Joined: 06/17/2014 09:32 PM EDT
Location: Carmel, IN
Spruce Point Capital Management’s Report on Porch NASDAQ PRCH is full of inaccuracies
For those with younger siblings, you know the joys of making them grow up fast. Sometimes it’s through minor beatings, other times through verbal abuse. It’s part of growing up with siblings and if you’re the younger or youngest of three as there were in my household, you were going to be the target of your older brother’s desire to help you grow up faster at some point.
With all of that torment comes some huge advantages. You get to learn from your older brother, experience some things younger kids don’t generally get to, and he might even teach you a thing or two...but he will mess with you and he’s bigger so he wins. I’m not suggesting anything more than normal brotherly shenanigans here. If you’ve ever tried the warm water trick on your younger sibling trying to get them to pee themselves at night or put just enough salt in their bed that they don’t notice until they’re miserable at 2 AM, we might have a few things in common.
Some might suggest the biggest advantage of being a younger sibling is that for all the crap your older sibling might give you on a daily basis, they will stand up for you when someone else tries to mess with you. Even if they only mess with you a little. Every oldest sibling knows this defensive nature very well and today I’d like to share with you my perspective – likely the most qualified of any perspective outside of Porch – on the company known as Porch and traded on the NASDAQ as PRCH.
For purposes of making this an interesting read, I’m going to respond to each of the claims from Spruce Point Capital Management that were so sloppily released as a “research opinion” document I’ve attached here for reference, and do so pretending that Matt Ehrlichman is my little brother. In some ways, I feel like he is.
The following facts, principles, and beliefs pertaining to this topic should be known before reading further:
1. Porch isn’t profitable. Duh. I’m not certain they will ever be, but I’ll outline how it’s likely to happen if it does at the end of this document. I believe it is more likely to happen than not by the way, so let’s call PRCH a “buy” by my analysis.
2. Porch has many programs that are demonstrably horrible for home inspection businesses. Some are fine, some have been successful for many inspectors including many very respectable clients of mine. They have not established a great base in this industry or reputation as of this point and any representation to the contrary is false. They could succeed in both, which again will be outlined at the end of this document.
3. Porch has a program that includes my companies’ services. For this I applaud them (and candidly it has driven much of their activity so they may see me as a necessary evil), for many other things I applaud them (see this document and the summary at the end), for anywhere we conflict it is generally something they are doing wrong in the industry and bad for the industry and I’m not saying this as a matter of opinion unless you consider the verifiably correct opinion to still qualify as an opinion. I tell them this very often by the way, as a good big brother, often in a very colorful and blunt manner. To their credit, my sound advice often changes their course and may very well be what led to them getting through their SPAC indirectly at least.
4. I love innovation and I love people that get shit done. While I clearly don’t like all the ways Matt Erhlichman does it, I’m warning anyone who thinks to themselves at any point in time “Oh, he’s done for,” that I have personally had this thought on numerous occasions and he somehow pulls off whatever he’s planned on doing on the financial side of the business (particularly in raising funds and some exotic acquisitions). In other words...don’t count him out. Ever.
5. I have never bought a single share of Porch stock and I wouldn’t. It’s not because Porch isn’t a great pick compared to other things in what I will call a very “speculative class” of investments, it’s that I’m a strict financial investor and my holdings are more like C, WMT, JPM, CVS, PG, BP, IDA, HD, HRL, etc. Good solid things that I can invest in both personally and professionally, meeting both my personal financial goals and a risk tolerance that satisfies regulators in my risk management businesses. Plus, I like sleeping at night and don’t know how those of you buying into companies selling at crazy multiples or with negative income statements aren’t dead of stress-driven heart attacks by 40. To me you’re all gamblers but I get it, it’s fun and if you buy into enough of these things you get a few big hits. Just not my cup of tea.
I’m just a regular dude, a home inspectors son, a brother and a father that knows how to fix stuff with hand tools and doesn’t understand or like the big money games of modern Wall Street. I have on some levels a great relationship with Porch while simultaneously being the fiercest competitor on other fronts which to their full credit they seem to deal with rather well. I’m not an investor in Porch as I mentioned above.
In other words, everything you’re about to read is without conflict (or at least has a very well balanced level of conflict) and uniquely comes from the largest direct competitor of Porch AND a company they utilize for services as well...while the Spruce Point Capital Management report was written by an uninformed idiot as you will discover in this overly long and factually accurate rebuttal. I’m neutral here and can demonstrate such.
Also Spruce Point, if anyone is going to beat up Little Bro Matt it’s me, you picked on him, so here is a very public and very provable document showing you are absolutely full of crap and lack credibility. Try to enjoy it about as much as the stockholders would enjoy an artificial and invented stock crash you intended to inflict so sloppily.
Without further ado... P. Nathan Thornberry’s Analysis of Spruce Point Capital’s “Research Opinion” (or “Research Presentation” or “Research Report”) on Porch and CEO Matt Ehrlichman. Itemized by Page. Which I have renamed appropriately. This won’t make sense to you unless you have the report, which I have posted on this page.
WARNING: BEFORE YOU START READING OPEN UP ATTACHED PDF AT END OF THIS POST IN A NEW TAB SO YOU CAN FOLLOW ALONG!!!!
Page 3: An Irrelevant Start.
As you look at this page, it starts with a fairly generic warning about companies without a business model and promises to demonstrate such about Porch. The four companies represented aren’t in the same space and seem irrelevant. I can only imagine the attempt by the author of the piece was to put the reader in the mindset of “there’s a lot of crappy stocks out there, and this is one of them.” Why these four? It’s never actually made clear throughout this document despite the first line of content in this “Research Presentation” promising such. By the end of this rebuttal you will wonder what “Research” actually means to Spruce Point Capital Management.
