Via SeekingAlpha.com

Here is a company that seems to thrive in the altered Covid-19 business landscape, EverQuote (NASDAQ:EVER). We were already very bullish on the shares for a variety of reasons (see here and here), and the company delivered in Q1.

For starters, revenue keeps on growing at a phenomenal rate (56% in Q1), and operationally things are rapidly improving:

ChartData by YCharts

Covid-19 altered business landscape

There are a number of changes in the insurance business landscape that seem to favor EverQuote:

  • An acceleration in the digital transformation of the industry.
  • A temporary reduction in revenue per quote request as insurers shifted to working from home, but a more lasting slump in advertising cost.
  • Little effect from the slump in new car sales.
  • A tailwind from consumer belt tightening, more shopping around for bargains as most insurances are a non-discretionary expense.
  • Insurance companies have remained healthy.
  • Increased demand from agents.
  • A better market for hiring scarce talents in programming and data science.

It’s a digital world

Like in many other industries, the pandemic has accelerated the shift toward the digital world in the insurance business, too. The odd situation with EverQuote was that while most (80%+) customers are shopping online for insurance, most policies are closed offline.

In our first article on EverQuote, we described the business model and how the company makes life for consumers, agents and insurers easier (and cheaper, generating average savings for consumers of $610).

We also explained how this produces network effects which are self-reinforcing, basically becoming a one-stop shop, and leveraging their auto insurance marketplace to enter other verticals.

Then we explained how moving online enables the company to unleash tools like big data and machine learning, which improves the matching process between insurers and customers.

We’re not going to repeat all that, but it all starts with EverQuote’s efforts to market itself as a relevant channel through advertising, marketing its quote requests that links consumers to insurers. So quote requests can be regarded as the single most important KPI:

Q3 Q4 Q1 19 Q2 Q3 Q4 Q1 20
Requests 3,044M 3,284M 4,113M 4,519M 5,516M 5,86M 7,4M
Growth -5.7% +10.1% +19% +50% +81% +79% +80%

Source: Company filings.

These are terrific numbers, and the company has well and truly left the slump in 2018 behind with four quarters in a row of 50%+ growth in quote requests.

Critics have argued that this increased demand for quote requests is acquired at increasing cost and/or declining revenue, so it’s not nearly as good as it seems at first sight. Well, Q1 didn’t really show much of that (Q1CC):

VMM expanded to 29.3%, up from 26.5% in Q1 of last year, an increase of nearly 3 percentage points. The VMM expansion, this quarter, resulted from attracting more consumers to our marketplace at lower acquisition costs and with better unit economics.

VMM stands for variable marketing margin (revenue minus advertising cost). While it was true that revenue per quote request was a 14% lower (to $11.01) versus Q1 2019, this was more than offset by lower advertising cost (minus 17% to $7.78).

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The latter is no surprise of course, given what has happened to the ad market in the pandemic, with whole sectors suddenly stopping their ad campaigns. From the Q1CC:

What’s most dramatic in the advertising landscape is the not big online non-insurance advertisers, e-commerce, travel auto, where the actual auto car sales have largely exited the online market. So we have seen and expect to continue to see reduced costs for things like display and social display, which are large marketing channels for us

The lower revenue per quote requests isn’t likely to establish a trend though (Q1CC):

Large increases in consumer volume in a given quarter can outpace insurance provider coverage and/or budget resulting in our marketplace monetizing less referral per quote request, which is what we saw in Q1.

And this is likely to be related to the pandemic, caused by insurance companies temporarily halting their marketplace participation in order to shift workforce home.

So both the revenue and the cost sides have been influenced by the Covid-19 pandemic, but the bigger influence was on the cost side, hence the increase in VMM.

And what’s more, these temporary halts by insurers are likely to last while the slump in ad rates is likely to last longer, so the positive net effect looks to be more pronounced.

The work from home is also accelerating the move towards online business both for agents as well as insurance companies. This is a secular tailwind for the company (Q1CC):

We believe that the pandemic will accelerate digital transformation in the insurance industry, which has been a laggard moving online… After shifting to remote operations, we are seeing increased demand for our consumer referrals from agents in our marketplace and many agents are leaning into the transition from offline to online customer acquisition with some growing spend and reporting increased productivity.

Car sales

New car sales are obviously down a lot, but some investors might be surprised to learn that this has hardly an effect on EverQuote, with policies related to new car sales a tiny percentage of its business (Q1CC):

You recalled we don’t have much of any connective tissue with car shopping, 98%, 97% vast majority of the consumer demand is renewals is folk shopping to look for discounts, coverage, perhaps they’ve had a claim.

