Good day, ladies and gentlemen, and welcome to the Goosehead Insurance First Quarter 2018 Earnings Conference Call. [Operator Instructions] As a reminder, today's program is being recorded..

And now, I'd like to introduce your host for today's program, Garrett Edson, Senior Vice President of ICR. Please go ahead. .

Thank you, Jonathan, and good afternoon. With us today are your hosts, Mark Jones, Chairman and Chief Executive Officer of Goosehead Insurance; and Mark Colby, Chief Financial Officer. In addition, Michael Colby, President and Chief Operating Officer, will be available during Q&A..

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 In addition, this call is being webcast and an archived version will be available shortly after the call ends on the Investor Relations portion of the company's website at www.gooseheadinsurance.com..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

Thanks, Garrett, and welcome to our first quarter 2018 earnings call and our first call as a public company. We're excited to be with you today. And let me thank everyone for participating on our call and for your interest in Goosehead.

I will provide a bit of an overview on our company and Goosehead's competitive advantage; and our CFO, Mark Colby, will follow and provide some details about our first quarter results, absent per share details since we were not yet a public company in the first quarter..

Given that we are a newly public company, I think it would be helpful to spend a few minutes providing some context on our business and share how we've created a company that is bringing meaningful value to our clients and to our shareholders.

We've built one of the fastest-growing companies in not only the insurance industry, but also relative to most any consumer-facing business. Goosehead has demonstrated that it can and is disrupting one of the largest financial industries in the country, changing how business is being won.

Our clients are benefiting and ultimately, our investors are going to benefit as we focus our efforts to become an industry leader over the long term..

Goosehead Insurance is a pure play personal lines property and casualty insurance broker. We primarily sell homeowners insurance and auto insurance as well as other insurance [ like ] -- to consumers throughout the United States.

Over the last 15 years, we've built a unique business that is disrupting the massive $300 billion a year personal lines insurance industry in terms of delivering exactly what consumers both desire and need from their insurance broker.

We've accomplished this by successfully leveraging our extraordinary human capital and our innovative technology to provide a world-class client experience. Importantly, our business model positions us to drive strong and highly predictable revenue growth as well as long-term margin expansion as we scale our business..

My wife, Robyn, and I founded the company in 2003 starting with a blank sheet of paper. After multiple poor experiences with many insurance agencies, we knew there had to be a better way to deliver personalized insurance products to consumers and provide a full service experience that we and many others really need.

From day 1, we put the client at the center of our universe and focused relentlessly on meeting their needs and giving them an effortless experience. By starting with a blank slate with no legacy ideas or costly systems, we've fostered a culture of innovation at Goosehead.

We were not locked into an outdated business model that was built around what's best for the insurance company, rather, we encouraged our smart and creative team to always think outside of the box to constantly enhance our business model in all aspects.

Whether it's challenging and eliminating industry norms or finding a better delivery mechanism that results in a consistent outstanding client experience or creating even more efficient operations, we're able to invest capital and create a company that has significant barriers to entry.

The result is that today, we're a profitable company that now has 7 corporate sales offices and over 400 franchise locations, either operating or under contract. And what's even more exciting is we're just getting started..

With that background in place, I want to shift to how we went at Goosehead over the long term. As I noted before, we compete in the $300 billion personal lines insurance industry that has really struggled to focus on meeting the needs of the consumer. In the industry, about 1/3 of the market consists of independent agents.

The other 2/3 are captives and direct carriers. Those channels generally sell only one company's product, but in the modern world, consumers have come to expect choice when buying almost any product or service.

These single carrier companies survive because of their enormous scale built over time, which allows them to invest billions of dollars in the blunt instrument of advertising, focused primarily on price. The result is a chronically underinsured American consumer..

Goosehead succeeds in this environment because we've created a unique business model supported by extraordinary human capital.

We offer a broad product choice for consumers, over 80 insurance carriers and combine that with best-in-class service capability developed over time, that has earned us a Net Promoter Score of 87, and helping to ensure that our clients stick with us.

We know of no other company in the world with a comparable NPS to us, including some sterling names in the service world such as Ritz-Carlton, Disney, Apple, Amazon and many others.