Page 6: Strong Allegations
From the report:
“We believe at best Porch’s CEO has unethically portrayed his biography to investors when at The Active Network by concealing his involvement in HelpScore, the predecessor to Porch.com, and at worse committed securities misrepresentation. In fact, there was never a public filing made that he relinquished his executive position at ACTV. In addition, we believe Ehrlichman exaggerates his contributions to ACTV during his tenure.
Now, at the helm of his own Company, we believe evidence shows the following serious material misrepresentations from investors:
• We believe Porch has concealed or obscured numerous business activities from 2017 - 2021. As a result, investors’ can’t see how miserably Porch failed in its corporate partnerships and through its acquisition strategy. For example, Porch is currently being sued for fraud by Kandela for selling “Vaporwear” or services that don’t exist. We find additional evidence of an obscured recent partnership service that doesn’t exist
• We believe Porch has recorded a $33m transaction on its book that had absolutely nothing to do with the Company, and made conflicting statements about it to the SEC. We believe this transaction allowed Porch to avoid taking a staggering goodwill impairment
• We estimate $1.1 billion of maximum potential exposure to financial guarantees are being kept off Porch’s balance sheet, thus understating the Company’s true leverage. Unlike other public peers, Porch also doesn’t include leases on its balance sheet and its $40m of claimed debt is closer to $51m
• Experts familiar with Porch disagree with its home inspection economic assumptions, a major pillar of its growth strategy. Porch claims each lead is worth $25 but experts indicate the real value is $14 - $15, or 40% lower. Porch assumes it receives $4 per inspection, but in practice offers discounts
• Given negative EBITDA, EPS and OCF, we believe Porch has artificially inflated its gross margin, and positioned this metric to investors as an appropriate valuation metric. Porch books revenues for selling leads to home service companies, but doesn’t account for the cost of these leads which are effectively barter transactions. Barter transactions have historically come under immense scrutiny by the SEC, resulting in many accounting fraud cases. We estimate gross margins are overstated by at least 230 basis points
Buyer Beware: Porch has never made money, and its recent uptick in share price is likely correlated to new home sales and home remodeling, tailwinds during COVID-19 that look to become headwinds as the economy opens and mortgage rates rise. We find tremendous problems with its recent spree of low quality acquisitions made for 2x sales and believe new competition is coming. Porch wants investors to believe it’s a high growth, high margin SaaS company deserving a 9x sales multiple. However, we see Porch for what it is: a low quality lead generation business, and another attempt by Ehrlichman to recreate The Active Network vertical software story, which ultimately failed and was taken private at 2x sales. Applying a generous 2x – 4x multiple range on Porch’s 2021E sales puts its stock value at $5.06 – $8.56 per share (50% – 70% downside).”
Whenever you start a sentence with “We Believe...” that’s a fancy way of saying you’re just guessing and I, P. Nathan Thornberry, without any insider knowledge by any means but with likely the most substantial amount of knowledge about this company of any outsider can say the following in response to each of these points (and I don’t say things I am uncertain of without clarifying first that I am hypothesizing- remember that throughout this document or anything else you read from me as you’re scrambling trying to figure out who this guy is):
1. I don’t think going public and showing your top line revenues counts as “concealing,” we can all see the revenues as reported and they’re not great at this point and Porch has been pretty open about this. So far as the issue of Kandela is concerned, whether those involved believe they are entitled to $11 Million+ and whether that will ultimately pan out as valid and either settled or determined by a judge is inconsequential at this point. It’s water under the bridge, it’s a disagreement, it will be worked out and for an amount of somewhere between $0 and $11 million, which in the cash position of Porch isn’t so bad but this is one issue being implied as if it were many. The representation here by Spruce Capital Management implies that there are a bunch of these issues out there, unreported, which just isn’t plausible. At least one of the others being alleged would have been filed, especially considering the publicity surrounding the SPAC. If there were many others or even a few others that thought Porch owed them big money, they’d be suing and they would have done it right after the SPAC was funded and that is common sense. Shifting focus now to Kandela, whatever issues there might be there with prior owners, I personally tested that relationship just yesterday. I personally went to their site, made a contact request, and not only did I get a response personally to my cell phone...that response came from an executive at Porch. In other words, there may be a minor marital dispute, but they’re still married and living in the same house.
2. We’ll get into this $33 Million business later in the report where more details are disclosed (next page).
3. Debt of $51 million compared to $40 million? Not exactly big numbers at this scale, you’d find in GAAP financials from any company debatable points and this sounds like one of them or could be just an old slide in a video you’re crying wolf over. So far as the $1.1 Billion in financial guarantees goes...we’re going to have to see something to back up this claim. I know pretty much every player in every space Porch plays in well enough to get a sense of the dealings they’ve had with them, with probably 10,000 times the knowledge base on this topic and infinitely more relationships within the industry I couldn’t possibly get to 1/10th that number. This is just the purest form of guessing imaginable in a “Research Report”. If I’m wrong and Matt Ehrlichman, personally making every deal from that grey chair in his unimpressive home office hiding from COVID for the last year and a half and only limited resources until this latest SPAC closing racked up over a billion in guarantees and obligations it would be mind-blowingly impressive. It would be like Richard Pryor in Brewster’s Millions except that Million per day wouldn’t be for a month, it would be blown at that rate for 3 full years without a single day off. If he did, it would be impressive I suppose, but it certainly wouldn’t be in exchange for nothing and whatever benefits would be derived from such extensive business dealings aren’t apparent. I can’t say with absolute certainty he didn’t do that, but I want to go on record as saying if he did I will go high five him. It would be crazy, but impressive!
4. Lead value from the Home Inspection Industry has one expert, that’s me, so whoever these “Experts” being referenced...they have led this report to just being a guess once again. It’s not an area of zero concern, more on that later, but they’re not close enough to say it has been “researched” with any degree of accuracy.
