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

Good afternoon, everyone, and thank you for participating in Porch Group's First Quarter 2023 Conference Call. Today, we issued our first quarter earnings release and related Form 8-K to the SEC. The press release can be found on our Investor Relations website at ir.porchgroup.com today. Joining me here today are Matt Ehrlichman, Porch Group's CEO, Chairman and Founder; Shawn Tabak, Porch Group's CFO; Matthew Neagle, Porch Group's COO; and Nicole Pelley, SVP of Product and Technology. Before we go further, I would like to take a moment to read the company's safe harbor statement within the meaning of the Private Securities Litigation Reform Act of 1995, which provides important cautions regarding forward-looking statements. Today's discussion, including responses to your questions, reflects management's views as of today, May 10, 2023. We do not undertake any obligations to update or revise this information. Additionally, we will make forward-looking statements about our expected future financial or business performance or conditions, business strategy and plans, including the pending application for the Reciprocal Exchange. 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 as well as the risk factor information in these slides 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 earnings call. As a reminder, this webcast will be available for replay, along with the presentation, shortly after this call on the company's website at ir.porchgroup.com. And with that, I'll turn the call over to Matt Ehrlichman, CEO, Chairman and Founder of Porch Group. Over to you, Matt.

Thanks, Lois. Good afternoon, everybody. It hasn't been long since we last spoke in March. And in that time, the business has progressed nicely, which we look forward to discussing with you today. Overall, the Q1 2023 operating environment is not dissimilar to what we experienced in Q4 2022. The home service and insurance industry has faced home sales and weather headwinds. And as expected, we were impacted by them as well. As the insurance industry and weather trends evolve, it creates not only a growing homeowners insurance market, but a substantial opportunity. And we are well positioned to become a leader given our unique demand and data advantages. I'm pleased to have Nicole join us today to talk through advancement from this last quarter in some of these areas. So moving to Slide 6 to review the high-level financials. In the first quarter, revenue grew 37% to $87 million, with solid revenue growth in our warranty and homeowners insurance businesses. Q1 2023 adjusted EBITDA loss was $22 million. The underlying business is performing well. However, as expected, and built into our 2023 plan, the reinsurance market has hardened. While our April 2023 renewals were successful given our strong relative past performance, excluding the impact of reinsurance market, Q1 profitability would have increased by approximately $15 million in our Insurance segment. As a reminder, we rely on reinsurance to both mitigate weather risk and to offset a portion of the capital requirements associated with operating a homeowners insurance carrier. So while our Insurance business saw a strong and profitable growth performance, in fact, a 97% gross combined ratio in 2022 by our carrier entity, the reinsurance cost weighs on our net results until our premium price increases have flowed through all policyholders. We believe the impact of reinsurance is transitory and the market dynamics will improve over time as it has in the past. And if not, Porch and really all other carriers will continue to raise prices and ensure these increased costs are fully loaded into what is offered to consumers. Margins in the industry were challenged in 2022 because of weather and expected to be compressed in 2023 because of the reinsurance markets until price catches up. But to highlight capabilities and performance, we think it is helpful to note not only that our Insurance business was profitable on a gross basis, but also show how our Insurance business compared to the rest of the homeowners insurance carriers in 2022. I mentioned last quarter that HOA was the fastest-growing homeowners carrier through the third quarter of 2022 as measured by gross written premium. AM Best has now released their full year 2022 report ranking 50 different homeowners insurance peers based on direct written premium growth. I'm happy to share that we ended the year ranked third. Importantly, though, in addition to growing rapidly, we demonstrated a leading gross combined ratio. And so as you can see on the bottom chart on this slide, the AM Best market share report shows a gross combined ratio of HOA and 50 peer carriers in 2022. And here, HOA was also the third best performer. Although there are 2 insurers with better loss ratios, those companies had much slower growth, and this demonstrates our ability to use our unique capabilities to grow premium while also maintaining strong underlying performance. Again, as we mentioned, our strategy is to manage our premium growth carefully in 2023 to drive our business to profitability. As I mentioned, we've made a number of successes in the quarter. First is the insurance strategic initiatives announced in the fourth quarter of 2022 are on track. So in March, we filed the application to form the Reciprocal Exchange with the Texas Department of Insurance, which I'll touch on more shortly, and which we believe is key to producing the weather volatility within our earnings. To facilitate this transition to a more efficient reinsurance system with the Reciprocal Exchange, we moved our reinsurance ceding rates to approximately 50% in January; successfully placed our excess of loss reinsurance treaties in April; continuing to further leverage our captive reinsurer to fill any reinsurance needs, where it makes sense; and are in the process of nonrenewing approximately 37,000 of our higher-risk policies. I'm happy to share that we successfully launched Porch Warranty in February. This is our own whole home warranty product that covers systems and appliances within the home. Nicole will comment on this later in the presentation. I will note, the home sales industry declined 26% in Q1 year-over-year and continues to impact our software and moving services businesses. Despite this ongoing lower-demand environment, our software businesses continue to iterate, launching new modules and capabilities to take more share. And Nicole will touch on our progress also in today's presentation. Finally, after the quarter-end, we secured a $333 million of new Senior Secured Convertible Notes that tied to a $200 million paydown of our existing unsecured note, which is due in September 2026. It's a great transaction for us as it increases Porch Group's capital by more than $100 million, replacing the capital which will transfer with the reciprocal on approval. And it also provides a 2-year maturity extension for much of our debt while maintaining the same $25 per share conversion price at the cost of a 6.75% coupon rate on the new money. Finally, I want to spend a moment to provide a reminder about our strategy to form a Reciprocal Exchange. We've been thinking through this since we first acquired HOA 2 years ago, with the objective to move the Insurance business to higher margins and without the volatility from direct exposure to weather. Provided we receive approval from the Texas Department of Insurance, the HOA carrier business, including all its assets, such as cash and investments, as well as its liabilities, will move to the new entity and be owned by its policyholder members. In exchange, Porch will receive a coupon-bearing note, the terms which will be provided following approval. We will continue to operate the Insurance business such as selling the policies and managing claims processing in return for fees from the reciprocal. This means, once the Reciprocal Exchange is in place, we lose the potential upside profitability in good weather conditions. However, we do not have the same claims downside when there are frequent and severe weather events and, as a result, our revenue and profitability are steady and predictable. We are in active discussions now with the Texas Department of Insurance and still anticipate approval later in the second half of this year. And I'll now hand the call over to Shawn to cover our financial performance and guidance. Over you, Shawn.

