Goosehead Insurance, Inc. — Q2 2020 Form 10-Q
Reporting period: Three and six months ended June 30, 2020. Unaudited. Goosehead distributes personal and commercial property and casualty insurance through company-owned agencies and franchises.
Financial performance
Amounts below are in millions except per-share data. The 2020 results use ASC 606; 2019 comparatives use legacy ASC 605 and were not restated. Management provides comparable 2020 ASC 605 figures where noted.
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Total revenue | $29.9 | $19.4 | $50.3 | $42.5 |
| Operating income | $7.6 | $3.9 | $7.8 | $12.6 |
| Net income | $7.4 | $2.8 | $7.1 | $10.1 |
| Net income attributable to Goosehead | $3.4 | $0.9 | $3.2 | $3.4 |
| Adjusted EBITDA (non-GAAP) | $9.8 | $4.7 | $11.0 | $14.2 |
| Adjusted EBITDA margin (non-GAAP) | 33% | 24% | 22% | 33% |
| Diluted EPS | $0.19 | $0.06 | $0.18 | $0.22 |
- Management’s comparable ASC 605 basis showed revenue growth of 42% in Q2 and 23% for the first half, versus reported growth of 54% and 18%, respectively. Q2 comparable adjusted EBITDA was $7.3 million, up from $4.7 million; first-half comparable adjusted EBITDA was $12.6 million, down from $14.2 million.
- Q2 Core Revenue, a non-GAAP measure, grew 41% to $24.7 million. Reported Q2 adjusted EBITDA margin was 33%, but management said it would have been 27% on the ASC 605 basis. First-half reported margin was 22%, versus 24% on the comparable ASC 605 basis.
- Revenue growth reflected expansion in commissions and agency fees and franchise royalties. Q2 contingent commissions were $4.0 million versus $0.1 million a year earlier; they are high-margin but unpredictable. First-half contingent commissions were $5.1 million versus $7.6 million.
- Operating expenses rose with hiring, stock-based compensation, franchise growth, technology investment and additional sales offices. Q2 employee compensation and benefits were $15.9 million, up 53%; first-half expenses were $29.4 million, up 50%.
Cash flow, liquidity and debt
- At June 30, 2020, cash and cash equivalents were $54.3 million, restricted cash was $1.5 million, current assets were $72.4 million and current liabilities were $12.4 million. Total liabilities were $159.8 million; total equity was negative $17.2 million.
- First-half operating cash flow was $6.5 million, down from $10.7 million. Investing cash outflow was $4.1 million, principally reflecting office expansion and equipment. Financing cash inflow was $38.1 million, including a $37.9 million term-loan draw.
- Debt at quarter-end comprised $79.5 million of term debt and $5.0 million drawn on a $25.0 million revolver. Another $19.7 million was available under the revolver after a letter of credit. Interest rates were variable; the company reported compliance with debt covenants.
- Contractual obligations included approximately $26.0 million of operating lease payments and $35.8 million of tax receivable agreement liabilities. The company said it expected cash, operating cash flows and revolving credit availability to meet foreseeable needs.
Business trends and material changes
- Total written premium increased 41% year over year to $273.7 million in Q2 and 43% to $487.8 million for the first half. Policies in force reached 590,000, up 45% from June 30, 2019.
- At quarter-end, there were 730 operating franchises, up 36% year over year, and 317 corporate sales agents, up 49%. Client retention was 88%; premium retention was 89% for the trailing twelve months. NPS was 90.
- Q2 franchise-channel adjusted EBITDA was $6.5 million and corporate-channel adjusted EBITDA was $4.1 million. Management’s comparable ASC 605 analysis indicated year-over-year Q2 increases of 70% and 34%, respectively. For the first half, comparable channel results were weaker, with declines attributed in part to lower contingent commissions.
- ASC 606 changed the timing and presentation of revenue, including contingent commissions and initial franchise fees. The filing’s reported Q2 and first-half year-over-year comparisons are therefore not fully like-for-like.
Outlook, risks and unusual items
- The filing provides no specific revenue, earnings or other quantitative guidance. Management described the business as resilient and said it continued to monitor COVID-19 developments.
- COVID-19 had not, to the filing date, adversely affected revenue, receivable collections or access to capital, according to management. Remote work, cloud systems and virtual meetings helped maintain operations. Management cautioned that effects could emerge later through weaker home sales, lower insurance purchases, customer payment difficulties, or extended limits on in-person sales and training.
- Management said pandemic-related consumer behavior may have reduced insurance loss ratios through the first half, potentially increasing contingent commissions. Such commissions depend on carrier underwriting and loss experience and are inherently uncertain.
- On July 30, 2020, after quarter-end, Goosehead approved an extraordinary $42.0 million distribution to LLC unit holders; the company declared a $1.15-per-share dividend to Class A holders, payable by August 24. No Q2 dividend was declared.
- On March 6, 2020, the company refinanced and expanded its credit facilities. It drew the remaining $37.9 million of term-loan capacity on June 24. Deferred tax assets rose to $41.4 million from $15.5 million at year-end, primarily due to LLC unit redemptions; the related tax receivable agreement generally entitles pre-IPO members to 85% of realized tax savings.
- Management said outstanding legal claims were not expected to have a material adverse effect; potential loss amounts were not considered probable or reasonably estimable. Operating lease accounting guidance was expected to have a potentially significant effect when adopted in the 2020 annual report.
Key facts for investors to verify
- Compare growth and profitability on a consistent accounting basis, especially the effects of ASC 606 on contingent commissions, franchise fees and reported margins.
- Assess the sustainability of Q2 earnings and EBITDA given contingent-commission timing, first-half results, hiring costs and channel-level performance.
- Monitor COVID-19 effects on home transactions, premium growth, client retention, carrier loss ratios and commission collections.
- Evaluate debt repayment and variable-rate exposure, lease commitments, tax receivable agreement payments, and the liquidity impact of the $42.0 million extraordinary distribution.
- Track franchise and agent productivity alongside rapid growth in operating locations, headcount and policies in force.