5. There’s no question that Porch’s EBITDA is negative, this was reported publicly and involved licensed, certified professionals to do such. The allegation that operational costs and transactional costs were hidden is absurd, the bartering comment unfounded. Porch offered up some software for free, this was one of the costs of transacting that business, and it gets reported as less revenue for the software, but the revenue in the other place goes up. The expenses remain. It’s not a complex situation to understand and Spruce Point Capital Management is making ado about nothing in this point because they don’t have even the basic idea of how the Porch model works.
So far as Porch not making any money so far, undoubtedly true. So far as the “tailwinds” are concerned from Real Estate...we’re talking about a minor boost. Later on in this document you’ll see the chart of real estate transactions and it’s not like our industry has seen some windfall in a market that has doubled or tripled – there has been a low double digit increase in transactions paired with a slight decrease in the home inspection side from non-inspection contingent real estate transactions. Are things good? Sure. Are they bubbly good? Perhaps a little, but not even close to a level that would cause some massive stock shift and Spruce Point Capital Management’s lack of knowledge on this point alone should diminish the overall credibility of this “Research Opinion”. Or “Presentation”. Or whatever we are calling it to avoid culpability over at Spruce Point Capital Management.
Page 7: If you make it a Question, Does THAT make it Okay?
Page 7 starts with a charge that Porch lied about a transaction between Lowe’s and Porch’s CEO Matt Ehrlichman. It looks bad, smells bad, and I’m going to be very clear when I am saying something I’m not certain of...I’m not certain of the following, but it makes sense so I’m going to lay out my theory on this weird, inexplicable transaction:
If I were to ask a question at the top of this page, it would be “Did Lowe’s want a diminished position in Porch and if so why?”
It’s hard to take what Spruce Capital Management has laid out here and say it doesn’t shock a reader, but if there’s a SEC violation and you have knowledge of it call them. If you believe Lowe’s, a major shareholder and gigantic, respected publicly traded business would find itself as the party to some shady financial dealings...I’d say you’re likely wrong but we’ll see how this one plays out. My guess is it goes nowhere and no wrongdoing will ever be found. Which leads me to why Lowe’s would do such a thing...
My best guess (it’s good to admit when you’re guessing Spruce Point Capital Management...you should do it not just in a little disclaimer but maybe not publish bullcrap as a policy) is that Lowe’s invested a great deal of money in Porch early on and at that time there was no indication that the ultimate goal was to go public via a SPAC and all the optics that come along with it. I think this issue is .000000001% of Lowe’s portfolio and that someone decided from a PR perspective that it was best not to have Lowe’s double or triple or quintuple their investment just in case those share sales happened and then there was a dip in the stock affecting some everyday Americans and making for a PR nightmare. It is my belief that Lowe’s is a very conservative, stable company that would be happy to be on board in the biggest way if this had come to fruition in a typical IPO and with better numbers and early profitability, but instead they’re dealing with a hotly controversial SPAC market and a company that is bound for some level of a roller coaster ride to ultimate profitability (hopefully, more on that later) and it has now become something outside their risk tolerance and desire to participate for reasons aforementioned.
In conveying the shares back to Matt in this way, they absolved the severe downside PR risk while giving him more runway for the positions they’ve held onto. What Matt and Porch plan to do with these shares now or in the future is unknown, but if they become one of the financial vehicles by which Porch gets to its destination then hindsight will show this was a good move for all. Things go bad, Lowe’s didn’t profit. Things go great, Lowe’s contributed to it happening.
Lowe’s spent $33 Million on PR here and it just went back in the deck for Matt to turn into more money, which he seems to be good at.
Page 8: Spruce Point Capital Management cries wolf (while only showing a single whisker).
Here’s where I get to tell you why I play the role of Matt’s older brother in this scenario...and apparently I get to feel really awesome about being a self-made billionaire. At least in the overbloated world of tech investing I would be if you go by Porch numbers or any of these crazy speculative stock numbers. (I’m not likely to ever go public with any company I’m involved in by the way, not my style, so unlikely to ever get to actual billionaire status and I’m okay with that! I have enough to worry about impressing clients and partners every day...add stockholders and I’d go nuts.)
It’s honestly a little weird seeing a company like Porch do way less revenue, after hundreds of millions being invested, in the same space as a single shareholder company like mine and have a market cap of over $1 Billion. It’s honestly a little surreal, but that’s the market. I’m glad my little bro Matt has the skills and gumption to take his smaller position in the market than my own and turn it into something with a couple hundred million in cash and a billion in market valuation and utilize that to invest in a future we’re excited to see. His Stanford education and history in high-growth, well-capitalized businesses and understanding of how the markets work is something I’ll never likely even attempt to participate in.
If you sense a bit of tongue-in-cheek here, it’s definitely prevalent in my writings so go back to everything you’ve read so far and decide which parts I might have been a little over the top with...but know there’s always honesty in it. I’ll admit fully to having a preference for a responsible, organically grown, low-debt (or no debt in my case), steady growth business with a reasonable profit and a great product. If Matt is like Charlie Sheen in Wall Street, I’m more like his father back at the airline. We just have a very different approach, but that doesn’t mean I’m okay with Spruce Point Capital taking only a sliver of their financial data and expressing it as a “Barter Deal” when they have no idea what they’re even discussing.
Again, this is a very simple issue and it’s not hard to dissect even as an outsider. Porch gives away some software to users, big whoop. So do I: www.NXTinspekt.com is the leading competitor to ISN and in the last week alone we’ve probably picked up another 50 users to add to the over 1300 Inspectors on the platform and growing. I even gave it away for a full 5 years – no strings attached – to every member of InterNACHI (a home inspection membership association) and got a personal endorsement and multiple postings from InterNACHI’s founder (Nick Gromicko) himself. Does this show up as an expense on my books? Yes, in the form of hosting and development costs. The exact same way it shows up in the public financial filings of Porch when you show all the line items of the P&L, not just pulling out seven lines that make this erroneous point. It’s not “bartering” when you give something of value for free to boost volume or value in the other item. 100% of what is going to be paid, ultimately, in one way or another.