Thanks, Matt. Hello, everyone, and good afternoon. Revenue was solid at $87.4 million in the first quarter of 2023, which is an increase of 37% over the prior year driven by growth in the Insurance segment and partially offset by the Software segment, which continues to be impacted by the soft housing market. As a reminder, quarter 1 and 2 typically have the highest claims cost for HOA, with quarter 2 historically being the period with the most weather events. In the first quarter of 2023, the gross loss ratio for HOA was 79% compared to 81% in the prior year. Revenue less cost revenue was $36.1 million, which is 41% of revenue. As Matt mentioned, the reinsurance markets have hardened, as expected, which resulted in a reduction in revenue less cost revenue by approximately $15 million in the first quarter of 2023 compared to the prior year. Our price increases, which we disclosed previously, are well underway in being rolled out, which will have a larger impact in the second half of this year given the timing of renewals for the underlying policies. Adjusted EBITDA loss of $21.9 million was in line with our expectations, a decrease from the prior year, driven by reinsurance as noted and, to a lesser extent, the soft housing market impact on the Software segment. Excluding the reinsurance market dynamic compared to the first quarter in the prior year, adjusted EBITDA loss would have been approximately $7 million. And finally, gross written premium was $115 million, an increase of 12% over the prior year. Moving on to revenue by segment. In the first quarter of 2023, revenue from our Insurance segment was $58.7 million, growth of 101% over the prior year, driven by strong growth in our warranty business based on demand and renewals as well as HOA due to increases in premium for policy and lower reinsurance ceding. Approximately half of the revenue growth in the Insurance segment was due to ceding less and the balance from the operational wins. Insurance segment revenue increased from 46% of total Porch Group's revenue in the first quarter of 2022 to 67% of total revenue in the first quarter of 2023. Vertical Software revenue was $28.6 million, a decrease of 17% over the prior year due to the housing market declining 26% industry-wide year-over-year. The biggest impact of the housing market decline was on our moving services group, which continues to have these macro headwinds directly impacts its revenue. Our B2B Software revenue was relatively flat year-over-year, with market share growth, key initiatives and pricing offsetting the housing market impacts. At a segment level, our Insurance segment adjusted EBITDA loss was $7.2 million. As Matt mentioned, the underlying contribution margin in our -- in HOA insurance carrier increased by 500 basis points compared to the prior year when excluding the impacts of reinsurance. The Vertical Software adjusted EBITDA loss was $400,000. Corporate expenses were $14.3 million in the first quarter of 2023, reducing to 16% of total revenue from 21% in the prior year, driven by strong expense control. Now on to our outlook. Today, we are reiterating the full year 2023 guidance provided 8 weeks ago. Revenue ranging from $330 million to $350 million, where we continue to expect an 18% decline in home sales for the full year 2023, with a greater impact from the difficult housing market in the first half of the year versus the second half of the year when the comps become easier. Revenue less cost revenue ranging from $170 million to $180 million, where we have assumed a 62% gross loss ratio for the year. This assumes cat weather events will be in line with our historical averages. Any unusual catastrophic weather events in excess of our historical norms are not included in our guidance assumption. Adjusted EBITDA loss ranging from $30 million to $40 million, where we expect, on a cumulative basis, adjusted EBITDA to be profitable in the second half of the year and beyond. And finally, gross written premiums of $500 million. Shifting to the balance sheet. We ended the first quarter with $272 million of cash and investments. This includes $165 million of cash and investments in our insurance carrier, HOA, that we expect will transfer to the reciprocal when approved and launched. Excluding HOA, Porch held $107 million of cash and investments at the end of the first quarter. In addition, we held $15 million of restricted cash in relation to our warranty and captive businesses. And as Matt mentioned earlier, we are increasing the amount of excess of loss reinsurance provided by Porch's captive to HOA, where it makes sense, and can provide strong returns. To support this, we expect to hold approximately $43 million of cash to collateralize this placement, and it will therefore show as restricted cash in future quarters and remain as such for the next 12 months. And finally, in the first quarter of 2023, we've repurchased 1.4 million shares for $3.1 million under the existing share repurchase program. We will continue to evaluate whether they're repurchased or otherwise transact in shares or notes, and we'll do so if and when we think it is in the best interest of shareholders. And finally, a brief update related to the issuance of our new $330 million Senior Secured Convertible Notes, which we closed in April after the end of the quarter. We are pleased with the deal, which reduces our medium-term September 2026 debt maturity from $425 million to $225 million and bolsters the balance sheet by adding $102 million of cash. These new secured notes have a coupon of 6.75% and maintain the same conversion price of $25, which was important for us to minimize future dilution for shareholders. This increased coupon payment is partially offset by approximately 5% interest we are currently earning on interest-bearing cash deposits. The $330 million of the new secured notes are due October 2028. Thank you all for your time today, and I'll now hand it over to Matthew to cover our KPIs.

