Goosehead Insurance, Inc.

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 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 an operator by pressing star and zero. I would now like to turn the conference over to Dan Farrell, Vice President, 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 FCC 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. 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 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 tradeoffs 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. Let me start with a reminder that our largest shareholder block by far is our management team. Our goose head holdings represent the majority of our individual net worths. We think and act like long-term owners because that is what we are. When we make strategic decisions, we do so well-informed and in a very real way with our own money. In the first quarter, we delivered accelerating growth and made a number of critical investments that we believe will support ongoing growth accelerations. Let me take a moment to highlight some of these. Premium growth, the leading key indicator of future revenue growth, has continued to accelerate year over year on a larger base. In Q1 2021, premiums increased 49% compared to 46% for the first quarter of 2020, while policies and force grew 49% compared to 45% for the first quarter of last year. Our premiums in the franchise channel grew 55% for the quarter, providing excellent visibility into strong and accelerating embedded revenue growth as those policies convert to renewal and our commission share jumps to 50% versus the 20% we earn on new business. Core revenues increased 47% over the prior year period compared to 32% growth for the first quarter of 2020. Our total franchise count at the end of the first quarter was up 61% year over year as our franchise sales team becomes increasingly effective identifying and winning successful franchise candidates for both within and outside the insurance industry. This growth compares favorably to the 45% increase in the first quarter of last year and the 55% growth for the full year 2020. Franchise growth is critical to future premium and revenue growth. When we make the investment in recruiting and training today, premium growth typically takes several years to fully manifest, and revenue growth takes even longer because of the structure of our royalty fee agreements, which is 20% on new business commissions and 50% on renewals. For example, in 2020, total franchises grew 55%. but those growth units contributed only 4% to 2020 royalty fee revenue. Furthermore, 61% of our total franchise base is either in their first year or preparing to go live, giving us an enormous growth platform for many years to come. Also, while our franchise unit count is growing rapidly, the unit productive capacity is also growing as many of our more seasoned franchises are now adding producers, which will be a larger and larger source of growth over time. The corporate agent team is up 51% from a year ago compared to the 31% growth we saw in Q1 of 2020. Continued growth of this channel is important as efforts in training, mentoring, and beta testing of new technology and processes helps drive the extraordinary growth and improves productivity of the larger franchise channel. Remember, these corporate agents, aided by our proprietary technology, are 3.8 times more productive than the most productive insurance agents in the United States. Our agents are the best in the business. We continue to invest in expanding our physical footprint in the corporate channel to further support the expansion of our largest growth channel, the franchise network. During the remainder of 2021, we'll be further expanding our corporate footprint with new offices in Denver, San Antonio, Columbus, Ohio, a second Austin, Texas office, and a second Chicago office. In addition to providing support to franchisees, these corporate offices help us scale nationally and enhance college recruiting opportunities in both the short and long term. In addition to the significant and consistent direct investments to sustain growth acceleration in our traditional channels, we've made strong progress developing our direct-to-consumer quoting platform, which we anticipate releasing in the third quarter of this year. We believe this platform will fully enhance our omni-channel strategic advantages, particularly, as Gu said, will be the only true online choice model in the marketplace. Mike will provide more on the direct trader and other digital progress in his remarks. Our runway in the market is enormous, as our 2021 premium base will likely represent less than one-half of 1% of the $360 billion U.S. personal lines market. To accelerate our path toward industry leadership in the personal lines space, we remain maniacally focused on continually improving all drivers of growth, those being recruiting, productivity, and retention. Our competitive mode in the marketplace is deep and robust, and our people and proprietary technology are the core of what makes our organization so unique and difficult to replicate. We've now been a public company for three years, and many private equity-backed firms and publicly traded insurance brokers look at our growth and success with envy. If our business could be replicated through M&A, it would have happened by now. I believe the only way to create a truly viable competitor to Goosehead is to start from scratch and build the company de novo. Our unique ability to attract extraordinary human capital and 17 years of accumulated experience serving clients, agents, and carriers in the personalized market space have created profound strategic advantages in our business model that are extremely difficult to replicate without the benefit of significant time and capital. And most of the people with the capital aren't willing to devote the necessary time. I truly feel it would take at least a decade to create a competitor that could come close to matching Goosehead's capabilities. All the while, we continue to increase our momentum and expand our already powerful competitive position. Our success as a public company certainly has helped pave the way for several InsurTech IPOs. However, we're unique in that we're a broker, not an underwriter. In fact, many of the recently public InsurTechs are on our platform as carrier partners. Unlike most of the InsurTech world, which are startups operating cash flow negative, We have been operating for 17 years with a proven model delivering consistent, strong revenue and earnings growth. Also, our operating cash flow fully funds our growth strategy. Now, a word about margins. Our objective is to maximize total profits over the long term, and we know that the stronger the foundation we build now, the larger and more sustainable our profits will be over time. In the short term, we make investments that will facilitate this. And as a reminder, most of our investments run through the P&L and don't show up on the balance sheet. While we manage the business responsibly, short-term margins are a lower priority than achieving our growth goals. There is natural operating leverage and margin expansion in our business over time, particularly as franchises season and new business converts to renewal in the franchise channel. Long-term, we believe that it is not unreasonable to anticipate EBITDA margins north of 40%. But for now, the priority is capturing market share and we'll make the short-term investments to do so. All of that being said, our annual EBITDA margins approximate the other publicly traded insurance brokers, notwithstanding the fact that our 2020 organic growth rate was 25 times theirs. And by the way, much of their growth investments end up on their balance sheets because they're implemented through acquisitions, which makes our results all the more extraordinary. I'm extremely excited about the accelerating growth indicators we're seeing in our business. These results are further validation of our unique and powerful business model focused on the clear advantages of a choice product offering, the value of skilled and professional sales and service agents, and the benefit of industry-leading technology that delivers an unmatched experience for our clients. It is important to remember that the premium and revenue growth we're seeing today is largely being driven by investments we made in 2018 and prior. We expect the investments we made in more recent years and the ones we have planned for 2021 to help support high rates of growth for many years to come. Our organization will remain aggressively on offense as we further expand our unique and differentiated platform into the US personal lines market. I want to thank our entire Goosehead team for delivering a fantastic start to the year, which positioned us extremely well for 2021. Mike?