Goosehead Insurance, Inc
Q1 2021 Earnings Call Transcript
Published:
- Operator:
- Thank you for standing by. This is the conference operator. Welcome to the Goosehead Insurance First Quarter 2021 Earnings Call. As a reminder, all participants are in listen-only mode and the conference is being recorded. After the presentation, there will an opportunity to ask questions I would now like to turn the conference over to Dan Farrell, Vice President of Capital Markets, for opening remarks. Please go ahead.
- Daniel Farrell:
- Thank you, and good afternoon. With us today are 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, which may also be found on our website at ir.gooseheadinsurance.com.
- Mark Jones:
- Thanks, Dan, and welcome to our first quarter 2021 results call. We had another quarter of accelerating growth. In addition to reviewing our results, I'll provide a summary of building blocks we've recently laid to support continued accelerating growth at Goosehead. I'll also delineate and explain some of the core strategic trade-offs we make as a company. I'll then hand it over to Mike Colby, our Chief Operating Officer, to update you on some of our technology efforts in the quarter. Our CFO, Mark Colby, will then go into greater detail on first quarter results.
- Michael Colby:
- Thanks, Mark, and hello to everyone. On past calls, we've discussed our plans to take the proprietary comparative quoting platform we built for agents and pointed towards prospective clients. In the first quarter, we made significant progress on this project. We're beta testing it now and plan to release this technology as well as a complete rebuild of our website in the third quarter. To better understand how this is so completely differentiated, let me walk you through the process of shopping for insurance online today and how our quoting platform delivers an effortless online shopping experience that most importantly is informed by expert agent intelligence and nearly two decades of accumulated experience. When shopping for insurance online today, clients come across several options. One, direct-to-consumer insurance companies two, lead generators; or three, digital independent agencies. Direct-to-consumer insurance companies are structurally disadvantaged from providing the best experience because they only provide one product option, requiring the client to shop the market for themselves to find the right policy at the best price. With each insurance company, the consumer completes a lengthy questionnaire, providing the site with their personal information and information about their home and vehicles. This interview process can include upwards of 100 questions, many of which the client will not know how to answer or they will not have easy access to the required information. For example, does their home have a hip or gable roof? What is the distance from their home to the closest fire hydro ? What is the VIN number on their vehicle? They want to complete this process with many different insurance companies to determine if they're getting the appropriate coverage at the best price, and there are over 400 home and auto insurance companies in the U.S. The client is then presented with pricing, including various options to increase or decrease the cost, based on coverage additions or subtractions and can continue the process to purchase online. These trade-offs can be very confusing, even overwhelming and getting access to an expert agent is difficult, if offered at all. Other online options include lead generators, digital independent agencies or hybrid of the two . After going through the same lengthy interview process, these sites return only a few pricing options and other options without any pricing indication at all, neither of which allow the client to easily proceed to purchasing a policy. Many times, what's happening here as the lead generator is gathering information to sell to multiple insurance companies and agencies. At that point, the client will incessantly be solicited to by numerous insurance providers for weeks and on the anniversary of this process indefinitely.