A key for us is the separation of our sales and service functions, which allows our team members to do what they do best, our salespeople focused on selling, and our service people focused on providing top-shelf service. It's our clients that win in the end and that in turn drives our growth..

We sell through 2 distribution channels. Our corporate channel is staffed primarily with young, hungry and well-educated agents who're typically recent college graduates, and we continue to invest in this channel's growth. We recruit using the targeted approach I helped develop when I was worldwide head of recruiting at Bain & Company.

With that toolkit in place, we built strong relationships at core campuses to enable us to target and hire top graduates. It's a playbook. It is time tested and proven to work and is easily expandable to additional campuses as we look to drive long-term sales growth as well as expanded margins and profitability..

Notably, the average age of our corporate sales agent is 26 versus the industry average age of 55. So while the typical insurance agent is beginning to wind down their career, our team is just getting warmed up.

Alongside our corporate agents, we established our franchise channel in 2012 and have significantly ramped up this side of our business in the last several years to accommodate strong market demand for our value proposition..

Our franchises are managed primarily with more experienced insurance agents with an average age of 40, who became dissatisfied with their older platform. These are generally entrepreneurial-minded individuals, highly motivated to build a successful and growing agency, and we provide them exactly that platform to succeed.

We focused our recruitment in this channel on those producers who are doing very well, but are stuck in a model that is not consumer-centric, frequently box them down with client service issues and this thus does not reward top performers or allow them to scale their agencies efficiently and profitably..

Given that there are nearly 400,000 insurance agents in United States, we believe there is a tremendous pipeline of growth opportunity available to us. Our distribution channels are both supported by our centralized service function, which handles each client's case from beginning to end, and also has the ability to cross-sell additional products.

In any given month, our service team tease up a significant portion of our new business revenue. They are the backbone of our organization. Because they provide world-class service to our clients to ensure we retain them, our corporate and franchise agents can focus all of their efforts on new business generation..

Let me just add a little more color on our extraordinary service team. The majority of our service agents are college graduates and all are fully licensed insurance agents that can handle a client's case from cradle-to-grave. The large majority of our renewal revenue flows straight through to our bottom line.

Providing extraordinary service, really world-leading service is the key driver of our success in creating and maintaining strong renewal revenue streams, and our service team has helped us generate an MPS higher than any other company that we've been able to identify in the public domain.

And while all of our focus is on delivering quality, our service costs are a little more than 1/4 of industry best practice, think about that for a minute. A little more than 1/4 of industry-best practice. By providing the best friction-less client experience, we've also created an incredibly efficient and low-cost service operation.

This approach allows our corporate and franchise agents to rapidly grow their books to business and achieve success and compensation levels, otherwise, unachievable. Our model has enabled us to achieve industry levels of sales production..

Our sales and service functions are supported by a robust and innovative technology platform built on the salesforce.com platform and is a key enabler of our competitive advantage.

We've built our technology platform over the last decade, creating a company-wide custom management system that provides us with 360-degree visibility of our clients as well as cutting-edge data analytics that allow us to be smarter as we make business decisions.

We use our platform to drive new business generation and to provide top-shelf client service, and the best part is that the platform can easily evolve over time as we further refine our client service offering and business processes..

And finally, we have our centralized back office that focuses on training, marketing, quality control, policy fulfillment, quality carrier management for both of our channels. They ensure that our sales and service functions run smoothly with the common goal of putting the client at the center of our universe.

We win clients through an efficient and low-cost marketing strategy. We focus on anchoring the client relationship with homeowners insurance. This product tends to be an individual's most complicated policy and provides us the opportunity to expose new clients to Goosehead and our platform.

Once we win the client, we can then cross-sell additional policies such as auto and other lines. Our go-to-market strategy focuses on building referral partner relationships whose business can benefit from our value proposition.

We focused on point-of-sale transactions where we enhance the ability of professionals to get deals closed seamlessly and quickly..

Ultimately, we offer broad choices to our clients. Given our relationships with over 80 carriers, we can provide clients access to top-rated providers, enabling us to best match coverage levels of pricing.

The substantial new business volume we generate for our insurance carrier partners is buttressed by our quality control process that provides reliable and precise risk placement. So when the client obtains the appropriate amount of coverage, the carrier gets a high volume of exactly the kind of business they want..

