies in as part of the Porch's platform, we can really help those companies accelerate the growth. And that can be very accretive for the Porch shareholder and investor base.

Okay. Okay. Interesting. So you needed a public currency, you could have raised capital, you're raising capital. What about the cost of capital? As in there is this growing rhetoric amongst the investment community around the duration of IPO process being broken, look at what happened to Airbnb and DoorDash in terms of the pricing versus the actual valuation and so on and so forth. As in do you feel that SPAC and going through this process, the valuation process is much more rational and there is less kind of broken valuation theme around the SPAC? Or how would you improve that?

I think what you have with the SPAC is you have certainty and clarity, right? And so you're able to work through those discussions with a partner and be able to come up with valuation and terms. There's other things you can bring in into the discussion that provide more levers to be able to get a deal done that makes sense for all parties. And that's not just the sponsor and the company like Porch, but also the investors that are key partners in the journey. And so you're able to structure something that can really make sense for all parties. You can sign that up and be able to have certainty and clarity, right, as you then go through that process. And that is one of the other reasons that we elected to go down this path is that you go through an IPO and you really don't know how it's going to be priced and if it's going to happen at the end or if there's going to be some change in the market. And so for us, that gives us confidence that we can go run our playbook and go build our company. So no, I think you are seeing some of that with an IPO where there's a tremendous amount of uncertainty right up until the very, very end. And we were able to fully derisk as we selected to go on the SPAC path.

Okay. I guess switching over to you, Tom. In terms of your funnel look, potential targets. Like how has that evolved over the last year or so? As in now that you have gone through 1 full cycle of delivering a baby, bad pun here, but as you have done that, how has your pipeline of potential companies that look and feel like Porch, how that pipeline has evolved? And how are your conversations evolving given what's happening in the IPO markets?

Yes. It's a really good question. So perhaps I'll start with what we're looking for or what we were looking for, for Porch. So first, we're looking for a company that's sizable, with scale. So at least $500 million of enterprise value. And we can always scale up, as Matt said, through a pipe, supersizing the SPAC, which we did in Porch's case. So our first screen is by size. Second is quantitative metrics. So proven revenue model, attractive unit economics, compelling growth story. And I think you've heard some of that through Matt's presentation, but 50% CAGR over the past couple of years, growing at this rate into 2021 as well for Porch, 80% gross margins, 30x LTV to CAC and month-to-month profitable this year starting in June. That combination is very rare to find. And so Porch checked the box in terms of the financial metrics. And then, of course, you have also the qualitative metrics. Management team that is not only capable of being public, but that wants to be public. That certainly is the case here with Matt and his great team. And so our pipeline has certainly shifted. We're looking for category winners. We think we found that here in Porch. And we're just starting our journey for our second SPAC, which we priced about 2 weeks ago. And so the world has changed quite a bit since we raised our first SPAC. When we raised our first one, it was much more about market education, SPAC 101: what is a SPAC and how does it compare to my other paths as an entrepreneur or founder, how does it compare to a traditional IPO? How does it compare to a strategic sale or staying private longer? And I think you've seen with the number of SPACs, the year of the SPAC, it seems, in 2020, it's certainly become a more mainstream institutional product. There's more public investors that are now adopting the product and investing in the product. And I think there's a few dynamics at play. One is that the traditional IPO, as you mentioned earlier, certainly in the small-cap space, so sub-$2 billion of market cap, is somewhat nonexistent especially for tech companies. And so the SPACs are somewhat filling that gap. Filling that gap, allowing really exciting businesses to go public and bringing new supply of high-growth businesses to the public market investors who have great demand for these types of businesses. And so going forward into our second SPAC here, I think the conversation has shifted to what is a SPAC to why should I partner with you, PropTech, Tom and Joe, as compared to these other SPACs that are out in the market. And so that conversation has shifted. I think many companies are now much more amenable and open to the idea, and we're seeing that in our category, specifically with Opendoor and View and Porch, all category winners in their own respective categories that are now being very well received by the public markets.