- Mark Colby:
- Thank you, Mike, and hello to everyone on the call. For the first quarter of 2021, total written premiums, the leading indicator of our future core and ancillary revenue growth, increased 49% to $319 million. This included franchise premium growth of 55% to $230 million and corporate segment premium growth of 35% to $89 million. This accelerating growth is being driven by continued high retention rates, strong new corporate and franchise agent growth and increasing agent productivity in the franchise channel. The continued shift in our mix of business towards the faster-growing franchise channel imply significant embedded future revenue growth as the new business premiums reliably convert to renewal premiums, at which time our royalty fee increases from 20% to 50% for ongoing renewals for the life of the policy. At quarter end, we had roughly 788,000 policies in force, a 49% increase from one year ago and another indicator of increasing momentum in our business. Revenues were $31.2 million for the quarter, an increase of 53% from the year ago period, while core revenues increased 47% to $26.7 million for the quarter, both growth rates accelerating from the first quarter of last year. Ancillary revenue, which includes contingent commissions, was $2.8 million in the quarter compared to $1.1 million a year ago. I'd like to remind everyone of the cadence of our ancillary revenue from contingent commissions throughout each year under ASC 606. In the second quarter, we expect to book minimal contingent commissions as we will not have sufficient insight into loss ratios and other drivers of our contingent revenue to meet GAAP thresholds for recognition. The third quarter should have some additional contingent commissions as our profitability with our carriers comes more into focus. The fourth quarter should have the majority of our contingent commissions as our results with the carriers are finalized. Finally, as a reminder, we do not rely on contingencies to fund future growth or operations. The franchise channel generated core revenue of $11.9 million, an increase of 60% from the year ago period. At the end of the first quarter, we had 1,628 total franchises, up 61% from the prior year and 987 operating franchises, up 45% from a year ago, two additional key performance indicators where growth has accelerated. At this time last year, total franchise growth was 45% and operating franchise growth was 36%. We continue to build on our strategy of national expansion within the franchise channel with non-Texas franchises accounting for 76% of total units compared to 70% a year ago. And these non-Texas franchises are continuing to grow their productivity in 2021. We have also continued to accelerate our investment in corporate agent hiring and national expansion to facilitate the franchise channel growth and productivity. Corporate sales headcount at the end of the first quarter was 363, an increase of 51% from the year ago quarter and compared to 31% growth in corporate headcount a year ago. As a reminder, the majority of our corporate agents launched in the summer months following college recruiting season and our expanded geographic footprint positions us well to add quality talent for numerous additional universities. Corporate channel core revenues were $14.8 million in the first quarter, an increase of 38% compared to the year ago period as new agents continue to ramp up productivity over their tenure. Total operating expenses for the first quarter of 2021 were $32 million, up 58% from $20.2 million in the prior year period. Compensation and benefits expense was $21.3 million for the quarter, up 58% from one year ago on 56% headcount growth. The increase in compensation and benefits is being driven by our ongoing investments in headcount across the organization, particularly the hiring of corporate sales agents in support of the franchise channel growth, service agents to manage our largest revenue stream renewals, recruiting and on-boarding functions to continue our growth trajectory and systems developers to ensure our technology is on the cutting-edge for our clients and internal users. General and administrative expense for the quarter was $9.3 million, an increase of 58% from a year ago with the increase due to an expanding real estate footprint and investments in technology, including our client-facing portal and a number of carrier integration projects. Total adjusted EBITDA in the quarter was $2.1 million compared to $1.2 million in the prior year period. As Mark mentioned, our goal is to maximize total profit dollars over the long-term. For now, that means investing heavily to grow rapidly and to responsibly maximize market share capture in the near term. Recognizing the mechanics of our business model will expand margin over time as new business predictably converts to renewal business, shifting our premium mix more and more to renewal. We continue to make very focused investments just like we did while a private company, but we believe driving growth is more strategically critical to the business than margin expansion at this time as we continue to put distance between us and any potential competitors. That being said, I would like to reiterate Mark's point that we believe there is powerful operating leverage available in our business model with long-term EBITDA margin potential north of 40%. Our strong revenue and earnings growth has continued to generate high levels of excess cash for the business that will self-fund future growth. In the quarter, we generated $7.9 million of operating cash flow, compared to cash used for operations of $1.5 million in the prior year. As of March 31, 2021, the company had cash and cash equivalents of $30.8 million. Additionally, we have an unused line of credit of $19.7 million. The total outstanding term note payable was $78 million as of March 31, 2021. Based on our experience to-date, the company is raising its full year 2020 outlook with respect to total written premiums and revenue. Total written premiums placed for 2021 are expected to be between $1.5 billion and $1.56 billion, representing organic growth of 40% on the low end of the range to 45% on the high end of the range. Prior guidance issued was for organic premium growth between 38% and 44%. Total revenues for 2021 are expected to be between $146 million and $156 million, representing organic growth of 25% on the low end of the range to 33% on the high end of the range. This assumes continued strong growth in core revenue and a return in 2021 to a more normalized level of ancillary revenue following a record year in 2020. Prior guidance issued was for organic revenue growth between 23% and 32%. Our strong first quarter results position us very well to deliver strong revenue and earnings growth for the balance of 2021 and beyond. I want to thank everyone for their time. And with that, let's open up the lines for questions. Operator?