Thanks, Shawn. Right, turning to Slide 18. We've introduced a slightly different look to our KPI slide here. For reference, the original slides are in the appendix, which show the KPI trend over time. The average number companies was 30,600 in the first quarter, similar to Q4 2022, and a 20% increase in the same quarter prior year. Average revenue per company per month increased to $951, an increase of 15% from the same quarter prior year. This was driven by higher insurance premiums, generating more revenue per insurance customer, the change in our reinsurance ceding and rapid growth in our warranty business. We had 214,000 monetized services in the quarter, a small increase from last quarter. Finally, average revenue per monetized service increased to $328, an increase of 88% versus the same quarter last year. We continue to focus on selling the highest-value services to consumers, such as insurance and warranty. Let's now look at our Insurance business KPIs. Gross rate premium was $115 million, an increase of 12% year-over-year. This was produced from 376,000 policies in force in the first quarter. Annualized revenue per policy was $612, increasing 82% from $330 in Q1 2022. This was driven by increased premium per policy, lower reinsurance ceding levels and rapid growth in our warranty business. As Shawn mentioned in March, we are introducing retention on a premium basis to help demonstrate the impact of pricing increases and align our disclosure with the peer group. Premium retention is on a 12-month basis and was 107% for Q1 2023, an increase from 100% in Q1 2022, driven by increased premium per policy. As a reminder, we have started to nonrenew 37,000 high-risk policies, which will impact short-term retention rates. Overall, the Insurance business had a gross loss ratio of 79% in Q1, of which 39% related to cat events. This is a little worse than our historic average with the usual hailstorms and tornadoes in March above historic trends. As Matt mentioned earlier, HOA's gross loss ratio is significantly outperforming peers. Today, Shawn has reiterated our guidance, which includes a 62% gross loss ratio assumption for the full year as weather improves in the second half of the year and the impact of increased premium per policy changes roll through. Finally, on Slide 20, I want to quickly recap our 2023 strategic priorities. First, we will plan to continue to develop new software for the companies who use our Vertical Software and upsell more software through bundled solutions, which Nicole will talk to shortly. We are extending our online experiences and increasing revenue per homebuyer. Between our app, Recall Check Monitoring and other services, we are finding ways to better engage consumers to then help them with more services. We are improving premium per policy in our insurance and warranty offerings. We've now launched the Porch Warranty brand and expect to launch the Porch Insurance brand later this year, creating differentiated offerings for consumers. And we are focused on getting the reciprocal structure approved, moving the Insurance business to a lower-risk, higher-margin business. Thank you all. I'll now hand things over to Nicole to highlight a few key product updates.

