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Goosehead Insurance, Inc  (NASDAQ:GSHD)
Q1 2019 Earnings Call
May. 02, 2019, 5:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Welcome to the Goosehead Insurance First Quarter 2019 Earnings Call. As a reminder, all participants are in listen only mode and the conference is being recorded. After the presentation there will be an opportunity to ask questions. (Operator Instructions)

I would now like to turn the conference over to Garrett Edson, Senior Vice President, ICR. Please go ahead.

Garrett Edson -- Senior Vice President ICR

Thank you and good afternoon. With us today are your hosts Mark Jones, Chairman and Chief Executive Officer of Goosehead; Michael Colby, President and Chief Operating Officer; and Mark Colby, Chief Financial Officer. By now everyone should have access to our earnings announcement which was released prior to this call and which may also be found on our website at ir.gooseheadinsurance.com.

Before we begin our formal remarks I need to remind everyone that part of our discussion today may include forward-looking statements, which are based on the expectations, estimates and projections of managements of today. The forward-looking statements in our discussion are subject to various assumptions, risks, uncertainties and other factors that are difficult to predict and which could cause actual results to differ materially from those expressed or implied in the forward-looking statements.

These statements are not guarantees of future performance and therefore undue reliance should not be placed upon them. We refer all of you to our recent filings with the SEC for a more detailed discussion of the risks and uncertainties that could impact the future operating results and financial condition of Goosehead Insurance. We disclaim any intentions or obligations to update or revise any forward-looking statements except to the extent required by applicable law.

In addition this call is being webcast, an archive version will be available shortly after the call ends on the Investor Relations portion of the company's website at www.gooseheadinsurance.com.

With that I'd now like to turn the call over to CEO, Mark Jones. Please go ahead.

Mark Jones -- Chairman, Director and Chief Executive Officer

Thanks, Garrett, and welcome to our first quarter 2019 earnings call. As we've done on previous calls, I will provide an overview of the quarter, as well as discuss our unique and proven long term strategy. I'll then hand the call over to Mike Colby, our President and Chief Operating Officer, who will update you on our ongoing technology investments and why we believe they further facilitate our competitive advantage and support high levels of sustained, rapid, organic growth. Mark Colby, our Chief Financial Officer will then follow and provide more detail about our first quarter results and our outlook. Before I review the highlights of the quarter, I would like to share a few thoughts given that we just celebrated the first anniversary of our listing as a public company. Because our disruptive and highly differentiated business model produces profitable organic growth at levels this industry has not seen, some have voiced skepticism over our ability to sustain these kind of results. We have continued this quarter to demonstrate that we can do just that. Just as we have done so over the past 15 years. There is no doubt the Goosehead platform works. Those that participated in our IPO a year ago and have remained shareholders have seen their investment nearly triple. Betting on ourselves has always been a winning proposition for the management team and we are highly aligned with our public shareholders as we continue to be the largest donors of Goosehead stock.

Now let's turn to the results of another successful quarter. The first quarter of 2019 saw us continue to build on the success of our banner 2018 and the many years prior to that with our rapid and responsible organic growth model clearly intact. On top of accelerated revenue growth in the quarter, we generated record adjusted EBITDA dollars and margins, thanks to consistent investment in our technology and our people. Our business model has proven to be highly durable and scalable and to produce sustained growth and profitability even while we continue to invest heavily to create shareholder value over the long-term. For the first quarter, our revenue and adjusted EBITDA grew to $23.1 million and $9.5 million respectively. This represents year-over-year organic revenue growth for the quarter of 59% driven by new and renewal business in both our corporate and franchise channels, as well as large increases in contingent commissions received.

It also represents adjusted EBITDA growth of 86% as strong and high margin contingent commissions and renewal business more than offset our investments in technology and talent. Total written premiums and policies in force, both grew by 45% from the prior year. We've maintained our industry leading client retention rate of 88%, and once again increased our world class net promoter score to 90, which is higher than any other company of which we are aware including Apple, Ritz Carlton, Nordstrom, Disney, Amazon and so forth. Our results benefited this quarter from strong contingent commissions. These represent annual bonuses we receive based on the growth and profitability of the business we add to many of our carrier partners.

