EverQuote: Excellent Crisis Execution

Summary

• Shares of EverQuote rallied nearly 30% after reporting stellar Q1 results that have seemingly been barely dented by the coronavirus.
• The company notes that reduced claims at EverQuote's auto insurers have led them to invest more in customer acquisition.
• Though EverQuote's revenue per quote request fell this quarter, corresponding to the broad decline in digital ad pricing, its cost to deliver quote requests fell even more.
• EverQuote also delivered positive operating cash flows in the first quarter, despite cash flow losses in the first quarter last year.

For EverQuote (NASDAQ:EVER), it's like the coronavirus never happened. The insurance technology company, which provides an online search engine for consumers to search and compare insurance quotes, has just released first-quarter results and skyrocketed nearly 30% in response, with shares rallying near new 52-week highs. Unlike many other small-cap technology companies and recent IPOs that have had to contend with sharply decelerating revenue growth, tight liquidity, and mass layoffs, EverQuote is now sitting firmly in a position of strength.

Data by YCharts

Since last quarter, EverQuote has outperformed the S&P 500 by more than thirty points. I wrote in February that astronomical growth rates are the main driver propelling EverQuote's stock higher - but now, we can also see that shrewd management has also led to stable demand and rising profit margins amid a difficult macroeconomic backdrop.

Beyond the near term, EverQuote believes that the coronavirus and shelter-in-place orders help to accelerate the process of insurance shopping becoming a purely digital activity. EverQuote is already one of the best-known online marketplaces for auto insurance, but it's now also extending its capabilities into other huge insurance verticals, including home and life. With a market cap of just over $1.3 billion, I'd say EverQuote is still on the early cusp of re-formatting the way we purchase insurance, and investors have a chance to get in on the ground floor.

Q1 download

Let's now look into EverQuote's first-quarter results in greater detail. Take a look at the company's earnings summary below:

Figure 1. EverQuote 1Q20 resultsSource: EverQuote Q1 earnings release

Revenues grew 56% y/y to $81.4 million, obliterating Wall Street's expectations of $77.5 million (+48% y/y) by a wide eight-point margin. One of the key pieces to note here is that EverQuote managed to continue shepherding traffic to its site - its overall quote request volume jumped 80% y/y. The company's traffic growth teams have also been at work on driving more traffic from "high intent" consumers that are more likely to result in policy sales.

Aside from core auto insurance, EverQuote's "other insurance" category consisting of the home/renters, health, life, and commercial insurance categories grew at 90% y/y, hitting a 17% contribution to overall revenues (up three points from 14% in the year-ago quarter).

Seth Birnbaum, EverQuote's CEO, believes that if anything, the coronavirus is proving to be a tailwind to EverQuote's core business, especially due to the fact that auto insurers are paying out far less in claims due to the steep reduction in driving. Per his remarks on the Q1 earnings call:

From a market perspective, we are fortunate that the insurance industry remains healthy. 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.

In addition, we continue to see both consumer demand and provider budgets remain strong in our verticals, both for auto and non-auto. Early indications are that the impact from any moderation in premiums in the personal lines insurance market are being outweighed by increased profitability, which we believe support continued investments in acquiring consumers, particularly in large efficient online channels such as ours. A similar dynamic is occurring on the agency side of our business where we believe COVID-19 is creating a relatively favorable environment for EverQuote."

Some investors may have been worried about the impacts of softening digital ad pricing on EverQuote. Google (GOOG), Facebook (FB), and other major internet advertisers all saw revenue deceleration thanks to softening ad pricing. But for EverQuote, this works both ways - though EverQuote's revenue per quote request (what insurance companies pay EverQuote for leads) fell by 14%, its cost of acquiring quote requests (advertising costs that EverQuote pays for traffic) also fell 17%, actually indicating that EverQuote's marketplace has so far benefited from ad price movements.

We can see this in the fact that EverQuote's "variable marketing margin", which it defines as revenue less advertising costs, grew 72% y/y to $23.8 million in the quarter, sixteen points faster than revenue growth. This increase in margin dollars has also led EverQuote's GAAP net losses to shrink to just -$1.4 million, a third of last year's -$4.4 million losses - and very close on the path to breakeven. Meanwhile, EverQuote managed to deliver $3.9 million of operating cash flows in the quarter, despite a loss of $3.5 million in the quarter.

Figure 2. EverQuote cash flowsSource: EverQuote Q1 earnings release

So despite the fact that EverQuote's ~$50.5 million of cash balances as of the end of Q1 seems thin, we find comfort in the fact that EverQuote has proven an ability to drive positive cash flows (full-year operating cash flows in FY19 were also positive, at $4.4 million, versus a modest loss in FY18). In addition, the majority fo EverQuote's expenses ($66.5 million of $83.0 million in total operating expenses) lies in variable marketing expense, which EverQuote could easily cut back in a pinch. But considering the fact that EverQuote has not yet laid off any staff nor has any plans to, the company appears to be navigating through the current crisis quite comfortably while still growing its business at a rapid pace.

Key takeaways

EverQuote's huge outperformance to the broader market over the past several months has been well-earned by strong fundamental performance. Amid a soft pricing environment for digital ads, EverQuote has managed to reduce its cost per ads at a faster pace than the reduction in its revenue per quote, with this additional "spread" translating into strong variable marketing margin growth for the company. Stay long here as the company becomes the de facto marketplace for purchasing insurance online.

Analyst’s Disclosure: I am/we are long EVER. 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.