Thanks, Matthew, and hello, everyone. I lead our product and technology teams and responsible for our consumer experiences and data platform, and work across our businesses to help them leverage the Porch platform and accelerate their product velocity and growth rate. I'll highlight today some key successes from the first quarter. First, I'd like to touch on our insurance pricing models. We take our insights in the properties and homebuyers, where we have insights into approximately 90% of U.S. homebuyers. In addition, we have 15 years of claims history, from HOA across various insurance categories such as water, fire and theft. All of this data feeds our risk model that is generated using machine learning and advanced pricing techniques. Successful Insurance businesses rely on how accurate their models are at predicting risk. And while there will always be losses, improving prediction accuracy allows for effective pricing, which is key. While for competitive reasons we will not provide details on what data creates the biggest impacts, we have been able to improve our risk accuracy in key insurance risk categories by approximately 15% to 20%. This is a common way to measure accuracy in segmenting risk through pricing and our team's experience. Anything in the high single digits is going to be a meaningful improvement. So we're all really excited to see double-digit improvement in model accuracy, and we're just getting started. What this means is that we can charge a lower price for low-risk policies, increasing our conversion of low-risk policies; and more accurately price high-risk policies higher, leading to either appropriate pricing and margins or lower conversion on the subset. All of this is expected to lead to long-term profitable growth. The unique insights we have about properties includes information such as who are the borrowers, appliance age and model and potential issues about specific homes. This information feeds the insurance pricing model I just mentioned. We have approval in 9 states to use information on the water heater location. This has now been expanded to include other insights such as the type of roof, age and quality, the type of flooring and the type of piping and characteristics. We are pleased to have approval to use this data in 3 states: Arizona, Virginia and Texas. We have also submitted filings in Illinois and Nevada to use all of our insights. A key focus for the business is to continually develop new products for the companies using our Vertical Software. We want to launch a new module for each of the type of companies we work with, at least once per year, both to create more value for these companies and to increase revenue per company. I would like to call out 3 new developments across various Porch brands. First, within our Floify business unit, we're now able to offer an all-in-one solution for brokers that combines the great features of our mortgage point of sale with a mortgage loan origination system by integrated partners. In addition, we have launched 2 new products for mortgage companies, Closing Accelerator, which will help customers close loans faster; and Customer Capture, which helps mortgage companies get more customers. With this powerful combination, we're able to provide a best-in-market solution. Secondly, we have released a new Report Writer for inspectors. This new release provides a fully redesigned modern user interface, an enhanced functionality that can serve as an all-in-one solution for small home inspection companies. Our new Report Writer allows inspectors to create reports faster with voice commands, media editing, and support for multiple inspectors on site. The new platform will also enable tighter integration with some of our other modules, such as payment processing and the Porch mobile app. Lastly, we have rolled out price increases within our title business, alongside launching new products for these customers. This includes RynohEscheat. Escheatment is a complex process that title businesses need to follow to comply with state regulations on unclaimed funds. The module is an easy-to-use, cloud-based software that seamlessly integrates with bank accounts, ensuring the title agents are notified of unclaimed funds and helps to facilitate the reporting process in accordance with each states' escheatment reporting regulations. I'll now shift to our work for consumers. Our app has now been rolled out to nearly all eligible ISN inspection companies. This is key to engaging additional consumers who access their inspection report via the app, the home data that is generated from that report, and our Recall Check Monitoring functions for their appliances. We then use this opportunity to cross-sell other services Porch provides. We also look at how we can continue to make the moving journey simpler for both moving companies and consumers. In our moving business, we have launched a fixed-price product called Plus. This allows consumers to lock in a fixed price for their move rather than an hourly rate. This gives them confidence that costs will not build up through an already-expensive period and allow us to increase our margins per customer by including more services that third-party movers offer, such as wrapping and packing or moving permits. ISN FlexFund is our inspection pay-at-close module first launched last year. This product gives consumers the flexibility to roll the cost of their home inspection into their mortgage payment. Giving consumers more time to pay often increases the number of services they sign up for, such as radon testing, asbestos check and sewer scope, thereby giving them more confidence in the home they're purchasing and upselling services for our inspection businesses. We are pleased with how this product has gained momentum and look forward to strong growth in 2023 and 2024. As Matt mentioned earlier, we launched Porch Warranty in February. We're excited by this as it's a high-value service for consumers and will help this high-margin business of ours continue to grow rapidly. This branded warranty product is being launched across multiple channels such as utilities and real estate. In addition to the traditional channels, Porch Group has access to inspectors and others, which allows us to sell warranties at a lower customer acquisition cost. We also enhanced the coverage and value consumers receive by including a variety of our handyman maintenance services to drive differentiation. Thanks, everyone. I'll now hand it back to Matt.