I would like to highlight the important role our quality control department plays in helping us earn strong contingencies. Our 22 professional quality analysts review every policy before it is issued, to check for accuracy and underwriting compliance. Their important work enables us to be precise in matching the placement of risk with the appetite of each carrier and improves underwriting accuracy, thereby enhancing the profitability of the business we write with our carrier partners, that enhanced profitability in turn positively impacts contingent commissions available to us.

Our Q1 results are in part a testament to the value of our investment in quality. On the talent side, we ramped up corporate agent hiring in the first quarter onboarding net 17 new corporate agents and remain well-positioned to grow that number further in a seasonally strongest summer months.

In addition we added 44 net new operating franchises in the quarter, as our dedicated franchise sales team continues to source excellent leads from our pipeline to help maintain the pace of growth in that channel well into the future. As I've consistently noted, onboarding top talent and investing in our people are key drivers of our success.

Setting this on the path toward continued long term sales growth and expanding operating margins over time. We recently held our Goosehead annual team meeting for employees and franchise owners. This meeting is an event that brings our team together from all across the United States. As happens every year, I was struck by how many of our franchise owners and employees, some with us for a long time, some very recent additions, made a point to share with me that the opportunity Goosehead has provided to them has fundamentally changed their lives.

I am proud that we can have that impact and our goal is to keep transforming the lives of our team members for the better. We are clear about the fact that for us to create sustained shareholder value over time, we need to be highly accretive to every member of our business ecosystem, our employees, franchisees, carrier partners, referral partners and suppliers, and our management team is deeply committed to doing just that as we look to the balance of the year, we are confident in our ability to sustain strong growth and profitability. Given that it is still early in the year, we have not revisited guidance and are maintaining our full year guidance for written premiums and revenue. However, we will evaluate this outlook at the conclusion of the second quarter and thereafter and provide further updates as appropriate. I'll now turn the call over to Mike Colby to update you on the progress of some of our recent technology initiatives.

Michael Colby -- President and Chief Operating Officer

Thanks, Mark, and hello to everyone. During the first quarter we continue to make significant progress on the technology roadmap we've laid out on previous calls. Today I'll provide an update on the major technology initiatives we've discussed previously and also discuss some exciting new initiatives under way. As we noted on our prior calls the integration of our comparative rating application into our sales force platform and implementation into our sales operations is a key initiative, and in the first quarter we successfully implemented in eight states. Mostly in the mid-Atlantic and northeast regions and we're now covering states where over 80% of our new business revenue is generated. In April. We launched five additional states Ohio, Indiana, Missouri Colorado and Washington making steady progress in our plans to have this technology implemented nationwide by the end of 2019.

In addition to the national rollout efforts of the integrated comparative rating application, we've worked to optimize the application and have made improvements that allow for insurance quotes to be generated three times faster than experience in our original version, closely related to our comparative rating application is the integration with property, driver and vehicle data providers. We were excited to announce that our annual meeting in April, the national release of our vehicle and driver data integration. Now with only several data points such as name, date of birth, and home address. Our agents can generate an accurate home and auto insurance quote for clients in a matter of minutes. It's enhancements to our technology platform like these focused on driving productivity in the client acquisition and onboarding process that create a highly differentiated value proposition for both our agents and our clients. Over the remainder of the second quarter we're focused on further advancements with our ring central voice solution and our service centers and franchise offices bringing exciting new features such as live chat, SMS text capabilities, and speech analytics into our operations that will allow us to further enhance the client experience.

Additionally, we're scheduled to launch our first artificial intelligence application focused on improving client retention in our service centers. This will provide actionable insight real time to our service agents allowing them to identify and address issues with our clients that will increase the likelihood of them renewing with us. And. While client is the single longest economic lever in our business. We believe this to be the first of many use cases for AI to assist with driving higher levels of performance across our entire business. Lastly, we plan to launch our first client facing technology interface by the end of the second quarter. This will be a portal for existing client to manage their accounts in a self-service capacity and engage us in their ongoing insurer's needs directly online. This is an exciting first step toward our ability to ultimately provide a complete quote to buying experience online to our clients. As noted before, we couldn't accomplish our strategic technology advantage without the enthusiastic buy in from our entire team which is a direct result of the forward thinking culture we've created at Goosehead.

