Goosehead Insurance, Inc. — Q3 2022 Form 10-Q
Reporting period: Three and nine months ended September 30, 2022; unaudited. Goosehead operates a U.S. property and casualty insurance brokerage through corporate-owned agencies and franchises. It reported one operating segment.
Financial performance
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Total revenue | $57.7 million | $41.7 million | $152.0 million | $111.1 million |
| Operating income | $3.8 million | $3.5 million | $3.4 million | $6.5 million |
| Consolidated net income | $3.0 million | $5.4 million | $0.05 million | $7.4 million |
| Net income attributable to Goosehead | $2.0 million | $4.0 million | $0.06 million | $5.1 million |
| Basic and diluted EPS | $0.09 / $0.09 | $0.21 / $0.19 | Less than $0.01 / less than $0.01 | $0.27 / $0.25 |
| Adjusted EBITDA (non-GAAP) | $11.0 million | $6.6 million | $24.8 million | $15.5 million |
| Adjusted EBITDA margin (non-GAAP) | 19% | 16% | 16% | 14% |
Q3 Core Revenue, a non-GAAP measure, rose 39% to $51.9 million. Growth was led by renewal revenue: renewal commissions increased 50% and renewal royalty fees 63% year over year. Contingent commissions fell 18% to $2.0 million. Nine-month revenue grew 37%, while operating income and net income declined; higher compensation, bad debts, depreciation and interest expense contributed.
Cash flow and liquidity: For the first nine months, operating cash flow was $33.0 million, investing cash outflow $16.8 million, and financing cash inflow $1.7 million. Cash and cash equivalents were $46.1 million at September 30; including restricted cash, cash totaled $48.4 million. The company reported $119.8 million of notes payable on its balance sheet and $25.0 million drawn under its revolving facility at quarter-end, with $24.8 million available. On October 11, 2022, it repaid the $25.0 million revolver balance.
Total assets were $324.0 million and total liabilities $369.7 million at September 30. Total equity was negative $45.7 million, including $52.0 million of non-controlling interests; equity attributable to Goosehead was positive $6.3 million. The company reported $112.4 million of tax receivable agreement liabilities on the balance sheet.
Business changes and operating indicators
- Total written premium increased 42% year over year to $615.6 million in Q3 and to $1.63 billion for the nine-month period.
- Policies in force reached 1.238 million, up 31% from September 2021. Client retention was 88%, versus 89% at December 2021; premium retention was 98%.
- Operating franchises increased 23% to 1,403; total franchises rose 17% to 2,287. The company onboarded 144 franchise locations in Q3, compared with 92 a year earlier.
- Corporate sales headcount fell 18% year over year to 411, while total company headcount increased 19%. NPS was 90, down from 92.
- Equity-based compensation rose to $5.4 million in Q3 and $16.4 million year to date, compared with $1.9 million and $5.6 million, respectively, in 2021.
Outlook, risks and notable items
- No specific financial guidance was provided. Management said available cash, operating cash flow, working capital and its revolver should fund working capital and commitments for the foreseeable future.
- Management describes renewal revenue as more predictable and higher margin; contingent commissions are unpredictable and depend on carrier underwriting, loss experience and events such as weather. The filing notes expectations for lower contingent commissions as loss ratios rise from pandemic-era lows.
- Variable-rate debt exposes the company to interest-rate increases; management attributed higher interest expense partly to the rate environment and borrowing. The credit agreement is secured by substantially all company assets, includes financial covenants, and was in compliance at quarter-end.
- Franchise turnover contributed to higher bad-debt expense and accelerated recognition of initial franchise fees. Nine-month bad-debt expense rose to $4.8 million from $1.8 million.
- The tax receivable agreement requires payment to pre-IPO members of 85% of realized tax savings. Future LLC-unit redemptions may create additional payments. Franchise receivables, the tax receivable agreement and future tax benefits depend on estimates and timing.
- Management cited ongoing uncertainty from COVID-19, inflation, housing-market activity and consumer spending. It reported no material changes to previously disclosed risk factors, no material adverse impact expected from outstanding litigation, and effective disclosure controls as of September 30, 2022.
Investor verification priorities
- Reconcile the October revolver repayment with subsequent cash, debt and borrowing availability.
- Track whether revenue growth converts to GAAP profitability, given nine-month net income of just $0.05 million and rising compensation and bad debts.
- Assess the durability of renewal growth, client and premium retention, and the trajectory of contingent commissions and loss ratios.
- Review franchisee receivable collectability, franchise turnover and bad-debt allowances.
- Monitor variable-rate debt, covenant headroom, the large 2026 term-note maturity, and tax receivable agreement payment estimates.
- Evaluate the impact of equity-based compensation and LLC-unit redemptions on reported earnings, dilution and ownership.