Thanks, Nicole. Thanks, guys. I'll wrap up by saying, first, that we really are excited about the journey ahead. The team and I remain confident in our offerings and in our strategy. Like many, we're facing market headwinds, but the team is staying focused and is executing well. We do not think the stock market accurately reflects what we are building, but that over time, it will. I am particularly looking forward to the second half of this year, during which we expect to both post positive adjusted EBITDA and launch the reciprocal structure for our Insurance businesses. These are both important moments for us and something we've been working on and looking forward to for some time. Thank you in advance to the Porch team for the great work. So with that, let's wrap the prepared remarks. And Lois, if you go ahead, please open the call for Q&A.

Great. Thanks, Matt. [Operator Instructions] The question 1 comes from Daniel at Benchmark.

Great. Matt, and I know we've spent a lot of time talking about Insurance, but maybe if we can just double-click on sort of Software for a second and just kind of talk through some of the trends there, whether you're seeing or anticipating a little bit of a different mix than you originally forecast. And obviously, the housing market has been messy and some of the per seat stuff has been challenged. But given some of Nicole's commentary and then also some of the up through -- upsell that Matt talked about in his remarks, just kind of help us think through maybe some of the dynamics there and maybe even a little bit on a longer-tailed outlook once we get into more normalized environment.

Matthew, why don't you take the first part of the question, and maybe I'll give my thoughts on the longer term lookahead.

Yes. I mean the first point that I'd say is we have good market position in all of our categories and our product velocity is increasing, right? So we're bringing the market or teeing up things to bring the market that I think will just make our offer more compelling. And right now, we are in a soft market, which creates some headwinds to bring on new customers and so forth. But it's also an opportunity for us to reposition. So when the market picks back up, we'll have a greater offering. And so the teams are focused, and we're excited about what we have planned in those categories. It's just a little soft, but we're not worried about it long term.

Yes. I'd just add, I would use the moment to give kudos to that team. I mean, our Software business is remaining flat in these quarters, ballpark flat in times when the market is down like it is. It just is a testament to, I think, the new products that they're bringing to market. But it is -- even the market is going to come back. There are going to be more housing transactions over time. We'll all see how long that takes before it really does start to ramp back up. But clearly, that's going to happen. And because we are both increasing market share and generating more revenue, either for a company or per transaction, in particular, per transaction, as transactions increase, obviously, we're well set up to get that real wind at -- in our backs. And last thing is, we are innovating and building some really new and unique things for these companies to become more important to these companies. And so I'm excited about how that positions us here looking forward.