- Operator:
- The first question comes from Meyer Shields with KBW. Please go ahead.
- Meyer Shields:
- Great, thanks. I had two questions on, I guess recent Texas or not so recent Texas freeze. I was hoping first that you could walk us through the timing like if that impacts contingents, does that impact this year or next year? And the second question is, what you're seeing in response in terms to increased shopping, following what has to have been a huge number of claims?
- Mark Colby:
- Yes, I guess, first, on contingents, Meyer. This is Mark Colby. It's still really too early to tell. What we do know about the Texas storm is that it was considered a catastrophic event, which helps us with contingencies, but again, it's a little bit too early to tell. As far as the shopping experience for a lot of those clients, I can't really speak. I don't think we've seen like a noticeable uptick in that. I think given our go-to-market strategy of being home closings, not necessarily online shoppers. I think, for us, it was a little muted.
- Mark Jones:
- We've certainly seen heightened claims activity, and it's not the first time we've been through a major event. We've been through many major events in our - in the course of business. So while that creates a certain level of taxation on the - the service team, we're well equipped to handle that, well equipped to deliver great experience. I mean look, our Net Promoter Scores increased over the quarter from the year-end and retention held steady. So there's no indication that we've seen an increase in our clients shopping. The other thing I'll note there Meyer, is that compared to a couple of years ago, in 2020, in the first quarter of 2021, Texas only makes up roughly 60% of our premium, which is way down from prior year. So as we get more and more diversified throughout the country that, certainly helps the contingencies as well.
- Mark Colby:
- And they were named catastrophic storms as well.
- Mark Jones:
- Which are typically excluded from contingency calculations.
- Meyer Shields:
- Okay perfect. No, I appreciate the clarification. One related question I guess, when you got that level of activity, does that impact the expenses associated with servicing claims?
- Mark Jones:
- No, no it doesn't - at all. We were able to, especially with our service center in Henderson, Nevada, we have a load balancing capability with our workforce management, and it's just a matter of how we're prioritizing service work. So it does not increase the cost of delivering service.
- Michael Colby:
- The clients seem to feel good because their net promoter score went up.
- Meyer Shields:
- Right, no certainly is working I just want to know whether how to back to that into neutral assumptions.
- Operator:
- The next question comes from Mark Dwelle with RBC Capital Markets. Please go ahead.
- Mark Dwelle:
- Yes, good afternoon. And I guess, in the course of your discussion, I think you made fairly clear that you're prepared to focus on growth, and you're investing heavily in the business at this point is understandable? I guess what I'm trying to get my arms around is, are you messaging that there will not, in fact, be any margin improvement this year that we should think about last year's margin as sort of the foreseeable run rate while you make these investments? Or do you think there's a degree to which there's enough leverage in the business that you can get some both?
- Mark Jones:
- Yes, I think, again long-term, we feel that margins can be over 40%. We don't guide to margins for a reason because we want to keep that flexibility, and again 2020 was a record year for contingencies. So, all I kind of has to keep in mind with how you look at us for 2021 and beyond.
- Mark Dwelle:
- Okay. On the direct consumer product that you've been working on, is there any time line related to the rollout of that or is that still kind of work in progress?
- Michael Colby:
- Hey Mark, this is Mike. Yes, as we said, it's a 3Q deliverable this year for us.
- Mark Dwelle:
- Okay.
- Michael Colby:
- And as I mentioned, we'll be scheduling a broadcasted demonstration of the product before launch so, excited for you all to see the new interface, the technology. There is truly nothing like it on the market. It is an effortless, transparent experience. It's a digital agent experience.
- Mark Dwelle:
- Apart from the cost, you've obviously been incurring to build and ramp. Will there be any particular incremental costs in the third quarter such as advertising or anything like that, that will be associated with the launch?
