Goosehead Insurance, Inc.

Thank you for standing by. This is the conference operator. Welcome to the Goosehead Insurance second quarter 2020 earnings call. As a reminder, all participants are in listen-only mode and the conference is being recorded. After the presentation, there'll be an opportunity to ask questions. To join the question queue, you may press star then one on your telephone keypad. Should you need assistance during the conference call, you may signal and operate it by pressing star and zero. I would now like to turn the conference over to Dan Farrell, VP Capital Markets. Please go ahead.

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. 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 FTC for 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. I would also like to point out that during this call, we will discuss certain financial measures are not prepared in accordance with GAAP. Management uses these non-GAAP financial measures when planning, monitoring, and evaluating our performance. We consider these non-GAAP financial measures to be useful metrics for management and investors to facilitate operating performance comparisons from period to period by excluding potential differences caused by variations in capital structure, tax position, depreciation, amortization, and certain other items that we believe are not representative of our core business. For more information regarding our use of non-GAAP financial measures, including reconciliations of these measures to the most comparable GAAP financial measures, we refer you to today's earnings release. In addition, this call is being webcast and 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 like to turn the call over to CEO Mark Jones.

Thanks, Dan, and welcome to our second quarter 2020 earnings call. I'll provide an overview of our results for the quarter as well as our strategy and outlook for the full year. I'll then hand it over to Mike Colby, our President and Chief Operating Officer, to update you on some of our technology and human capital investments as well as an update on actions around COVID-19. Our CFO, Mark Colby, will then go into greater detail on our second quarter results and outlook. Before reviewing our results for the second quarter, I would like to share our business philosophy. Adherence to this philosophy has allowed us to deliver exceptional results even during a global pandemic. One, we view and manage the business through the lens of long-term owners. Every member of our senior management team has the vast majority of their net worth tied up in Goosehead stock. We think like long term owners because we are long term owners and are deeply committed to reaching our collective full potential, which is achieving market leadership during my lifetime. All of our decisions are geared to create value over the long term and drive toward our full potential. Number two, we are successful because we create value for others, which means we are maniacally externally focused. This external focus has been particularly powerful while the world grapples with COVID-19. While others were wringing their hands with worry and experiencing paralysis to a greater or lesser degree, we were in the market, making things happen, and our results are a testament to this. And three, our business was built with a client at the center of our universe, and we are heavily tech-enabled. The guiding objectives for our technology investments are creating a better experience for each of our clients, which includes consumers, agents, and our business partners. This is a very different approach than we see with so many companies who start with technology, then try to find a use for it. And by the way, when you're a hammer, everything looks like a nail. Our tech investments are focused, disciplined, and economically rational, and they incorporate input from all levels of our organization, all people connected to the market. Our approach produces strong, sustained organic growth with a highly retentive book of business, leverages our human capital and drives actual profitability. Our investments are very powerful and follow the immutable law of a free market, that you always start with the client. Now, let me turn to our second quarter results. I'm very pleased with our exceptional second quarter wherein we continue to demonstrate VuceHead's differentiated platform and strengthen and extend our formidable competitive moat. We made tremendous progress in a number of areas which position us well for future success. First, and perhaps most importantly, our recruiting team has been playing aggressive offense. adding a significant amount of high quality talent to our organization with corporate sales agent headcount and total franchise count growing 49% and 48% over the prior year respectively. Additionally, we continue to expand our referral partner network and rolled out new proprietary technology to improve the client and agent experiences. During these unprecedented times, we remained laser focused on best practices which drive our high level of client service, improve the overall productivity of both our sales agents and back office functions, and allow us to achieve full share of wallet with our clients. I'm extremely proud of our ability to deliver these accomplishments in an almost entirely virtual operating environment during the quarter. Our whole organization is