That's helpful. And then maybe just some more color on warranty expansion. You guys called it out. I know it's not a huge component. I mean, I remember when you initially started, Matt, we were looking at quarterly policies and revenue per policy and some of the KPIs there. And I'm sure it's too early, but now that you have kind of Porch branded, with Porch-branded insurance to come, I know you were super excited when you made the original entry into the market. So just kind of help us think about sort of the contribution, maybe some of the puts and takes, and how much you're investing, I guess, at this point to kind of scale that business over the balance of the year and into next year?

Yes, I can take that. We're excited about the Warranty business. We mentioned today, it's growing rapidly. We mentioned today, it's high margin. And we mentioned today, we have a new Porch-branded Warranty product. One, a couple of things that are interesting about our opportunity in the warranty space. The first is we're going to be able to bring multiple products to market. So we already are in a market with 90-day warranties from inspectors, annual warranties, 3-year warranties. And we think there are other products we can bring to market. But we also have access to multiple channels. And so we're engaged with real estate inspectors. We think we have an opportunity in utilities. And we have direct-to-consumer channels that are working for us. In terms of investment, we're actively growing, seeking to grow the Warranty business and investing in the Warranty business, and we see it as a key part of our strategy going forward.

Yes. I'll say, Dan, when we had first talked about Warranty business, however long ago that was, the thesis that we had out there is certainly working. We've -- we're getting lots of opportunities ahead. We've not started to use in any kind of material way our unique data into the pricing for warranties. And so clearly, there are opportunities there over time. Right now, just through our channels, our demand access, we have big advantages there. And so the team is taking advantage of it.

Yes, I was going to follow up on the data angle, but you've just covered that. So I appreciate it. Before I jump off, I'm sure...

And you sort of asked like 16 questions, Dave.

Okay, Jason. I was just going to ask you about literally the convert, Matt. I mean, I just wanted to clarify, I think there was a carve-out for you guys to be able to buy the old convert. So just your thoughts on repurchasing the legacy convert versus the stock at this point.

Shawn, do you want to take the convert question?

Yes. So I think the deal overall was very positive for the company. Obviously, we were able to reduce our medium-term maturities while, at the same time, adding just over $100 million of cash to the balance sheet, which, I think, gives us some good flexibility, especially with the macro headwinds, et cetera, and yes, want to talk hardened reinsurance markets. And I think there's a number of options that we have here over the coming months and years. And we will obviously do what's in the best interest of our shareholders to create value for our shareholders there. So that's where we're at today.

Next up, we have Jason from Oppenheimer.

So I'll ask 2 questions. So just what's driving your confidence in the full year ratio loss getting to 62% versus 73% in this quarter? And then within the context of that, review the milestones and expected timing to go live with the Reciprocal Exchange. I'll call that one question. And two, just a quick one. Any tailwinds from housing improvement in your guidance?

I'll take the reciprocal. Shawn, why don't you take the gross loss ratio question, if you want to tackle on housing, that's great, and the assumptions there. We are making progress, as I would expect, Jason, with the Texas Department of Insurance as it relates to the reciprocal. I would say, on track with the timing that we would expect kind of in the process. No changes in terms of our expected timing for the finish line. We still expect second half of this year, but nothing surprising coming out of that process, thus far.

With respect to the gross loss ratio, we mentioned on the call today, Q1 was relatively in line with what we expected. The 62% assumption that we noted, that's for the full year Q1. The way the seasonality works in our HOA insurance carrier business, Q1 and Q2 typically have the worst weather. And so the guidance that we reiterated today was, again, we're expecting that 62% gross loss ratio for the year. The other thing I'll note is we also mentioned the 37,000 higher-risk policies, that will continue to roll off as the year progresses, along with pricing increases as we go here through the year. So those will have more of an impact as we get through the year. So that's the first question on gross loss ratio. The second one, I think, was on industry-wide home sales. And a couple of things I'll point out there. We do also see some seasonality in our housing market and in our businesses throughout the year. As you expect, Q2 and Q3 around the summer months, it starts to pick up a little bit more. And then from a comp perspective, there is a relevant thing to point out, which was Q1 of last year was a relatively, I'll call it, a normal-ish quarter. And so we do expect the year-over-year decline to tighten as we go in the year. Basically, we expect the comp to get easier as we progress throughout the rest of the year. But again, we're -- we reiterated our 18% assumption for the full year. And Q1, as we said, was relatively in line.