The fact that Porch takes this line of business and shows a “Gross Profit” associated with such is nothing unsimilar to how other public companies represent themselves. As an example from outside the real estate industry, you can look at any major bank and see their marketing expenses and overheads, but you won’t find the per user overhead and expenses associated with their mobile applications and websites that they offer up free for use to all their clients as a free service listed as a “per client” or “per transaction” expense. Spruce Point Capital Management is applying a standard here that is beyond unfair. By their logic, every bank you’ve ever heard of is in the “bartering” business on just the mobile app front alone and needs to go back and redo all of their financials...because a feature of their accounts is something they were willing to invest in and give away (and claim all of the revenue and expenses). It’s absurd, Spruce Point’s position is idiotic.
Also party at my place. Celebrating my billionaire status . I’d like to personally invite the CEO of Spruce Point Capital Management. Send your RSVP to firstname.lastname@example.org, we’ll roll out the red carpet!
Page 9 is irrelevant, see Page 8 explanation above.
Page 10: Spruce Point Capital Management, get your notepads ready. You’re about to get a Lesson from Professor Thornberry.
The basic message from Page 10 is that Porch assumes the maximum fee for ISN, and they make a big deal about that (even though the fee could be $0 for aforementioned reasons). I suppose I have to give Spruce Point Capital Management credit for writing this as a question: “Why does Porch Assume The Maximum Fee?”
Well, apparently Spruce Point Capital Management has one of the following issues going on at their offices:
1. Their internet service doesn’t work and they’ve lost their phones.
2. They’re super bad at math.
Let’s go to your own page 55 of this report where you post the National Association of REALTOR’s existing home sales data. Basically on an annualized rate the number of homes sold in America has been very stable other than a 20% tumble leading up to the ‘08/’09 crash (financing was getting difficult leading into this and the economy was definitely in a cool down period) and then a 20% uptick to 6.2 Million+ in recent months annualized. I’m glad you discovered what real estate is as a part of this research project gentlemen. Fun Fact: I get these numbers before NAR does even . But I’m glad you have these basic numbers now because we need to do some basic math.
Let’s take the 80% of those homes that will get a home inspection, which would typically be around 4 million, and divide those over the 30,000 or so home inspection companies in the entirety of the industry. That’s 133 units per year. Take out the 6000 or so that are in reality retirees or doing miniscule numbers, we’re still only averaging under 170 units per year mean average. Certainly there are many inspectors that do much higher volumes and they’re called “Multi-Inspector Firms” and probably 80% of them are clients of mine. They’ll average 600-1000 each and some will do as many as 25,000 units this year. This brings the average down even more for the vast majority of home inspectors and home inspection companies that are in the “single man operation” category – the median average is much lower than the mean and therefore most are many multiples of their business from ever qualifying for one of those volume discounts as displayed for ISN.
For the math geniuses at Spruce Capital Management, the $4 per inspection fee for ISN is where most end up. I think they even have a minimum now in the $25 per month range, but don’t quote me on that as fact (it was factually a consideration at some point). Out of all the possible accounts that would qualify for the reduced fees, which is very few, I’d say most if not all of them are either current clients, former clients, or companies that have considered ISN fully already. It would be my very educated opinion that most of the inspectors that sign up from here forward for ISN services will be in the 600 or less unit per year category and thus, Matt’s statements were not misrepresentations in any way.
As to the value of a lead, that’s a very different discussion:
I believe Porch can make a “lead” worth $25, and I’m saying that as someone who very regularly makes leads worth around half that in the same space and has for 15 years. The key difference between my way and theirs on this topic is that Porch seeks to make a client a buyer of a lot of things in a very aggressive approach, where I tend to focus on a single thing in a very soft approach. There’s no reason why they couldn’t get to the $25, but it has been an uphill battle clearly and will continue to be for a variety of reasons, all too complex to get into here. I may address at some point in the future – but whoever these “experts” being quoted are, their knowledge and experience level is zero next to mine. I’m not saying that to be cocky, I’m saying I’ve been handling these by the 10’s of thousands every month for a decade and a half and if someone is an expert outside of me I’d love to meet them (so I can hire them).
At our company, particularly the service offerings you find at www.InspectionSuccess.net as an example (one of literally hundreds of websites we promote similar concepts and related services in), we’re not looking to max out any sort of value or be a party to any aggressive solicitations. It’s just not our model, but we get an enormous volume and have amazingly high customer satisfaction. Our approach is very non-invasive. If there’s one tiny aspect of this report that is getting pretty close to an issue for Porch, the $25 lead value issue is definitely one of them but not for the reasoning that Spruce Point Capital Management suggests. The real issue is the level of solicitation that will be requisite to reach that $25 number and the market’s absolute and undeniable inability to accept that as a service in their (Home Inspection, largely) business. It’s not an impossible thing to fix by any means, the insurance play is a potential solution candidly, but if that’s not it then the next idea follows and Porch is already on version 9.0 in their business. I don’t think it’s the final version and I don’t think many investors would believe such either, especially with the lack of specificity in which the Porch team has presented themselves and these concepts.
Page 11: Hearsay at it’s Finest!
Posting one side of a lawsuit and what the plaintiffs want to say isn’t evidence of much generally, and here you simply have a sales pitch with a bit of fluff being described by someone with Buyer’s Remorse. To say one has 50% of homebuyer data isn’t difficult. I buy enough data and bring in enough data that here at my company we may even have far greater than 50%. “Providing services to over 15% of U.S. Homebuyers” wasn’t likely a false claim either – it just wasn’t defined in the same way to Kandela as it was for Matt when he said it, and I say this because I’ve heard him say it.