However, since more consumers are forced to belt tightening, they are more shopping around for bargains, including for lower insurance premiums, with most insurances being a non-discretionary expenditure. So again this is a net positive for the company.

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Insurance health

The car insurance business is still by far the company’s largest vertical, and people worrying about the health of the car insurance business should be relieved to know that this remains healthy (Q1CC):

Our largest verticals, auto and home insurance, are benefiting from fewer claims being filed as consumers are staying home and driving less due to nationwide stay at home order. This has resulted in many carriers publicly reporting strong profitability for Q1 and passing savings on to consumers. Based on what we’re seeing in our marketplace, some carriers are now investing more in online customer acquisition as we believe they are leaning into incremental profitability in their business and driving up new premium volumes, which may have moderated in the second half of March in the immediate aftermath of the shelter-in-place decision.

The company is also benefiting from a better hiring climate, especially for sought-after people like engineers, programmers and data scientists.

Other growth factors

  • New carriers and agents
  • Integration with insurers and agents
  • New verticals

The company keeps adding carriers (insurance companies) and agents to its platform. On the latter (Q1CC):

Our agency business grew its revenue by 62% over the prior year, adding over 1,000 new agencies to the platform and increasing revenue from our Accelerated Growth Program, or AGP, which consists of our larger agents by more than 30%.

What is pretty crucial is the integration of these on the company’s platform, as this reduces the friction for consumers (having to fill out less forms, for instance), increasing the conversion rate (Q1CC):

Integrations create a more efficient marketplace with less friction for consumers and providers, delivering better customer experience. One of our top five carriers, for example, recently launched a deep pre-fill integration where EverQuote populated over 20 data fields onto their online quote growth.

It’s the goal of management to complete deep integrations with all of its carriers, and at the end of Q1, it was over halfway there (56% of its carriers).

The company has also entered new verticals (home and renters, life, health and commercial insurance) and these continue to develop rapidly, growing a whopping 90% y/y, benefiting from network effects.

Q1 results

Revenue beat expectations by nearly 5%, coming in at $81.36M (+55.8%), and there was a $0.01 GAAP EPS beat at minus $0.05. Automotive insurance grew by 50% while the other verticals grew at 90%, reaching 17% of revenue.

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VMM grew 72% to $23.8M, reaching 29.3% of revenue, rising nearly 3 percentage points versus last year, leading to a positive adjusted EBITDA at $3.8M (4.7% of revenue), improving from last year’s loss of $1.3M.

Guidance

Management provided the following guidance (earnings PR):

Second-quarter 2020:

  • Revenue of $77.0-$80.0 million.
  • Variable Marketing Margin of $23.5-$25.0 million.
  • Adjusted EBITDA in the range of $3.0-$4.3 million.

Full-year 2020

  • Revenue of $318.0-$327.0 million, an increase from our previous range of $315.0-$325.0 million.
  • Variable Marketing Margin of $96.0-$102.0 million, an increase from our previous range of $92.0-$98.0 million.
  • Adjusted EBITDA in the range of $12.5-$17.5 million, an improvement from our previous range of $10.0-$15.0 million.

Guidance has increased a bit, both for Q2 as well as the year as a whole (for the latter, prior guidance used to be $315M-$325M and VMM at $92M-$98M), which is pretty remarkable in this brutal environment.

Margins

ChartData by YCharts

These are GAAP figures. Gross margins are of course sky-high and operating margin is improving on operational leverage and VMM improvement.

Cash

ChartData by YCharts

What investors surely appreciate is cash flow having improved greatly since the middle of last year. This is invaluable in this environment, and it’s set to continue. The company also has $50.5M in cash and equivalents and no debt. Neither stock-based compensation nor dilution is a reason for concern:

ChartData by YCharts

Valuation

ChartData by YCharts

Analysts expect small GAAP EPS losses of $0.20 this year and falling to just $0.02 in 2021. We think that shares are still very reasonably priced at these levels.

Conclusion

EverQuote isn’t just surviving in the present pandemic plagued economy, but it is actually getting some benefits like lower ad cost, a better hiring environment, and an acceleration in the digitalization of the insurance industry.

The company enjoys several virtuous cycles like the use of big data and machine learning and the venturing into other verticals, leveraging its existing capabilities.

Given the fact that the company is cash flow positive, has a solid balance sheet and is growing at a 50%+ rate, the shares are actually still fairly modestly priced.

Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in EVER over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.