Yes. I agree with you. As in, in terms of IPOs for small-cap, mid-cap tech companies, that has been somewhat of a broken way for companies to seek the time it takes for a small-cap IPO to find ground in public investors. It probably frustrates a lot of CEOs and entrepreneurs as -- or it could take up 2 years. And in 2 years, it's having an undervalued currency and affecting your kind of day-to-day execution is probably a very long time in today's day and age. I guess switching over to more important and more kind of investment-focused ideas, as in our confidence in the road ahead, as in we want to see what happens after the pandemic and what are people like you thinking through. And everybody wants to forget what happened in 2020. But before we kind of go there, as in Matt, why would you recap what -- how has Porch reacted to the pandemic? An in is there -- are there elements of Porch that have become more sexy after the pandemic or due to the pandemic? And then I'll get into the 2021 kind of predictions as such.

Yes. We are incredibly fortunate to be in the industry that we are in because obviously the pandemic has impacted different industries in unbelievably different ways, and it's a little bit of just luck in terms of what industry you happen to be playing in. And there's just no doubt that more people are moving and that more people are spending time in their homes, like I am today. I think we probably all are today. And so that just changes our business not only right now, but just as you look forward. We just have wind at our backs. More people are going to be deploying more of their dollars into their home versus travel or entertainment or some of the other things that they would typically be putting money to. More people are moving out of the city centers into suburb areas, wanting more space for their family and their kids. And so Porch's business is based on helping the companies that surround this ecosystem run their business, obviously, with our software. But through those companies getting introduced to these consumers that are moving at a higher and higher clip, right? And so while we -- there's tremendous uncertainty, I will say, in mid-March. Really, things just fell off a cliff in the middle of March, bottomed out in the middle of April and just came roaring back. And so while the 2020 year certainly was impacted by COVID, particularly in that second -- end of the first quarter and second quarter, meaningfully negatively impacted by COVID, at this point, we are just in a very strong spot. Things have fully recovered and it puts us in a really good position as we look forward to 2021 and future years.

Okay. A couple of questions that have come through, just clarification. Matt, you talked about OpenTable-like model, what percentage of revenues today come from transactions versus pure SaaS? And when you talk about say, 5 years from now, you're 5x bigger company. What's your magic kind of breakdown, advertising, SaaS and marketplace transactions, like today versus 5 years from now?

Yes. So we look at -- I mean, virtually all of our business comes from providing software to companies and then the revenue we get by providing software to companies. But like I mentioned before, we monetize our software through both SaaS fees and transactions. Over these last 3 years, we introduced transactional pricing about 3.5 years ago. So we had 0% of consumers of the companies paying us in that way. And we've been migrating more and more companies over to pay us. But right now, we have about 41% of our companies that pay us with transaction pricing. And we'll continue to migrate more and more because the vast majority of all new companies pay us transaction fees as they go through training. The -- overall, if you look at our whole business, around 11% of the -- there's a chart that shows this in one of our public decks, but around 11% of revenues for 2021 would be anticipated to come from direct SaaS fees and then the balance through B2B2C reoccurring transactions from those companies. The majority of those transactions related to move services such as insurance moving, TV, Internet and security. And then the balance, less than 1/4, coming from postmove services, helping people with projects in their homes. We're actively trying to move companies from paying us with SaaS fees to getting those companies instead to pay us with transactions because those companies are worth 6x more to us when they do so. And so if we're successful, hopefully, that becomes smaller and the volume of transactions we have access to becomes bigger and bigger. As we look forward 5 years out, I think the best representation is that chart that I had pulled up actually at the end of the presentation, where we have a number -- we haven't specified the time frame, but certainly, it's not in that long term. Hopefully, in that medium term, we're able to get that -- get the business to that $1.5 billion in revenue-type level. And we do break down there how much of that comes from core business, a $200 million kind of target for mover marketing, just having brands to be able to market to consumers. We do think insurance is a very large opportunity. For us, insurance is the largest and the highest value service in the home. And we have, again, 2/3, give or take, of all of the U.S. home buyers coming through our platform and that's exactly when they need to buy insurance. And so we're really excited about continuing to go deeper and deeper there, leveraging our software platform and the data that we have. So that's how we think about kind of the breakdown as we look forward.