In Matt’s view, he’s “offering services” when a home becomes a record in a database. The client doesn’t necessarily know of Porch, engage in any actual services from Porch, and the user of the SaaS service may very well have all access to any further interactions from Porch completely turned off and restricted...but they’re “a client”. Kandela’s definition was very different.
It’s salesmanship folks. Can’t blame him. To the ones that were sold – Kandela – you didn’t ask the right damn questions because you went into a deal and didn’t know what you were doing. Then you posted a book online about how little you knew and how you didn’t ask the right questions in the form of a lawsuit.
Final word on this: Spruce Point identifies Kandela as an “acquisition target”. If we’re talking in a historical sense perhaps, but that deal closed long ago, dudes.
Page 13: Elon Musk would be Proud!
This page has some allegations about filings and such with regard to Matt’s prior positions. I can’t speak to those because I know nothing about them, so I’ll make the only two points I can on this topic:
1. I never particularly found Matt’s bio to be at the forefront of much of the messaging, I don’t think it’s why people invest, I don’t see why this is towards the beginning of this “Research Report”. We’re talking about one guy at a company of hundreds. I’m also going to assume, potentially wrongly, that their staff Counsel has perused their websites now and again. They are afterall a dot com so they probably care about this sort of thing especially in the course of going public. If there’s an inaccuracy and an actionable one I don’t see it.
2. Wow, Matt works at a company that loses millions of dollars and worked at a company that loses millions of dollars. This is newsworthy? If it is, I’m glad. I thought I was alone in the world focusing on a profitable venture, but let’s be real: this is the way companies in this space operate now. They either find their way or they don’t and they morph or the assets go to the next guy to take to the finish line (or maybe a totally different finish line than ever imagined). That’s the way things are and the losses are far less severe and proportional than some of the companies we seem to celebrate in the markets and society today. Now go plug in your Tesla so it can do that Christmas song dancy thing for me. I heard they turned their first “profit” this year. (I put that in quotation marks because to me it doesn’t count until that first $19 billion they lost is made up for)
Mysterious disappearance? This Spruce Point guy is a little dramatic. Seriously I hope while you’re reading my analysis here that you have their document open. Otherwise you’ll miss out!
Page 14: Sounds like Somebody else’s Problem.
If this is all true and as devious as represented, you’d think by now that The Active Network, their board, their investors would have shown up at my little brother Matt’s place with pitch forks. Not a peep from them even on the internet.
It seems that nobody sees it the same way Spruce Point Capital Management does at the source of the alleged victimhood. Maybe they’ll sue later. Maybe they won’t. If there are victims there, tell them to stand up for themselves. If you have information at Spruce Point Capital Management that will help these poor souls in a RobinHood-esque venture, use it to make it right with those that lost.
There’s not much mention in this “Research Opinion” of all the work that went into the current Porch dot com curiously. There’s no mention of this being totally different branding, a functional (what I believe to be Salesforce driven) database, or a website with actual content. Instead there’s just a picture of a single field funnel page from a third party app from many years ago. Not exactly a smoking gun and not an even 1% baked idea. If you were to ask the guy that invented Facebook, he’d tell you this page is conjecture.
Page 15: The Super Friends Unite!
The same people that brought you a previously unprofitable, highly funded, high growth company and ended said venture with bailout are back together? Delicious!
You’re pointing out the obvious, public information that in some ways on this level is a positive. It’s a cohesive team, they’ve been here (or near it) before, and in the worst of outcomes found the best possible solution.
Alright, that’s it, this billionaire is calling PRCH a buy! You’ve sold me Spruce Point Capital Management!
Page 17: BORING
I’m sorry, but Spruce Point Capital Management must have their collective heads in their asses. Read item #2 under Spruce Point Observations Today:
“With 2020 revenues in decline, Porch divested businesses and is pivoting towards acquisitions in 2021, many of which we believe have problems. Still no cash flow. 2019 divested revenues revised twice”
Sorry guys, but I have to call you out. This was published just days ago and there was just an insurance company purchase closed that at first look has some pretty decent revenue and over $1.8 million in EBITDA. Take a second look at the agency side, you’ll find a multiple of that.
Spruce Point Capital Management either has bad researchers or intentionally omitted this very public purchase, and probably the most significant move Porch has made to date, of Homeowners of America Holding Corporation for $100 Million.
By the way – the ownership of that company is now the proud recipient of $25 million in Porch stock, something they would not have considered lightly. I’m saying this as the owner of a risk management firm in the same category. (In other words, they wouldn’t accept the stock position if they didn’t believe it would pan out as they would be taking a 25% effective reduction in sale price if it didn’t)
This page is basically a bunch of junk from someone who doesn’t understand Porch’s business. At one point here Spruce Point Capital Management suggests that not including Google or Amazon as Porch’s competition is a failure – neither are even close to competition and if they had included either in an investment pitch it would have been foolish and embarrassing to present. As a sophisticated investor and high net worth individual that gets pitches all the time...I’d ask Spruce Point if they’ve ever seen a pitch where the little company doing under $100 Million in top line revenue coming in for some initial capital compared themselves to Google and presented Google and Amazon as the “competition” and if when this slide in the deck came up if they immediately threw the presenter out the window or if they waited until he was through with his garbage presentation? Spruce Point is just inexplicably stupid for suggesting this.
I’m not saying this lightly: As arguably the foremost expert in this space and this company (a near second might be Nick Gromicko, but he’d admit I’m ahead of him on this topic), Spruce Point Capital Management has no fucking idea what they’re talking about.
Are things Awesome at Porch? No, much to be desired in fact. But we’re only 17 pages into this “Research Report” and while they might bring up a couple areas of concern any investor should consider, 99% of the content is completely bogus and badly sourced.
Moving on... but seriously, you guys at Spruce Point Capital Management are Certified Idiots. I’m saying this out of love – please make sure your next report isn’t full of crap so you can properly take on scams in the marketplace. Seriously, I like the idea of what you want to accomplish in your mission but this is just a disgustingly inaccurate hit job. I feel like there might be a noble cause for what you set out to do but you lost your way in this one.