All in, we've succeeded because Goosehead offers a very strong value proposition to everyone within our business ecosystem, whether it's our clients, agents, employees, franchise partners, carriers or referral partners. As a result, we've generated strong, sustainable and profitable organic growth..

Our 10-year premium CAGR is 33%. Over the past 5 years, our premium CAGR was 41%, and we've grown revenue at a CAGR of 35% since 2015. So our growth is accelerating on a larger base of business.

And because of our 88% client retention rate, we consistently have significant visibility into our ongoing top and bottom line growth given the amount of higher margin recurring revenue we generate each year..

We're focused on creating an industry leader over the long term. In terms of our growth plans, we're going to focus on 4 specific areas where we've already achieved considerable success but can ramp up to the next level. One, we'll continue to aggressively build our corporate channel.

In 2017, we grew our agent headcount by 61%, and we expect to continue investing heavily in growth in 2018. Two, we will further roll out our franchise channel in a strategic and disciplined manner.

Three, we will not rest, rather, we will continue to be thoughtful and creative about finding additional ways to innovate and enhance our client service and productivity. And four, we will support all of this by consistently investing in our technology and other structural enhancements, which has proven to be an effective approach to success.

We believe the investments that we're making now and in the future position Goosehead to achieve consistent and significant top line organic growth as well as considerable margin expansion over time, and ultimately create long-term value for our shareholders. It's an exciting time here at Goosehead, and this is a damn good business.

We appreciate all of your support..

I'll now turn the call over to Mark Colby to provide some color on our first quarter. .

Thanks, Mark, and good afternoon to everyone on the call. Let's go right into our first quarter results..

For the first quarter of 2018, we produced a 47% increase in revenues of $14.6 million, compared to $9.9 million in the prior year period, driven by growth in both our corporate and franchise channels from new and renewal business.

Total written premiums during the quarter, which is a good proxy for the growth of our business, grew 43% year-over-year to $100.9 million. At the end of the first quarter, we had almost 252,000 policies in force, a 33% increase from 1 year ago, and 11% growth from the end of the fourth quarter of 2017..

As a brief note, regarding the variability of timing of contingent commission payments we receive, we do not fully control the timing of these and thus, they can vary year-to-year and quarter-to-quarter.

In the first quarter of 2018, we received an annual contingent commission payment from one of our larger carriers that in 2017 had been paid during the second quarter. We wanted to note the shift in timing and that we would expect to receive a minimal amount of contingent commission in the second quarter of 2018..

Total adjusted EBITDA grew 74% year-over-year to $5.1 million, while our adjusted EBITDA margin of 35% rose from 30% in the prior year period.

Adjusted EBITDA growth and margin expansion was driven by higher-margin renewal revenue and contingent commission in both channels, partially offset by additional employee compensation and benefit related to higher corporate headcount and the number of operating franchisees..

Breaking down our results by channel. In the first quarter of 2018, our corporate segment generated revenues of $7.9 million, a 42% increase over the prior year period.

This increase was driven by new business revenue, primarily due to a larger corporate agent headcount as well as higher renewal revenue as the number of policies in the renewal term grew over the past year. As of March 31, 2018, we had a headcount of 121 corporate sales agents, up 61% from a year ago and up 9% since December 31, 2017.

Given the opportunities we're seeing to grow the business and buoyed by a strong class of recruits, we accelerated our hiring efforts in the second quarter. Though we expect some typical attrition as the training is completed and the quarter progresses, we expect to end the second quarter with approximately 150 corporate sales agents.

As a result, we will incur some additional employee compensation expense in the second quarter. However, our 2018 corporate hiring plan for this segment remains unchanged..

Adjusted EBITDA for the corporate channel grew 35% year-over-year to $2 million, while adjusted EBITDA margin was 25% versus 26% in the prior year period..

As I noted before, we are continuing to make significant investments in the growth of our business, which we expect to pay off handsomely over the longer term. But these investments will initially pressure margins in the corporate segment.

When new sales agents are hired, they receive a base salary, and it typically takes several months before an employee's commissions outpace their base salary.

As a result, adjusted EBITDA margins in the near term will be affected by the ramp in corporate headcount, but the investments are expected to translate into long-term margin expansion in both the corporate and franchise channels..

Having a strong corporate agency is key to the overall growth of the company as corporate agents contribute to building and disseminating best practices among the franchise channel.

