Goosehead Insurance, Inc. — Q3 2023 Form 10-Q
Business and period: Unaudited results for the three and nine months ended September 30, 2023, compared with the corresponding 2022 periods. Goosehead distributes personal and commercial property and casualty insurance through corporate-owned agencies and franchises. Amounts below are in U.S. dollars; financial statement figures are in millions unless otherwise noted.
Financial and operating performance
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Total revenue | $71.0 (+23%) | $57.7 | $198.3 (+30%) | $152.0 |
| Income from operations | $13.6 | $3.8 | $26.3 | $3.4 |
| Net income | $11.3 | $3.0 | $18.3 | $0.05 |
| Net income attributable to Goosehead, Inc. | $6.9 | $2.0 | $10.5 | $0.06 |
| Basic / diluted EPS | $0.29 / $0.28 | $0.09 / $0.09 | $0.44 / $0.43 | Less than $0.01 |
| Operating margin | 19.2% | 6.6% | 13.3% | 2.2% |
| Net margin | 15.9% | 5.3% | 9.2% | Less than 0.1% |
Revenue growth was led by franchise revenue, up 29% in Q3 to $38.7 million, and commissions and agency fees, up 17% to $32.0 million. Q3 Core Revenue, a company-defined non-GAAP measure, rose 22% to $63.1 million. Renewal commissions and renewal royalty fees grew 15% and 39%, respectively; contingent commissions rose to $4.8 million from $2.0 million. New business commissions and agency fees declined 1% and 27%, respectively.
Q3 Adjusted EBITDA, a non-GAAP measure, was $22.4 million, up 104%, with a 32% margin versus 19%. Nine-month Adjusted EBITDA was $55.7 million, up 125%, with a 28% margin versus 16%. Management attributed improvement mainly to higher-margin renewal revenue, lower corporate sales headcount, and slower G&A growth. Equity-based compensation and impairment are excluded from this measure.
Cash, debt, and balance sheet
- Nine-month operating cash flow was $37.2 million, versus $33.0 million. Investing cash use was $14.6 million, including $6.0 million for acquired books of business; financing cash use was $15.9 million, including a $10.0 million extra debt payment and $8.5 million in member distributions.
- Cash and cash equivalents were $35.2 million at September 30, 2023; cash plus restricted cash totaled $37.1 million. Cash and restricted cash increased $6.7 million during the first nine months, but ending cash and restricted cash was below the $48.4 million reported a year earlier.
- Debt payable was $78.8 million, with $8.8 million current and $70.0 million long-term. No revolver borrowings were outstanding; $49.8 million was available. Debt bears variable interest; the term note rate was SOFR plus 200 basis points at quarter-end. The company made an extra $10.0 million term-loan payment in May, reducing the final balloon payment to $55.6 million. The term note matures in 2026; the company reported covenant compliance.
- Total assets were $341.5 million and total liabilities $335.7 million. The balance sheet reported total equity of $5.8 million, including a $40.8 million non-controlling-interest deficit. The tax receivable agreement liability was $139.9 million on the balance sheet; the note reports total payments due of $140.3 million.
Material changes, outlook, and risks
- Total Written Premium increased 30% in Q3 to $802.9 million and 35% in the first nine months to $2.21 billion. Policies in force reached 1.456 million, up 18% year over year. Client retention edged down to 87% from 88%, while premium retention was 102% for the trailing twelve months.
- Operating franchise locations fell 8% year over year to 1,285; total franchises declined 31% to 1,584. The company onboarded 30 franchise locations in Q3 versus 144 in Q3 2022. Corporate sales headcount declined 23% year over year to 316.
- Nine-month general and administrative expense included $3.6 million of impairment charges: $1.1 million for internally developed software that would not be completed and $2.5 million related to two office locations expected to be subleased. No additional impairment was identified in Q3.
- Interest expense increased, primarily due to higher interest rates, partly offset by lower borrowings. Management says cash, operating cash flow, working capital, and the revolver are expected to cover foreseeable liquidity needs. The filing gives no specific financial guidance for future periods.
- Key exposures include the variability of contingent commissions, which depend on carrier results and other factors; franchisee performance and franchise terminations; client retention; and variable-rate debt. The company’s tax receivable agreement requires it to pay former LLC members 85% of qualifying realized tax savings, with future exchanges potentially increasing payments.
- A proposed settlement in a stockholder lawsuit would revise certain governance documents; final approval was scheduled for February 16, 2024. Plaintiffs also intend to seek legal fees; the company said any potential loss was not expected to be material. Management reported no material changes to previously disclosed risk factors and said disclosure controls were effective.
Important facts for investors to verify
- Whether premium growth and renewals continue to offset lower corporate sales headcount, franchise counts, and slightly weaker client retention.
- How much future earnings and cash flow depend on contingent commissions and franchise-fee recognition, including franchise terminations.
- Debt repayment capacity and sensitivity to variable interest rates, particularly the 2026 maturity and balloon payment.
- The timing and amount of tax receivable agreement payments, and their effect on liquidity and the reported deferred tax assets.
- The sustainability of reported profitability, including the impact of equity compensation and the non-GAAP adjustments used in Adjusted EBITDA and Adjusted EPS.