Page 18 & 19: So What?
Companies are good at saying how relevant they are if they want to be and if it makes sense to the audience. I don’t have a public audience, if I did I’d post numbers of processing through our platforms that were five times what Porch did here. Heck, I could make it 1000+ times what Porch did if I went by the value of the assets being transferred in every transaction in which we play a small role and do so proudly. In reality our products and services like RecallChek, SewerGard, and inspection warranty programs have much more impact and reach than anything Porch does today, but I don’t find their representations bad here and certainly nothing offensive by comparison to other publicly traded companies.
Let’s take this “$2.2 billion of gross services” nonsense off the table as some sort of offense, because it isn’t. ADP, the payroll processing company, touts “$1.1 Trillion: Amount ADP moves through the U.S. Tax and Banking Systems Every Year.” Everyone with a brain knows that ADP isn’t claiming $1.1 Trillion as any real benchmark here and that if they want to know their revenues and profits they can look at their very public financials (NASDAQ: ADP).
The rest of this is public information from long ago that no one is unaware of. Do I believe it should have ever been represented as “GMV”? Absolutely not. That was a mistake and a cliché one on Matt’s part.
Page 20: Somebody Forgot to update a PowerPoint...Better call in the Feds!
On this page the $40 Million in debt versus $50.8 Million number comes into play from an investor presentation. This isn’t from any filings, the filings represent $50.8 Million.
Is there an explanation? If I had to tender a guess, I’d say it was a very busy time around the SPAC closing for Porch and that the investor presentation, likely the one in video format from their website, hadn’t been updated after some numbers shifted in the process of getting verifiable and certifiable numbers for their public launch.
It’s a bit sloppy, but once again a very minor issue on a Billion Dollar valuation company and one that was corrected in filings which are the ultimate compliance measure.
Oh that reminds me...I’m a billionaire! I’m going to have to invite little bro Matt as well to this party. He and I and the Spruce Point Capital guys can work this out in person at my place here in beautiful Carmel, Indiana.
Page 21: Forgetful Analyst at Spruce Point Capital Management.
Sometimes the answer to the question you have is right in front of you. When you look at all the red ink it can appear very negative from any perspective, but let’s focus not on what Spruce Point Capital chose to highlight but rather what they chose not to: The FY End burn rate. Porch basically went from nearly $30 million to almost $50 million in Operating Cash Burn.
What is “Operating Cash Burn”? That’s when you spend actual dollars from an actual bank account. It’s not theoretical, and despite on the very same page Spruce Point alleging that Porch was “Falling apart”, it increased spending. It’s illogical that this would have been a go-to position if the lights were about to be turned off and in fact this sudden burst in activity was associated, directly and indirectly, with the SPAC closing (and anticipation of such). I’d be willing to bet when you pick through the financials in hindsight you’ll see some movement on deals once the SPAC was approved and a lot of expenses associated therewith.
Page 22: The Best page of this Report! I mean that Spruce. Well done.
Okay, no hiding it: Palm-Tech is pretty much obsolete. The good news is it was likely dirt cheap, and well below the required disclosure mark for a public company. Was it a move just for a PR boost at some point? Likely. Was it a “failure to disclose”? No, shame on you Spruce Point for implying such when you know better.
iRoofing hasn’t made much movement. The roofing business is slowly being taken over by other players like www.OneClickContractor.com. Maybe it becomes a focus at some point, maybe it is internally already. We’ll see what they come out with in the future.
I can’t speak to v12. Haven’t seen anything about it since. I don’t have a very positive view of this division candidly. Nothing worth going into at present, but I don’t see it being a part of Porch’s success.
HireAhelper seems to have been rightfully reduced in their earnout. Is this a report on good news?
Kandela is still a part of Porch. Keep talking about the little lawsuit Spruce Point, doesn’t change that fact (that they are still in business together) which outweighs the suit in my very educated mind on the topic.
Serviz. Just a little groundwork for more sales funnels. Nothing bad there. Didn’t work out, moved on instead of letting it be a drag. It’s not the only cut and run on their books and you seem to have missed a few.
Done.com – 3 year earnout on a funnel. This is smart everywhere else, but seems to be a criticism for Spruce Point. Bozos.
Robin Lawncare – No conozco.
ISN – Oh, that concealing of ownership was very well punished by older brother here. Little bro Matt still gets whipped for that one, but improvements (and vast ones) were made very quickly. The reference to comments from 3-4 years ago is a nice trick when you’re trying to make it look new. Turn it into a link so people don’t look so hard!
Home Owners Network – was never a factor. Was an abortion. It’s dust, so what? How does this apply to a SPAC that hasn’t heard that name since years before going public? Should they disclose if Matt took a Tylenol in 2016? Where’s the line exactly.
Page 23-27: Porch Updated a Website! Got ‘em!
There’s no mistaking the fact that Porch’s partner list has shrunk. It’s happened publicly. You can go on pretty much any website and see what it looked like historically, that’s known, and it’s certainly known by Porch.
Reality is that Porch has changed its model. At one point in time, from my perspective, they were a wannabe mini HomeAdvisor, somewhat smartly focused on particular services they could scale. So why did they have a Wayfair logo? Because Wayfair could sell their services for hanging a picture or building a piece of furniture or some other simple, unlicensed service.
Reality set in, it’s not easy to manage thousands of contractors (trust me, I do that as well for a living and have for 20 years quite successfully), and to do so on a level acceptable to these retailers that have generally a much simpler interaction with their clients...yes, that model was doomed. It was obvious from the start.
Porch pivoted and certainly haven’t gotten it perfect yet, but the notion that any company keep reiterating publicly things that didn’t work out in the past is absurd. Of course they’re going to put their best face forward and they should.