We're never comfortable settling and we're intensely focused on developing new ways to outperform our competition. We continue to invest in our technology platform and innovate as an organization positioning ourselves to win big over the long term and we look forward to updating you on our progress on future calls. With that, I'll turn the call over to Mark Colby to provide some color on our first quarter.

Mark Colby -- Chief Financial Officer

Thanks, Mike, and good afternoon to everyone on the call. For the first quarter of 2019, we produced a 59% increase in revenues to $23.1 million compared to $14.6 million in the prior year period. This improvement was driven by strong growth in both our corporate and franchise channels from new and renewal business and increased contingent commissions. As a reminder, we received most of our contingent commission payments in the first quarter of each year. Total written premiums during the quarter which is a good proxy for the growth of our business grew 45% year-over-year to $146.9 million. At the end of the quarter, we had over 365,000 policies in force, a 45% increase from one year ago.

We continue to generate consistent year-over-year rapid growth positioning us well for long-term success. Total adjusted EBITDA grew 86% year-over-year to $9.5 million while adjusted EBITDA margin was 41% compared to 35% in the prior year period. Adjusted EBITDA and adjusted EBITDA margin growth was driven by higher margin renewal revenue in both channels and increased contingent commissions received, partially offset by additional employee compensation and benefits related to accelerated hiring of franchise sales agents, increased number of operating franchises and material investments and technology, as well as public company cost. As a reminder, the cost of most investments we're making in talent and technology run through the current P&L. However, these investments provide opportunities for improved sales and service productivity over time which should fuel sustained growth in long term margin expansion. Breaking down our results by channel. In the first quarter of 2019, our corporate segment grew revenues 52% over the prior year period to $12 million. This growth was driven by a 34% increase in new business revenue, primarily due to a rising corporate agent headcount of 52% from one year ago and a 20% increase in renewal revenue as the number of policies in the renewal term grew over the past year.

We also recorded a tripling of contingent commissions due to significantly higher total written premiums and producing increasingly profitable business for our carriers. Our net promoter score, which is the key metric of our service team, increased to 90 from 87 one year ago and was largely responsible for the continued levels of higher retention. As of March 31st, 2019 we had a headcount of 184 corporate sales agents, up 52% from one year ago, as we reenergized our recruiting efforts during the quarter.

As we've noted consistently, we manage the business on an annual and long term basis, but as a reminder because of our on campus recruiting the summer months are historically our largest for corporate sales onboarding. As our new agents become seasoned, ramp up their production and profitability over time, their production ultimately converts into higher margin renewal revenue.

Adjusted EBITDA in the corporate channel grew 140% over the prior year period to $4.7 million, adjusted EBITDA margin was 40% versus 25% in the prior year period. The growth in adjusted EBITDA and margin was primarily due to the growth in renewal revenues as well as continuing commissions received, which more than offset the company's continued investments in growth, in corporate sales agent headcount.

Our franchise channel generated revenues of $11.2 million in the first quarter, a 66% improvement from the prior year period driven by the Greater royalty fee generated on renewal business versus new business. Higher royalty fees from a larger number of operating franchises. And increased contingent commissions received.

As of March 31st, 2019, we had 501 franchises operating up 47% from one year ago. As we've noted previously the period from signing a franchise to launching, has lengthened due to additional best practice requirements, we've instituted to ensure stronger long-term results and productivity. That said our franchise pipeline remains robust and we are continuing to invest significantly in our franchise sales team to continue the channel's rapid growth, which we believe will pay off very well for the company over the long term.

Adjusted EBITDA for the franchise channel in the first quarter was $5.6 million, up 80% from the prior year period, while adjusted EBITDA margin was 50% versus 46% in the prior year period.

The increase in adjusted EBITDA margin was driven by higher margin royalties related to policies in their renewal terms, and higher contingent commissions received. And partially offset, by the delayed recognition of initial franchise fee revenues and the additional investment in our franchise sales department.

Net income in the first quarter of 2019 was $7.3 million compared to net income of $3.8 million in the prior year period. Included in our first quarter results, were approximately $368,000 in equity based compensation cost.