Our franchise channel generated revenues of $6.7 million, a 55% improvement from the prior year period driven by higher royalty fees from the larger number of operating franchisees as well as the greater royalty fee generated on renewal business versus new business.

Contingent commissions also contributed to the increase in franchise channel revenues..

The economics of the franchise channel are compelling. When a franchise wins new business, we receive a 20% royalty fee in year 1 of the policy. The most critical aspect is the mechanical organic growth built into the franchise model. When the policy renews, our royalty fee elevates to 50% from 20%.

This equates to a mechanical revenue increase of more than 120% from the first term to the second term of the policy, just by retaining the business at historical retention numbers and assuming no increase in premium. Thus, we can generate higher margin and increasing revenue through policy renewal before we write additional new business.

It is this renewal revenue that will ultimately drive the success of our franchise channel and our business model..

As of March 31, 2018, we had 341 franchises operating, up 55% from 1 year ago and up 17% since December 31, 2017. As with our corporate channel, we have a robust franchise pipeline and expect to grow this channel..

Adjusted EBITDA for the franchise channel was $3.1 million, up 110% from the prior year period, while adjusted EBITDA margin was 46% versus 34% in the prior year period. This increase in adjusted EBITDA margin was driven by higher margin, contingent commissions and increased royalties related to policies and the renewal terms..

We typically experienced larger margins in the first quarter due to the contingent commissions we received during the period. That said, over time and as we grow this channel, the benefits from renewal revenues should lead us to achieve considerable, annual long-term margin expansion in this channel..

Net income for Goosehead for the first quarter of 2018 was $3.8 million, a 66% increase from the prior year period. We would note that since we were an LLC during the first quarter of 2018, we did not incur income tax expense.

Beginning in the second quarter, we will record income tax expense and for the full year 2018, we expect to have an effective tax rate in the mid-20% range of the income attributable to controlling interest..

Turning to our balance sheet. As of March 31, 2018, we had cash and cash equivalents of $6.3 million, an unused line of credit of $2.5 million and outstanding notes payable of $48.6 million on our balance sheet..

With that, I thank you for your time, and we'll now open up the call for Q&A.

Jonathan?.

[Operator Instructions] Our first question comes from the line of Sarah DeWitt from JPMorgan. .

First, on the franchise count and the agent count, that was a little higher than I was expecting.

I was wondering if you could just talk about, are you seeing the productivity of the new agents and franchises remaining consistent as you aggressively expand?.

Sarah, this is Mike Colby, President and Chief Operating Officer. Thanks for the question. Yes, we are seeing productivity remain consistent, and also our ramp up's to remain consistent in both channels. .

Sarah, this is Mark Colby. Yes, we are a little bit over where we thought we would be. Again quarter-to-quarter, there's going to be fluctuations, up or down. But again, we're comfortable with where we're at, at the end of the quarter. .

Okay, great. And then my second question. You may have seen today that Amazon said it was contemplating getting into -- or there was an article that they could get into homeowners insurance.

And -- wanted to get your thoughts on that, and the implications for Goosehead if that were to happen?.

Sarah, it's Mark Jones. At this point, to our knowledge, Amazon itself hasn't commented on that article. So we kind of just view that as speculation, but I would point out the most recent data that I have seen would suggest that only about 6% of homeowners insurance is purchased online and there's a lot of real strong reasons for that.

So we're going to -- before we kind of come to any conclusions or formulate a response, we're going to wait and see what they're really going to do as opposed to try and respond to speculation. .

[Operator Instructions] Our next question comes from the line of Christopher Campbell from KBW. .

Just quick question.

What is the current mix of like the business that you're writing between like homeowners and auto? And has that been changing?.

Yes. So we see about, annualized, about 47% of our business is homeowners versus 43% auto. We're starting to see that switch a little more to auto as we expand outside of Texas, but also as we do -- get better and better at packaging business. Obviously, our -- with our marketing strategy, we're leading with the home and cross-selling the auto.

So the better we can package that business, the more auto premium we're going to write. .

Okay, got it. And then one thing I noticed on the press release is that it looks like the operating franchise is less than a year tenured in Texas, that dropped to 49% from 60%. Any color on kind of what's going on there? Is it just people are -- your agents are becoming more tenured? Just any color on that would be wonderful. .