This whole section from Spruce Point is just old, irrelevant history packaged as some sort of news. None of it is secret, none of it wasn’t disclosed, none of it is relevant today.
Page 28: These Guys Don’t Get it.
Porch is not competing with Google. Porch is not competing with Amazon. You have to be seriously unaware to think otherwise and this particular component of the Spruce Point Capital Management’s “Research Presentation” in my view destroys their credibility for anything they might say in the future.
Page 29-30: Okay, That’s Fair.
If Porch says they have an Ebay partnership, they’re not loud about it. If it has a disconnected phone number on Ebay’s site, that would be a problem for me if I were Ebay. As stated above...that model wasn’t going anywhere anyhow. It looks like some websites need to be cleaned up. Same goes for Overstock.
On a good note, I’m still a billionaire in PRCH valuation terms AND these things out there sure don’t smell like “concealment” to me. If there was a crime they didn’t even try to cover their tracks.
Page 32-36: Rapid Fire Responses
1. Yes, you’d be correct in saying connection with a home buyer earlier in process might be more valuable. Value of consumer discussed above from Inspection Point on.
2. InterNACHI doesn’t do partnerships, they just say they do. Nick hasn’t made a commitment to anyone in the last decade beyond his new wife. There’s no conflict, I get sued sometimes just like Nick Gromicko, we both tend to always win too. To paint Nick Gromicko’s “partnership with Porch” as some sort of fallback failure position with a crazed litigious madman is pure ignorance. You’re speaking about the founder of the largest Inspection Association here and a person with infinite credibility in this space.
3. I don’t recall if HON was included in the 2017 moves, but if it was now I’m just sad. The owners of ISN, HON, etc. includes many friends of mine and if the grand total was $20.3 million in acquisition costs including “cash and non-cash (porch stock)”...well, I hope the stock has worked out well for them since. Maybe I’ll see them at an airport in their private jets. Of course if their jets are bigger than mine I might go from sad to jealous, we shall see! Seriously if this number is inclusive of all of those purchases that year I’m both sad and a little angry. You look at these two things, you slice and dice them for a few years, massage the message, turn $20.3 million (some part of that in promises) into a $1 billion valuation with people we’ve never heard of in the inspection industry being noted as selling shares in the millions. It’s mind blowing for me and my people (the inspection types, I’m one of them). It’s just outer space unreal level 5.
4. The inspector comments are way out of context and trust me when I tell you some of them say some crazy shit on the InterNACHI forum. Not exactly a braintrust there some days.
5. The “Partnered with Porch” doesn’t sit well with Inspectors. That’s a fair criticism. It has become the motto of those that sold to Porch, usually in some exotic way as now reported publicly, and sat well solely with those close to and involved in the transactions. It’s an immense PR challenge and one that Porch didn’t shy away from to their credit.
You’ll excuse the brevity. I’m not here to teach Spruce Point about an industry it clearly has no awareness of. The above aren’t statements of uncertainty and they come from a very credible source. Feel free to Google me if you need help on the credibility side. The YouTube videos, writing, and books from the last two decades of my very personal and passionate involvement in this industry are virtually endless.
Page 37: “We believe...”
I believe that most people can’t recall specifics. I only know this from my personal experience as a human. This page is just a few minor (by a few months) blunders from Porch execs or misstatements that could have easily been unintentional and were all later corrected in filings.
It should be noted that some of these deals were consummated in the time period represented, closed on in the time periods reported. I really don’t see an offense here.
Page 38: He said “Member”.
If Spruce Point was looking for something competitive, you’d think they’d find something competitive. Instead they post about a small coaching group (200-300 members maybe) along with a picture of an old blog post nobody read about a service they are likely reselling from a third party and I can’t find any evidence has ever actually been utilized.
InspectionGo is respected in the industry, no doubt, and I’m their biggest benefactor. I’ll be speaking at their annual event next week and we’ll have half a dozen booths. We’ll be involved in their discussions. They’re great but the portrayal of them as a threat to Porch is inaccurate. They may take a swipe at an ISN knockoff and it may get utilized by some, but InspectionGo’s focus has been training, call center, and outsourced accounting and they’ve done very well with this by all accounts. Are they a Porch supporter? Not really but a direct competitor or threat? The creator of this document from Spruce Point was just confused or did little research.
A true threat would be:
Everything at www.InspectionSuccess.net
HomeGauge and Home Inspector Pro enhancing their office software
Forthcoming integrations with NXTInspekt that will put nearly every major software provider integrated
Yes, we have a relationship with Porch AND we compete with them vigorously in several regards. Makes life interesting.
I guess a Google search or 5 minutes on Facebook was too much work for Spruce Point Capital management in preparing a sloppy hit-job Research Report.
Page 39-41: Those U-Haul guys must be Animals
I can’t speak much to this one, but if trade secrets were taken then that shall be punished. I’m not sure that little brother Matt nor the team at Porch would have been aware of these accusations prior to being served. We’ll see how it works out.
If it was a $2 million business, it was a $2 million business. Disclosed well prior to any investments from the public. If HAH settled for half the amount due and are unhappy about it, they don’t seem to have made much noise.
Theory about this half payment: If the U-Haul claims were potent, perhaps the $2 million is being held back for a settlement there. If the acquisition docs were written up correctly, this would have even been potentially a provision.
Page 43-46: Over my Head.
When I don’t know much about a subject matter, I don’t comment. Much of the accounting issues here are simply outside of my expertise, but I maintain my opinion (maybe the better word is theory) that Lowe’s didn’t want to be associated with the controversial SPAC market. It’s a downside risk and they are a very conservative company and this didn’t start out that way.
Page 47: How dumb is Spruce Point Capital Management?