When adjusting for those expenses, adjusted EPS in the first quarter of 2019 was $0.18 per share. As of March 31st, we had cash and cash equivalents of $18.4 million, as well as $48 million of debt outstanding.

On April 1st, we paid a special cash dividend of $15 million or $0.41 per share, to holders of record as of the close of business on March 18th. Finally, as Mark noted in his remarks, we are maintaining our four year 2019 outlook with respect to our total written premiums, and our revenue.

Total written premiums for 2019 between $700 million and $725 million representing organic growth of 38% on the low end of the range, and 42% on the high end.

Total revenues for 2019, between $80 million and $85 million representing organic growth of 33% on the low end of the range to 41% on the high end. As noted before, our 2019 revenue guidance is based on ASC 605 accounting.

We will report under ASC 606, on the Form 10K for the year end of December 31st, 2019. But we will provide a reconciliation at that time so investors can understand how we would have performed under a full year ASC 605. With that. I thank you for your time, and we'll now open up the call for Q and A. Operator?

Questions and Answers:

Operator

Certainly. We will now begin the question-and-answer session. (Operator Instructions) Our first question comes from Christopher Campbell with KBW. Please go ahead.

Christopher Campbell -- KBW -- Analyst

Yes. Good afternoon, gentlemen.

Michael Colby -- President and Chief Operating Officer

Hey, Chris.

Christopher Campbell -- KBW -- Analyst

Congrats on the quarter.

Mark Colby -- Chief Financial Officer

Thank you.

Christopher Campbell -- KBW -- Analyst

I guess you had just a few questions mostly around the contingents and things like that. I guess -- how much of the revenues were contingent this quarter? I think Mark said something in his script about contingency being three times what they were a year ago.

Mark Jones -- Chairman, Director and Chief Executive Officer

That's about right. So combined there were $7.50 million for this quarter compared to $2.8 million in the prior year quarter.

Christopher Campbell -- KBW -- Analyst

Got it. And then I guess just I mean that kind of what drove us to that. And I guess all your contingents now in the first quarter and not in the other three quarters. Is that how we should think about timing of those.

Mark Jones -- Chairman, Director and Chief Executive Officer

Most of our contingencies are received in the first quarter. Historically there's been one carrier that we received either the end of the third quarter or beginning of the fourth quarter and that's still on the table.

Christopher Campbell -- KBW -- Analyst

Okay. Got it. Now thinking about like second quarter there shouldn't be any contingents. Correct? So we should see some kind of margins.

Mark Jones -- Chairman, Director and Chief Executive Officer

Nothing material. Sorry, Nothing material.

Christopher Campbell -- KBW -- Analyst

Okay. Got it. And then that $7.5 million, how does that break out between franchise and then the corporate channel?

Mark Jones -- Chairman, Director and Chief Executive Officer

So there'll be some more detail in the queue about that. But -- 3.2 for corporate and 4.2 for the franchise channel.

Michael Colby -- President and Chief Operating Officer

What's been interesting Chris, this is Mike, is that we you look back over 2018, 2017, two of the worst catastrophic loss years that we've seen on record, I think it's a testament to our quality control efforts that we've been able to navigate through that and see increasing contingent commission revenue every year since then.

Christopher Campbell -- KBW -- Analyst

Got it. And then the mortgage pipeline I guess like that was an issue and I mean have you guys kind of rectified that. I mean have you guys got to back to where you were before?

Michael Colby -- President and Chief Operating Officer

So if you look at our our market shares, specifically in Texas, which is a pretty good proxy for most of our businesses, we went from around 11% market share around in the fourth quarter to 14% for the first quarter of 2019. Our ability to kind of pivot and start grabbing share is really starting to pay off.

Christopher Campbell -- KBW -- Analyst

Got it. And then are you seeing similar trends in like kind of your newer states like California, Florida, Illinois?

Mark Jones -- Chairman, Director and Chief Executive Officer

Yes, it's a much smaller sample size that we've seen success nationally.

Christopher Campbell -- KBW -- Analyst

Okay got it.

Michael Colby -- President and Chief Operating Officer

The market share outside of Texas, Chris, doesn't even register.

Christopher Campbell -- KBW -- Analyst

Okay, Got it. And then just one last one on the franchise fees. I know that that helped drive revenues and franchise in 4Q, didn't look like you would mentioned this time. I guess what trends are you seeing on the initial franchise fees between first quarter this year versus last year?