- Mark Jones:
- Yes, I think you're starting to see that already with the hiring of Ann Challis as our CMO, and as you mentioned, a lot of the developer time. So we've already started to make those investments. Really, I mean going to the SEO route, things like that, trying to compete with those $1 billion ad budgets is not our plan. Our plan is to be strategic in our investments and to invest in our return. So we'll have some more detail about that when we release the product.
- Mark Colby:
- And we do think the market will create new channel opportunities for us, but initially, we look at it as a great tool to augment our existing channels, which is the real estate mortgage focused client acquisitions and customer referrals. We actually think there's a big opportunity to leverage this to make that referral process easier for existing customers who are saying, overwhelmingly, based on our Net Promoter Scores that they're willing to refer friend or family members. So, we want to take advantage of that, but we consider that low-hanging fruit.
- Mark Dwelle:
- Okay. And then related to - I mean, it sounds like - I mean, you've continued to expand on the corporate channel. As you listed out the number of new or potential offices, it seems like a somewhat longer list than the last one I recall hearing. Is there is a roadmap in terms of how many kind of corporate offices or corporate hubs that you hope to eventually have? It's a pretty material expansion in the last two years really?
- Mark Jones:
- As we've said in the past, the corporate channel is - we invest there to drive growth in the franchise channel to drive success with our franchise partners. So we're strategically placing infrastructure is in markets where we're growing that agent footprint rapidly. We know that agents who are closer in proximity to a corporate facility perform better than the agents who are further away. So this is an opportunity for us to put resources out in the regions where we're seeing franchise growth that - where franchisees can leverage easy access to our corporate team who are performing at the highest level of the game. And who have a very defined scope of work to transfer that knowledge, transfer that best practice to the franchise channel.
- Mark Dwelle:
- Okay, thanks for the answers.
- Operator:
- Next question comes from Katie Sakys with Autonomous Research. Please go ahead.
- Katie Sakys:
- Thank you, good afternoon. I'm hoping you can provide some additional color for us around franchise productivity. Tenured agents in Texas last year had productivity of about $120,000 of new business, which is impressive, being that it's almost close to the level of corporate agent productivity? However, we've noticed that the tenured corporate agent productivity topped out at around $125,000. Is there some kind of practical ceiling at that $125,000 level or do you think the average tenured agent productivity can grow to something even higher?
- Mark Jones:
- Yes, I mean, if you look at agents who are exclusively focused on sales activity. We have not seen a peak in productivity. In fact, our most tenured agent, 14-year corporate agent, has seen productivity increases over the recent years until we moved him into a franchise - full-time franchise support capacity. So we have not seen the productivity capabilities peak. What you're seeing in the numbers is again, a deliberate investment. We're making a deliberate trade-off to bring high-caliber talent in the corporate channel and make that talent available in the franchise channel to drive success through training, through lead sales leadership, coaching, mentorship, marketing support. It's very tangible and defined scope of work in a very deliberate investment that we're making. That's - so when you think about the scope, their franchise support scope growing, you would naturally expect to see that manifest in the productivity numbers. And that's a trade-off that we're very willing to make, and we think it's clearly providing ROI for us when you look at franchise performance.
- Katie Sakys:
- Got you, got you thank you. My next question is about mortgage originations. What's your best estimate of what your mortgage and real estate and market share in Texas is?
- Mark Colby:
- I don't believe we disclosed that, do we?
- Mark Jones:
- I think we want, but we can. I mean I think we've said in the past, it's - in any given year between 13% and 14%, and it's been holding steady at that rate for the past two years.
- Mark Colby:
- Yes, and not that we haven't been growing in the state of Texas, but - the mortgage market is very strong. More importantly though nationally, it's less than 3%, I believe last I checked.
- Mark Jones:
- So big runway.
- Mark Colby:
- Even in Texas.
- Katie Sakys:
- Okay, great. Thank you so much.
- Operator:
- This concludes the question-and-answer session. I would like to turn the conference back over to Mark Jones, Chief Executive Officer, for any closing remarks.
- Mark Jones:
- We'd like to just thank everyone for their time and interest, and we look forward to continuing to drive accelerating growth.
- Operator:
- This concludes today's conference call. You may disconnect your lines. Thank you for participating and have a pleasant day.
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