relentlessly externally focused on our clients and business partners, utilizing our industry-leading tools and technology to demonstrate that Goosehead is a reliable and stable agency partner regardless of economic turbulence and uncertainty. The benefits of these efforts are most evident in our continued strong premium growth, a key leading indicator of future revenue growth. Total premiums placed were $274 million, an increase of 41% versus the second quarter of 2019, driven by strong new business growth and continued high levels of retention. Approximately 70% of our second quarter premiums were in the franchise channel compared to 67% a year ago. As our mix of business continues to shift more to the franchise channel, It is important to keep in mind how premiums convert to revenue. In the franchise channel, we earn 20% royalties on the first term of a policy and 50% on renewal terms. Given our 88% client retention rate, we see approximately 120% mechanical revenue growth as a policy converts from new to renewal. So strong premium growth today spring loads strong revenue growth tomorrow. Our revenue growth during the quarter was a result of our efforts over the past several years. During the quarter, revenues were $29.9 million, up 54%, while core revenue increased 41%. We achieved this impressive organic top-line growth while delivering EBITDA of $9.8 million in the quarter and expanding our EBITDA margin to 33%. We ended the quarter with 1,132 total franchises, an increase of 48% from the year-ago quarter, while operating franchises increased 36% to 730. We experienced a record number of signed agencies in the quarter, and our significant pipeline of signed and operating franchises with less than one year of experience bodes well for future growth. Franchises with two or more years of experience currently account for only 41% of total franchises, but represented 96% of our royalty revenue last year. We expect that our new franchises will fuel powerful growth for many years to come. Sales agent count in the corporate channel at the end of the quarter was 317, up 49% versus the year-ago period. The net increase of 76 corporate agents represented a record number of added agents in a quarter, a truly remarkable feat under the circumstances. During the quarter, we also opened offices in Charlotte, North Carolina, and Houston, Texas, that being our third office in the Metro Houston area, and began planning for a Denver, Colorado office. The growth and expanded footprint of our corporate channel plays a significant role in driving growth and profitability in the franchise channel. The corporate channel is a testing ground for new technology and development of best practices, as well as training and mentoring resources for the franchise channel. Last year, we highlighted the initial success of our virtual sales coaching pilot program and have continued to expand this effort through the first six months of 2020, helping drive a 32% increase in productivity among franchise participants. We continue to manage the corporate and franchise channels as one integrated whole. Efforts and investments in the corporate channel are integral to our overall success as an organization. In addition to strong agent recruiting in the quarter, we have added impactful talent across the broader organization. Our recruiting team currently stands at 83 compared to 60 individuals at the end of 2019. Over the last year, we have more than doubled our information systems development team, which is enabling significant progress on our technology innovation roadmap. Our service team transitioned seamlessly to a virtual environment and are continuing to provide unrivaled service to our clients. Over 35% of our clients are now using our online client portal, which was implemented in the fourth quarter of 2019. The combination of the online portal with our world-class service team is having a meaningful positive impact on the overall insurance buying and service experience, as clients on the portal show an average net promoter score of 94. As a reminder, our net promoter scores are higher than any company that we've been able to identify, while our cost to deliver this extraordinary level of service are roughly one quarter of industry best practice. Additional investments we're making to our proprietary comparative rater platform and further carrier integration projects will continue to enhance the overall client and agent experience going forward and strengthen our competitive advantage. Mike will provide you with more detail on our current technology platform and innovation efforts in his remarks. Based on the results of the first half of 2020 and strong ongoing momentum, we are raising guidance for the year, the details of which Mark Colby will cover in his section. We're also announcing at this time a special dividend, which Mark, again, will detail. I'm extremely excited about the future prospects for our business. We are staying on offense and will continue making the important investments in people and technology needed to continue our industry-leading organic growth and grab share of the enormous addressable personal lines market. I want to thank our entire Goosehead team for the incredible efforts over the first half of 2020 that have enabled us to deliver for our clients, our referral partners, and our shareholders. And with that, I'll turn the call over to Mike Colby.