Goosehead Insurance, Inc. — Q1 2023 Form 10-Q
Business context and period: Unaudited results for the three months ended March 31, 2023, compared with Q1 2022. Goosehead operates a national personal and commercial property-and-casualty insurance brokerage through corporate agencies and franchises. Unless stated otherwise, financial amounts below are in U.S. dollars.
Financial and operating performance
| Metric | Q1 2023 | Q1 2022 | Change / context |
|---|---|---|---|
| Total revenue | $58.0 million | $41.3 million | Up 40% |
| Core Revenue (non-GAAP) | $52.0 million | $36.5 million | Up 42%; 90% of revenue |
| Operating income (loss) | $1.5 million | $(6.1) million | Operating margin approximately 2.5% in 2023 |
| Net income (loss) | $(0.2) million | $(5.4) million | Net loss attributable to Goosehead: $(0.1) million vs. $(2.3) million |
| Adjusted EBITDA (non-GAAP) | $10.2 million | $1.3 million | Up 707%; margin 18% vs. 3% |
| Basic and diluted EPS | $0.00 | $(0.11) | 2023 amount rounds to zero; Adjusted EPS (non-GAAP) was $0.17 |
| Operating cash flow | $(0.6) million | $(5.2) million | Cash used declined year over year |
| Cash and restricted cash | $26.2 million | $22.7 million | At March 31, 2023 and 2022, respectively; cash and cash equivalents alone were $24.6 million at March 31, 2023 |
| Note payable | $92.4 million | — | March 31, 2023 balance-sheet carrying amount; $49.8 million available under revolver |
Commissions and agency fees were $25.5 million, up 27%; franchise revenues were $32.1 million, up 53%. Renewal Revenue grew 59% to $38.6 million, while New Business Revenue rose 9% to $13.4 million. Total Written Premium increased 41% to $637.7 million, and Policies in Force rose 23% year over year to 1.354 million. Client retention was 88%, and premium retention was 102%.
Material changes and balance-sheet items
- Renewal commissions increased 55% and renewal royalty fees increased 62%, reflecting more policies entering renewal terms and premium growth. Management identified renewal revenue as higher-margin and more predictable than new-business revenue.
- Operating expenses rose 19% to $56.5 million. Employee compensation increased 17%; bad-debt expense more than doubled to $1.7 million. Interest expense rose to $1.7 million from $0.9 million, primarily due to higher interest rates, partly offset by lower borrowings.
- Investing cash outflow was $2.7 million and financing cash outflow was $0.9 million. Cash and restricted cash decreased $4.2 million during the quarter.
- Total liabilities were $347.6 million and total equity was negative $26.0 million at March 31, 2023. The balance sheet included $128.8 million of tax receivable agreement liabilities. Deferred tax assets were $159.5 million.
- Franchise activity included 83 locations onboarded in Q1 versus 113 a year earlier. Operating franchises increased 9% to 1,387 year over year, while total franchises declined 19% to 1,865. Higher franchise turnover accelerated recognition of initial franchise fees; terminated franchise agreements also drove $5.6 million of contract-liability write-offs.
Outlook, risks, and other matters
Management provided no specific numerical earnings or revenue guidance. It said available liquidity—including cash, operating cash flows, working capital, and the revolving facility—was expected to meet foreseeable requirements. The company cited organic growth, operating costs, tax receivable agreement payments, debt service, taxes, and possible dividends as liquidity needs.
Debt bears variable interest rates and is secured by substantially all company assets, including rights to future commissions and royalties. A $65.6 million balloon payment is due in 2026; the company reported compliance with its debt covenants at quarter-end. The credit agreement provides for a transition to SOFR if LIBOR is phased out. The tax receivable agreement generally requires payment to pre-IPO LLC members of 85% of realized tax savings associated with specified tax-basis increases.
Management described contingent commissions as unpredictable and dependent on carrier performance and factors such as weather. The company noted seasonal revenue fluctuations related to contingent-commission timing and housing-market activity. It reported no material change to previously disclosed risk factors; routine litigation was not expected by management to materially affect financial position or results. Disclosure controls were assessed as effective, with no material change to internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether strong revenue and written-premium growth converts into sustained GAAP profitability and positive operating cash flow; Q1 remained a net loss and used operating cash.
- How much growth depends on renewals, premium-rate changes, and franchise performance, and whether 88% client retention and 102% premium retention persist.
- Franchise turnover, bad-debt expense, fee write-offs, and the declining total franchise count, despite growth in operating locations.
- Exposure to variable borrowing costs and the 2026 debt balloon, alongside the company’s covenant headroom and liquidity needs.
- The timing and amount of tax receivable agreement payments, which depend on realized tax savings and future LLC-unit redemptions or exchanges.
- Non-GAAP figures, especially Adjusted EBITDA and Adjusted EPS, alongside GAAP results; Adjusted EBITDA adds back $6.6 million of equity-based compensation in Q1.