Michael Colby -- President and Chief Operating Officer

So as we mentioned in Mark's remarks and my remarks there is -- you're seeing kind of a delay in people coming to training and that's on purpose. We've changed a lot of the onboarding tactics to make sure people are fully ready to commit to this business model in full before they start with us, and so what we've seen is kind of a little bit of delay toward the end of last year and that's continued into this year.

Christopher Campbell -- KBW -- Analyst

(Inaudible) a little bit more. Now I know you guys are seeing like your retention was like probably a little bit better than you expected in franchise. So I guess just what is the impetus behind delaying the franchise shale if retention is lower than where you would plan.

Mark Colby -- Chief Financial Officer

Yeah, Chris, I mean it's about -- I mean what we're focused on is we're focused on successful launches for our agents. So there's a lot that goes into them. Having a successful exit from where they're at currently to successfully onboarding and launching with us. So our primary concern is not about expediting that process to expedite the recognition of our franchise fee revenue. It's about a quality experience for that agent. But you know if you look at our pipeline of our franchise agents it's very strong. We're recruiting better and better agents every year, we're launching them more successfully every year, which I think kind of justifies our approach there. Again we're focused on the long term value that those agents can create over a career with us and having a successful launch provides just a lot more kind of lifetime value from that agent rather than focused on that initial franchisee fee.

Christopher Campbell -- KBW -- Analyst

That makes sense. And then just one last one if I may, what retention trends are you seeing in the corporate and franchise channel?

Michael Colby -- President and Chief Operating Officer

Very consistent trends with what we've seen historically.

Christopher Campbell -- KBW -- Analyst

Well, thanks for all the answers. Best of luck in the second quarter.

Mark Jones -- Chairman, Director and Chief Executive Officer

Thanks, Chris.

Operator

(Operator Instructions). Our next question is from Jay Cohen with Bank of America, Merrill Lynch. Please go ahead.

Jay Cohen -- Bank of America Merrill Lynch -- Analyst

Thank you. Chris, asked a lot of my questions. Just one follow up on the contingent question. Is it fair to say there was nothing unusual in the contingents in the first quarter, in other words as we look into 2020, that should kind of grow with your earnings, there's nothing unusual this quarter. Is that fair?

Mark Jones -- Chairman, Director and Chief Executive Officer

That's fair to say. We did have new contingency this year. But there's -- we have every reason to believe that that will continue into the future.

Michael Colby -- President and Chief Operating Officer

Proportionate with our total written premium growth and the value that we're creating for these carriers. So I agree with that.

Mark Jones -- Chairman, Director and Chief Executive Officer

Jay, it's Mark Jones. One of the things as you know the way that loss ratios are calculated, they're based on earned premium as oppose to written premium. So when you're in high growth mode like we are just the math works against you a little bit from a loss ratio standpoint. What we're really realizing or you're seeing run through our financial statements is the value of our investment in quality, because it is that precise risk placement, it is the underwriting compliance that improves loss ratios and that has overwhelmed just the arithmetic where we're measured on loss ratios based on earned premium as opposed to written premium.

Jay Cohen -- Bank of America Merrill Lynch -- Analyst

Got it. On a quality issue, I mean, it's a very interesting point. I'm wondering is there some measure that you can say, for example, a certain percentage of your business goes through with a mistake versus a typical independent agency. Is there any way you could compare your quality quantitatively versus a typical agent?

Michael Colby -- President and Chief Operating Officer

Our carriers don't make that available to us, and it's beyond just errors in the underwriting process. It's also about identifying the type of risk that the carrier wants and being able to place that risk with precision. So there's a lot of risk that a carrier may not want on their books but their system doesn't prevent it even if it's underwritten accurately doesn't prevent it from being written. And I'd say that's probably the biggest value added component of quality control is being able to understand kind of with our partners what are their business objectives, what are they seeing kind of real time in their loss trends and being able to react very quickly to that. If a carrier files array and they see maybe quickly that their position for higher losses than expected and they communicate those details with us, we can make a systematic change in our agency management system and that will be the last time we place that type of risk on their book of business. So I'd say there's obviously a component of accuracy and holding to the underwriting guidelines, eligibility guidelines, but really it's about understanding what they're seeing, be profitable for them and being able to quickly react to that and place that type of business with them.