Chris, this is Mike Colby. I think that's just quarter-to-quarter fluctuations and also, as our agents continue to mature and mature out of that, less than 1 year bucket. .

Okay, got it.

And then are there any -- are you seeing any change in like the churn metrics, as you're bringing on more and more agents? Kind of, what are you seeing with the old agents? Are they being -- are they kind of consistent with your historical experience?.

For Q1, it's actually a little bit better, but I'd hesitate to call that a trend. We'll continue to monitor that throughout the year, but again, it's -- we're comfortable with the attrition levels where they are at Q1. .

Okay, great. And then just one more. Like I know that there is like a greenshoe or something outstanding.

Now if that were to be exercised, what would be the plans for those proceeds?.

The greenshoe -- Chris, it's Mark Jones. The greenshoe was actually exercised the first day of trading. And so we have received those proceeds and right now, we're kind of holding them for general and corporate purposes. So that's where we are. .

Our next question comes from the line of Adam Klauber from William Blair. .

A couple of different questions. Franchise, obviously, has had pretty big growth.

How big is your franchise team today versus a year ago? And are you still growing that team of people?.

Chris, this is Mike -- sorry, Adam, this is Mike Colby. Yes, we are continuing to recruit new franchise recruiting talent into that team. Currently, we're at about 24 full-time equivalents there. .

Okay.

And just so we'll know, generally what was that roughly a year ago?.

Last year, that was 18 -- oh, sorry, excuse me, 13. .

13. Okay.

Looking at the growth again, big growth in franchise generally, but in particular, year-over-year your non-Texas franchise really jumped up from 30 to 105, which states are you seeing the most success in outside Texas?.

Our core markets outside of Texas right now are California, Florida, Illinois. We're making some big push into the mid-Atlantic area, North Carolina, South Carolina and Virginia as well as the Northeast and Pennsylvania. We launched New York, New Jersey, Connecticut this year as well. Michigan also would be included in kind of our Midwest expansion. .

Okay.

And of those big ones, California, Florida, Illinois, would you say 1 or 2 of those are leading? Or would you say it's more equal across the states?.

Yes, from a total written premium perspective, Adam, California and Florida, we've been in there the longest. So we've seen some significant growth there as those agents mature, and as we get more traction on boarding agents. We've also seen some great success in Illinois.

It's a little bit younger state, but we're excited about moving into that state even more. .

Okay.

And could you give us some idea of the production of those non-Texas states after a year? How is that today versus a year ago, roughly?.

Yes. Again those agents continue to mature and get better and better, and we continue to try and disseminate best practices to those agents. So we've seen some improvements in the non-Texas production levels as well year-over-year. .

Okay. Okay, good to hear. But then as we think about your expense ramp, but the G&A actually seemed to hold down pretty nicely for the quarter.

Is that sustainable? Or does that need to expand throughout the year?.

No, I think that's sustainable. Again, it's quarter-to-quarter, especially just 1 quarter of the year being done, it's hard to identify new real trends, but we're comfortable with where that's at. And as we continue to grow throughout the year, we feel like that's in a good place. .

Adam, it's Mark Jones. Can I just kind of go back to the one question you had about productivity growth outside of Texas? We don't have particular specific data for 2018 yet because we're so early in the year, but in 2017, we saw new business production per office ramp up 46%, that's for new franchisees coming into the system outside of Texas.

So we've gotten better and better at helping these new franchisees get their feet under them in kind of markets outside of Texas, and that 46% growth and productivity is evidence of that. .

That's really helpful, Mark.

Is it -- as you have presence in a state longer, say, if you're -- you've been in Florida longer or California longer, does the productivity tend to ramp more as you have more critical mass of that? Does that sort of follow that playbook?.

Yes. We do expect as we mature into the different states, to see productivity continue to improve both by agents coming down the learning curve, but also from a recruiting standpoint, us coming down the learning curve and continuing to increase the quality of new agents that we're bringing onboard. .

This does conclude the question-and-answer session of today's program. I'd like to hand the program back to Mark Jones for any further remarks. .

Thanks. We just appreciate all of you dialing in, appreciate your interest. And thank you for your support of Goosehead. .

Thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect. Good day..