Goosehead Insurance, Inc.

Thank you for standing by. This is the conference operator. Welcome to the Goosehead Insurance fourth quarter 2020 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. To join the question queue, you may press star then 1 on your telephone keypad. Should you need assistance during the conference call, you may signal an operator by pressing star and zero. I would now like to turn the conference over to Dan Farrell, VP Capital Markets, for opening remarks. 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.goosedeadinsurance.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 that 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 fourth quarter 2020 earnings call. I'll provide a summary of our results in 2020 and highlight our overall value proposition and unique competitive advantages in the market and I'll then hand it over to Mike Colby, our chief operating officer, to update you on some of our technology and human capital investments. Our CFO, Mark Colby, will then go into greater detail on our fourth quarter results and outlook for 2021. We delivered an outstanding fourth quarter, which capped off a phenomenal year for Goosehead Insurance. We continued our exceptional record of profitable growth in 2020, with premiums placed up 45%, revenues increasing 51% and EBITDA up 59% for the year. We also kept our foot firmly on the gas pedal, investing heavily in people and our disruptive technology platform, which we believe will drive strong growth in 2021 and beyond. While we are pleased with our success in 2020, it is important to remember that we've delivered consistently high levels of growth since the inception of our company. so driving high growth is not a recent phenomenon for us. Over the last 10 years, we've grown premiums placed at a CAGR of 37%. In more recent years, we've been able to drive accelerating growth through our technology and human capital investments while leveraging the benefits of our accumulated experience. Over the last three years, which represent our history as a public company, we've grown premium at a CAGR of 45%, and ASC 606 revenue at a CAGR of 38%. Our investments have been meaningful, consistent, and disciplined, having grown our franchises and corporate agents at a CAGR of 51% and 48%, respectively, over that time. We are very proud of our consistent, strong growth. It validates our unique and time-tested strategy and business model, the quality and dedication of our team, and the strength of our company's culture. We earn our growth by creating value for others. To fully appreciate the value of our model, there are three lenses through which you can view us from the perspective of one, the insurance buyer, two, the agent, and three, the insurance carrier. First, and most importantly, insurance buyers, the people at the center of our universe, desire to have the right coverage based on their risk tolerance at the lowest possible price, written with a reputable company who will respond quickly and fairly when they need to file a claim, desires that we believe only an independent insurance agent can best fulfill. And they want to accomplish this in a simple, fast, and convenient way that leverages technology for an effortless client experience. We have built a model that combines a choice product portfolio, knowledgeable sales and service agents, and proprietary technology to deliver on these expectations. This approach has resulted in 88% client retention, a level we believe is industry leading. Next, the agent's perspective. The more than 100,000 captive agents in the US are facing acute pain points in their business model. These agents lack product options in the single carrier model, have ineffective marketing playbooks, bear costs for expensive retail store locations, are generally working with severely outdated technology and spend a significant portion of their time servicing existing clients as opposed to growing their book. And the independent agent channel is comprised of small mom and pop businesses challenged in their ability to scale their agencies. Agents on the Goosehead platform immediately gain access to a broad portfolio with many of our more than 140 carrier partners, a proven and highly cost-effective go-to-market strategy of developing referral partner relationships in the home buying process, a disruptive proprietary technology, and the best service centers in the world, which allow the agent to focus on growth of their book of business. Finally, insurance carriers are seeking profitable growth, and their focus is on maximizing the ratio of client lifetime value to acquisition costs. Carriers see the benefit of distributing through independent agents, but that strategy usually comes with a great deal of complexity and cost in working with thousands of independent representatives with no standard training, varying levels of expertise, and no quality control functions. Working with Goosehead allows them to have scale distribution with a single point of contact. We handle all the training and enforce standards through a centralized quality control team that reviews 100% of the policies issued. We continue to make significant efforts integrating carriers onto our technology platform to make interactions with them as seamless and efficient as possible. Given our go-to-market strategy of leading with homeowners insurance, our client base tends to have more favorable characteristics of better loss experience, higher retention, and multiple policy needs. Many direct and insure tech carriers have tried to build models which eliminate the complexity of working with independent agents. What most have found is that a large portion of the market still prefers engaging with an agent in the sales process, particularly with homeowners insurance. Goosehead allows these carriers to access a very attractive segment of the market without the traditional complexities, and many of the direct and insure tech carriers are currently on our platform. Now, let me discuss our full year results in a bit more detail. I'm very pleased with our execution across all aspects of our operations in the quarter and full year. We had tremendous success in adding significant high-quality talent to our organization in 2020. Corporate sales agent headcount and total franchise count grew 47% and 55% over the prior year, respectively, and we expanded meaningfully in other parts of the organization, including our franchise sales, service, and technology teams. Overall employee count was 949 at the end of 2020, up 59% from 595 at the end of 2019. Total premiums placed for the year, the key leading indicator of future core revenue growth, were 1.074 billion, an increase of 45% over 2019, driven by strong new business growth and continued high levels of retention. Revenues were $117 million, an increase of 51%, and core revenue increased 41% over the prior year. We achieved this strong organic top-line growth for the year while delivering EBITDA of $27.8 million, an increase of 59% compared to 2019. We ended the year with 1,468 total franchises an increase of 55% from the prior year, while operating franchises increased 45% to 891, the fourth consecutive quarter of accelerating year-over-year operating franchise growth. Based on past experience, we are confident that our significant number of signed and operating franchises with less than one year of experience bodes well for predictable and powerful growth for many years to come. Corporate sales agent count at the end of the year was 364, up 47% versus the year ago period. It's important to remember that the majority of our corporate agents are added in the second and third quarters of the year, coinciding with college recruiting calendars. The ramp up of our new offices in Charlotte, North Carolina, and our second Houston, Texas office continue to go well. In 2021, we'll be further expanding our corporate sales footprint with new offices in Denver, Colorado, San Antonio, Texas, Henderson, Nevada, and another office in the Midwest region. With our corporate and franchise expansion, we had a presence in 43 states at the end of 2020, covering over 97% of the US population, up from 35 states at the end of 2019. 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. We've previously highlighted the success of our virtual sales coaching program and have continued to expand this effort through 2020, helping drive significant increases 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 and form a crucial part of our competitive moat. We're also actively expanding hires across the broader organization to support our future growth and innovation. Our recruiting team currently stands at 98 compared to 61 individuals at the end of 2019. In 2020, we nearly tripled our information services development team information systems development team, which is enabling significant progress on our technology innovation roadmap. Our omni-channel approach combined with our world-class service team is having a meaningful positive impact on the overall insurance buying and service experience as evidenced by our net promoter score of 92 from 89 at the end of 2019. As a reminder, our net promoter scores are higher than any company we've been able to identify while our costs to deliver this extraordinary level of service are roughly one quarter of industry best practice. Let that sink in for a minute. Best service in the world at a quarter of industry best practice cost. We believe our technology and human capital investments will continue to drive the client and agent experiences, further strengthening our competitive advantage and strengthening our client retention, which currently stands at the industry-leading level of 88%. I am extremely excited about the long-term prospects for our business. The benefits of investments we made in the years preceding 2019 clearly began to emerge more meaningful in our growth rates in 2020, and we believe that the people and technology investments we made in 2019 and 2020 provide us with great visibility into strong growth for the next several years. We will remain aggressively on offense and will further our investments through 2021 and beyond as we look to expand our competitive advantage into the enormous U.S. personal lines addressable market. I want to thank our entire Goosehead team for their tireless efforts and enthusiasm through an unprecedented year. Our unmatched talent is what makes it possible to consistently deliver for our clients, referral partners, carriers, and shareholders.