Dude, read their guarantees. They’re not like our Warranties that pay out in the tens of millions for our clients and smart home buyers that choose the right inspector every year. It’s a weakass guarantee that covers virtually nothing and you could have read it, but even if you didn’t take the time to read and understand a document you can see the most important part at the very top of the document: 90 Days. Any and all losses would be reflected within the same fiscal year with a run rate established by year 2. The most that could possibly be trailing is a couple months. This is a non-issue, you knew it when you published it, shame on you.
At this point I have to ask if you believe your readership is just Gullible?
Page 48: Okay, that’s Weird.
Perhaps Porch believes they will be a “work from home” opportunity. Maybe they largely already are and evacuated their headquarters the minute someone sneezed some COVID on a cruise ship after playing with that monkey from Outbreak. Perhaps Matt Ehrlichman himself is responsible for COVID and utilized it to ensure his employees would give their homes as work space in exchange for employment diminishing his office rent to nothing at all.
Either way, these are very small numbers to be pointing out. Find some meat at least if you’re going to try to burn someone.
Page 49: Every company on the market today seems to be focused on Gross Profit. It’s stupid, but what do we do, short the entirety of Wall Street?
Page 50: See responses above.
Page 51: See responses above.
Wait a second...you’re just repeating facts you know aren’t represented correctly for dramatic effect aren’t you?
Page 52: You did it again. See above.
Page 54: One Star Reviews!
Every big company has some bad reviews. Now let’s move on to this Revenue Distribution: You can’t call actual revenue a “buzz acronym” as if it weren’t revenue. Again, you must feel your readership is gullible as hell.
Page 55: See above, once again there is no “tailwind” driving anything other than the typical lunacy of the stock market. I feel like you guys could write a report like this about almost any company after reading it. Are you guys on Reddit by chance?
Page 56: Irrelevant nonsense.
Page 57: Repeated issues dealt with above. You know, your reports could be 30 pages, right? Well, zero pages I suppose if you stuck to the facts.
Pages 58-61: Irrelevant. You can find examples that are supportive as well, in hindsight.
Page 62: You might be right. Over my head. (Again, it’s good to admit when you’re not a subject matter expert)
Page 63: The Self-Fulfilling Prophecy, Laid Out in Detail
Look at this chart for a moment and pretend it is an Excel worksheet with all the calculations made and the data in front of you inserted. Now imagine arbitrarily replacing one of four numbers with whatever you wanted to justify. Those fields would be:
- Enterprise Value
- Equity Value
- Price Target
- % Downside
You want -71% Downside? Just insert that number and it will automatically calculate an Enterprise Value of $350 Million. That’s essentially what someone did here to paint a picture of a value that was lower than the current share price and likely in line (or just a little past) where they either have a short position ready to trigger or would like to buy up some shares (though the latter seems unlikely in this case).
If you believe in an alternative outcome, you could put a positive number in the Downside field and see growth to $2 Billion or $3 Billion or beyond. Much depends on what Porch accomplishes over the next 12-24 months and solid strives forward can serve to largely eliminate the potential doom and gloom being suggested at the top of page 63 in the Spruce Point Research Opinion on Porch.
Is there an Alternative Outcome?
This may surprise a lot of people that know me and the thousands of home inspectors that work with our products and services each and every day but yes, I believe there is a path for Porch to get to profitability. Have they made some shitty moves historically? You bet. Do I trust Porch? Sure, as long as my eyes are open and Porch is in plain view. LOL. Do I believe Porch has anything to offer Home Inspectors? I’m going to truly blow your mind when I say they have two things to offer inspectors: ISN and America’s Call Center.
The Path to Profitability for Porch
Forget everything you think you know about Porch. Forget about them being an aggressive phone solicitation company, a wanna-be HomeAdvisor, forget the seemingly endless list of retailers where they wanted to be a contractor fulfillment resource and certainly forget some of these tiny acquisitions that don’t truly fit into the future puzzle...just forget all of it because Matt did something brilliant in not only launching a nationwide licensed insurance agency over the last couple years, he bought an insurer too and likely just added $10 million or so in EBITDA. Take that and the few million ISN can throw off each year (which could be maintained with some greater efforts there), replace much of the standard overhead staff (or convert much of current staff) to digital, remote, commission based insurance agents fulfilling property and casualty insurance requests, and start cutting the cost side while building a book.
The twist for Porch, and why this could work so well and have such enormous upside, is that their systems are already connected via API to so many systems and providers (sure, sometimes connected through these exotic deals that gave Spruce Point the belief they were weak points worthy of inclusion in their “research opinion”) that they can take their existing platforms, change some field names, redirect the opportunities to an insurance team and they’re off and running and in many cases with most of the information necessary for quoting and binding policies already in the record.
Bringing customers to what very well could be the ultimate independent insurance agency could be quick and cheap if they were to utilize existing assets as advertising platforms. They may even be able to keep much of their current base in the “Porch Home Assistant” moving forward and efficiently bring closing percentages of Insurance Packages higher in that category.
It could be that in the next 12-24 months the insurance driven revenue becomes the catalyst for growth and Porch comes back around to their contractor network and building demand for it but this time in a much more reserved fashion and without national install deals until fully developed.
I say this as a subject matter expert: The chance of Porch creating $50 million+ in EBITDA on the insurance agency side alone is not an unlikely outcome and certainly easier to outline and justify than the doom and gloom from Spruce Point. It could also be done using facts
P. Nathan Thornberry is the CEO and sole shareholder of Residential Warranty Services, Inc., Residential Warranty Home Protection of California, RWS of Canada, Breeze Products, NXT Inspekt, PriorityLab, InspectorSHOP, Inspection Call Center, The Inspector Services Group, and a proud partner of thousands of hard working home inspectors throughout the United States and Canada and supporter/sponsor of every Association, Education Provider, Chapter, and Conference Host in the industry. Learn more about Nathan Thornberry at www.Nathan.tv and learn more about inspection offerings at www.InspectionSuccess.net.
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This message was edited 1 time. Last update was at 04/14/2021 12:59 AM EDT