Okay. Interesting. And in terms of kind of just profitability and how you're thinking through that, where are you right now? And on a structural basis, what's the best comp for profitability? Is this a business that could reach OpenTable-like profitability, higher, lower? What are you telling investors right now?

Yes. So like Tom mentioned, we did hit a month of EBITDA profitability there in Q3. The -- I think it's been really interesting, actually going through this process with public investors. People look at our unit economics and are asking why we would go try to be profitable next year and are really pushing us to just invest and grow and be the category winner. And so that's been really -- actually, I really appreciate those conversations, but also just great feedback from the investors that we're working with now. As we look forward, yes, we have put out kind of long-term profitability targets. And so we believe this business can get to 25% long-term EBITDA targets. And while we get there, we've shown how we still are able to invest really aggressively in R&D. Obviously, we could have shown even much higher EBITDA profitability targets and minimizing that investment. But what I'm trying to do with this company -- in fact, I would say the whole point of this company for me was to go try to build a really large company and to build a legacy company and brand. And so as part of that, we are -- we have historically and we'll continue to invest aggressively in R&D to make sure that we can do that even in that long-term economics. What we'll do and we're -- we've actually made incredible progress to kind of look getting to a month of EBITDA profitability, where we'll continue to just show progress as a percentage of revenue as we continue to tick forward toward that long-term goal. But we don't have to get there overnight. We want to invest. We want to make sure we're continuing to grow very quickly. And so that's what we'll continue to kind of represent to The Street to show that progress.

Okay, super. We are in the last couple of minutes right now. And I guess, switching over to you, Matt, what predictions for 2021? As in we have 3 different kind of ways for tech companies to go public: SPACs, direct listings and traditional IPOs. Where do we see the greatest mix shift happening from 2020 to 2021. Any guesses? What are your...

Yes, you bet. I don't think there's any doubt really in my mind that the SPAC tool is going to be more and more commonplace. I think that over the course of the 2020 year, the amount of awareness that exists now, like Tom was saying, is so much further ahead than where it was a year ago. Where a year ago, a lot of discussions is education to me and the Board, now people are just aware -- entrepreneurs like me are aware it's in the consideration set out of the gate. And all of the SPACs that have been created over the course of this last year all have to go and find targets and companies that are set up to go public. And so you're going to see a lot of that happening here over the 2021 year. As long as SPACs can just stay very disciplined. I think Tom and Joe did a really good job of talking to lots of companies, but really finding the high-quality companies. As long as the SPACs are finding high-quality companies, I think that, that will just continue. I think there's really good reasons for entrepreneurs to use that as a tool to get the company public. So -- and so I expect SPACs will do a good job on that overall. And that will just continue to build momentum. Tom, what about you?

Yes, I 100% agree with you, Matt. And I think SPACs are becoming more mainstream. I think they are becoming more of an institutional product. And what I'd like to say is it's a third leg in the stool. So you have your traditional IPO, you have your direct listing and you have the SPAC. Not every company is right for every one of those options, and not every one those options is right for every company. So I think increasingly, you'll find companies make the decision, the very conscious decision to partner with a SPAC and pursue public capital markets that way. I think, for us, finding high-quality business is absolutely the right criteria that we're focused on, and we'll be finding -- we hope to find another category winner like a Porch that has benefited from -- it has really received tailwinds through 2020 and the challenges that has come out of the pandemic. But I think that as owners of real estate, developers, operators increasingly pivot towards technology to enable them to increase their productivity while their employees are working from home, they have to manage institutional assets or manage your own asset, your home and any technology that enables that, that makes it easier for the consumer, for the customer, for the business, I think, is going to win. And that's where we're going to focus. And that could be across a number of different categories. It could be construction tech, commercial, residential, we're just really excited about the growth that we're seeing in real estate technology.

Awesome. Fantastic. I'm getting a tap on my virtual shoulder here. Times up, people. And again, this was fantastic. Tom and Matt, thank you for joining. Good luck next week, Matt. It's a very important and significant milestone in your company. And Tom, thank you for connecting again. Happy holidays. And I hope you stay safe and healthy over the next -- until we meet next year. Thank you.

Take care.

Thank you.