Jay Cohen -- Bank of America Merrill Lynch -- Analyst

Just a follow up on that, because you have that capability and I guess I could argue most independent agents really just couldn't do it just because of their size. Are you able to get, I'll use the word better more attractive terms for your contingent deals with the carriers in a typical mom and pop independent agent?

Mark Jones -- Chairman, Director and Chief Executive Officer

I think absolutely. One is I think the mom and pops just typically are at a scale where they would really kind of have a material benefit from those type of arrangements, but it's about two things. It's about growth, it's about underwriting profitability. And you have to be able to deliver both to really maximize your opportunity there and that's where we shine. (Inaudible)

Jay Cohen -- Bank of America Merrill Lynch -- Analyst

Right. Exactly. Last question on the franchise side. So, you just passed one year as a public company and I'm wondering if you could just reflect on any surprises, either good or bad that you've had in the franchise model?

Mark Jones -- Chairman, Director and Chief Executive Officer

I don't think being a public company has impacted us -- impacted our franchise business. It's the people that are involved in running the public nature of the company are very focused. It's a very specific group and everyone else is business. They're focused on executing their business as opposed to focus on the share price. I mean I explicitly tell people don't look at the price of the stock, because it doesn't -- you know looking at that isn't going to help. What's going to help is you doing your job. And we reiterate to people that we're here for the long term, the management team is here for the long term. There's no mercenaries among us, and we're going to continue to sort of focus on reaching toward our full potential, which is industry leadership. Being a public company has an impact at that other than sort of raising people's aspirations, I think a little bit about the kind of organization we are. But there's been no distraction associated with it.

Michael Colby -- President and Chief Operating Officer

I agree with that completely. I would say anecdotally, Jay, that maybe there's a heightened sense of awareness from our franchise candidates as we're kind of marketing in these new territories and I would say just feedback from kind of people in that process, the additional level of transparency being a publicly traded company and having kind of our filings that they can read through has been -- has been positive.

Jay Cohen -- Bank of America Merrill Lynch -- Analyst

I probably miss phrased the question. I don't mean really the effect of being a public company. I'm just saying we've known you for about a year. You've been scrutinized by new people for about a year. So I just want to get a sense as you look back over the last year, forget the fact that public, not public, what has surprised you either good or bad in the franchise channel?

Mark Jones -- Chairman, Director and Chief Executive Officer

I don't think there's anything in the franchise channel. The only thing that has surprised me and I chalk this up to rookie mistake as a newbie public company CEO, was on our third quarter call in the interest of trying to be transparent, I noted that we were facing some housing market headwinds, and then I tried to go on and explain what we were doing to address that. No one listened at that point. They just heard housing market and we saw some sell off in our stock. When we announced the fourth quarter we were able to sort of back that up, back my statements up from the end of the third quarter, and you know tell people that, yes, our system works. We fully recovered all of the volume that we -- that was impacted by housing market headwinds. And so you know, I think I learned a little bit how to talk to the investing public a little bit more, but other than that there hasn't been a lot of surprises.

Jay Cohen -- Bank of America Merrill Lynch -- Analyst

Got it. Thanks.

Mark Jones -- Chairman, Director and Chief Executive Officer

Thanks, Jay.

Operator

This concludes the question-and-answer session. I would like to turn the conference back over to Mark Jones for any closing remarks.

Mark Jones -- Chairman, Director and Chief Executive Officer

I'd just like to thank everyone for joining us on this call. We appreciate your support. And I'll just reiterate our management team's commitment to delivering a great business -- something special. Thank you.

Operator

This concludes today's conference call. You may disconnect your lines. Thank you for participating and have a pleasant day.

Duration: 35 minutes

Call participants:

Garrett Edson -- Senior Vice President ICR

Mark Jones -- Chairman, Director and Chief Executive Officer

Michael Colby -- President and Chief Operating Officer

Mark Colby -- Chief Financial Officer

Christopher Campbell -- KBW -- Analyst

Jay Cohen -- Bank of America Merrill Lynch -- Analyst

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