Porch Group, the Seattle-based home services software company, completed its $100 million acquisition of Homeowners of America Inc. on Tuesday morning, its biggest deal since going public at the end of 2020.
Based in Irving, Texas, Homeowners of America operates in six states but is licensed to operate in 31 states. Porch says it will use the acquisition to build its national footprint in the home insurance market.
“The plan is to expand very, very aggressively across the vast majority of states,” said Matt Ehrlichman, the Porch founder and CEO, in an interview this week. At the same time, he acknowledged that it won’t happen overnight, saying that it will take the “better part of a year to make a meaningful dent” in the overall Homeowners of America expansion plans.
Porch cut its net loss in half in 2020, to $51.6 million, from $103 million in 2019, in financial results released last week. The company, founded in 2012, has yet to turn a profit. Its revenue fell to $73.2 million in 2020, from $77.6 million in 2019. When adjusted for divestitures, including the sale of the online home repair booking platform formerly known as Serviz, revenue was up 28% from $56 million in 2019.
Releasing its fourth-quarter earnings last week, Porch raised its overall revenue outlook to $175 million for the current year, up $5 million from its most recent guidance, a projected 140% increase from 2020. That guidance took into account what was at the time the pending Homeowners of America acquisition, and was not adjusted Tuesday with the closing of the deal.
Founded in 2012, Porch focused initially on providing consumers with home improvement data, but then changed its strategy to provide enterprise resource planning (ERP) and customer-relationship management (CRM) software to home services companies. Those companies can pay traditional licensing fees or provide Porch with access to their customers. Porch then uses that access to connect homebuyers to movers, insurance agents, home security firms, TV/internet companies and other service providers, making money on transaction fees.
On the company’s conference call with investors and analysts last week, Ehrlichman compared the approach to that of OpenTable, which provides software to restaurants, gets access to the consumer through those relationships, and monetizes the transactions it enables as a result of that access.
“However, unlike OpenTable, we play in a massively larger addressable market, and where they might make approximately $1 per transaction, we can generate, at times, $1,000 per transaction, and in the case of insurance, recurring revenues from each sale,” Ehrlichman said on the call.
In addition to those recurring revenues, insurance is a promising market for Porch because it represents a required purchase for homeowners, Ehrlichman said in an interview with GeekWire this week. In addition, he said, the company is able to use insights from its data on individual homes to better understand the risks, allowing it to price and underwrite insurance more effectively.
The $100 million acquisition of Homeowners of America included $21.7 million in Porch stock, with the remainder in cash. It’s the largest of four acquisitions announced by Porch in January.
Looking ahead, the biggest business risk facing Porch is its ability to execute on its ambitious growth plans, Ehrlichman said this week. “The reality is that I feel really good about how we’re set up, where we are, and how the business is performing, but there is a lot we’re trying to do,” he said. “We’re trying to continue to be very aggressive.”
The company had 1,000 full-time employees and contractors as of January this year, according to its annual 10-K regulatory filing. The 10-K filing notes that Porch reduced pay for some employees and furloughed others from March 2020 to June 2020 in response to the COVID-19 pandemic.
“After this period, we did not bring back certain employees that were furloughed,” the filing says. “After June 2020, we have allowed certain employees to earn a portion of their compensation in equity in place of salary.”
Porch also had ambitious plans early in its history as a private company. It was forced to retrench and reinvent itself after hitting a ceiling to its growth in providing home services technology directly to consumers. In addition to now pursuing a larger opportunity — estimating its total addressable market at more than $320 billion — Porch is focusing this time on investing in approaches that are difficult to duplicate, and provide the highest return on capital, Ehrlichman said.
“Across the business, that’s something that we spend time on, to make sure that we’re just making good, thoughtful decisions,” he said.
Porch went public on the Nasdaq in late December, raising more than $322 million through a merger with PropTech Acquisition Corp., a publicly traded special purpose acquisition corporation, or SPAC, and a private investment from Wellington Management Company. It had raised more than $120 million in venture capital as a private company.
That process of going public was a lifeline for Porch, which had a cash balance of $3.9 million as of June, filings show. The company last year received an $8.1 million forgivable Paycheck Protection Plan loan. At the end of 2019, its recurring losses and working capital deficiency prompted its accountants to raise “substantial doubt” about its ability to continue as a going concern, according to its S-4 registration statement.
As of the end of 2020, the company’s cash balance was $196 million, up from $4.1 million a year earlier, according to its most recent financial statements. Shares of Porch rose 12% to $18.28 after its earnings report last week, and closed Monday at $17.62, with a market value of more than $1.5 billion.