Next, we go to John from Stephens.

Yes, earnings season is going to be a bit of a drag to having hot mics on Zoom. Tends to spice things up a little bit. But my question here is on the guidance. Obviously, a big revenue beat for you guys this quarter. You reiterated the full year guide. I'm just trying to square up those moving pieces. At a high level, I'm thinking that's conservatism. But if I take the insurance revenue from 1Q, it's a pretty stable revenue base. You've got some attrition coming as you're shutting off some policies, but you still have the growth dynamic, and you have the pricing that comes on more impactful. So I wouldn't think that comes down much, right? So if I annualize that, take that out of total revenue, it's implying the rest of the business. So maybe Vertical Software, down maybe 25%, 26% year-over-year, $115 million. I saw in the guidance where you guys said that you expect that to be relatively flattish year-over-year. So am I missing something here? Is Insurance taking a larger step down from the 1Q level? What am I missing here?

Yes. Yes. It's a handful of thoughts. I'll take this. So one, we feel good about how we're set up for the year, and we still feel like we're early in the year. We only provided the annual guidance 8 weeks ago. And so yes, we're early in the year. We want to see how this whole thing plays out. There are a number of moving pieces, to your point. So there are the 37,000 policies that we'll roll off over the course of the year. Obviously, we have price increases going through to consumers. And so we're going to be naturally conservative with what we expect to see in terms of the attrition from those consumers as they see a higher price. But we have to let that play its way through as that gets rolled out to consumers. I would also just say the housing market. Last year, full -- a year ago -- 18 months ago, we were surprised by what the housing market did when we first provided 2022 guidance. And while we feel like we've got a good handle on it, and we're conservative with our estimates in terms of what we expect this year, naturally, we're just -- I think there is uncertainty with the housing market right now. And so we're going to naturally build that in and, again, just give ourselves a little more time to let this all play out. We don't guide quarterly, obviously, and so just reiterating the full year right now. But I will say that we are hopeful and confident about how we're set up for this year, yet early.

Okay. That's a helpful rundown. Next question on the Reciprocal Exchange. Matt, I think initially, last quarter, you said by the end of 3Q, I don't know if I'm splitting hairs here, but it sounds like you said later this year. So I don't know if it's -- the time line is still on, if you're still on path there. And then secondly, just directionally, are we expecting a modest revenue haircut? I know it's probably too early for you guys to tell, but just generally speaking, as you've seen from past examples of a carrier or MGA converting over to Reciprocal Exchange, typically, what that kind of leakage looks like?

Yes. So yes, I would say, no change in what our expectation is in terms of the timing. But as we communicated last quarter, it's something that we are not fully in control of. Obviously, we're working with the Texas Department of Insurance. And so in the second half of the year, we would expect it to be approved. The third -- end of third quarter is not an unreasonable assumption, but clearly, we're not putting a hard pin on that. We have to provide a little bit of flexibility for the team to kind of work through that process with the TDI. In terms of the reciprocal revenue, we'll be a bit lower. We're not obviously guiding right now for 2024. But like we indicated last quarter when we announced the reciprocal, it will impact revenue some. It obviously also impacts our gross margins in a positive way, meaningfully, in just the overall margin levels of the business to improve. When that is approved, John, our plan would be to do a presentation to kind of really fully walk through that. And the reason we won't do that ahead of time is that some of the degree of those changes depends on where everything lands with the Texas Department of Insurance through that process. So once approved, we would kind of walk folks through that and let everybody know how that's settling out.

Next, we'd go to Josh from Cantor.

I'd love to dive deeper first into your ability to maintain those -- that flattish revenue on Vertical Software despite the ongoing housing headwinds. So given the rollout of all these products and the expansion of existing products, how are you thinking about the current cross-sell opportunity that still exists, potentially untapped in the vertical?