Goosehead Insurance, Inc. — Q1 2018 Form 10-Q
Business context and period. The report covers the three months ended March 31, 2018, with comparison to Q1 2017. The financial statements are for predecessor Goosehead Financial, LLC and its subsidiaries and affiliates. The company distributes personal and commercial property and casualty insurance through corporate-owned and franchise channels. Goosehead Insurance, Inc. completed its IPO on May 1, 2018, after the quarter ended.
Financial and operating performance
| Metric | Q1 2018 | Q1 2017 | Change |
|---|---|---|---|
| Total revenue | $14.6 million | $9.9 million | +47% |
| Commissions and agency fees | $9.6 million | $6.4 million | +51% |
| Franchise revenue | $4.9 million | $3.5 million | +41% |
| Income from operations | $4.8 million | $2.8 million | +70% |
| Net income | $3.8 million | $2.3 million | +66% |
| Adjusted EBITDA (non-GAAP) | $5.1 million | $2.9 million | +74% |
| Adjusted EBITDA margin | 35% | 30% | +5 percentage points |
| Net cash from operating activities | $2.6 million | $1.5 million | — |
Operating income was 33% of revenue. Net income and reported pro forma EPS ($0.08 versus $0.05) reflect predecessor-period results and pro forma public-company ownership and taxes; the predecessor was generally treated as a partnership for tax purposes.
At March 31, cash and cash equivalents were $6.3 million, and restricted cash was $0.6 million. Total assets were $22.2 million and total liabilities were $59.6 million, resulting in a members’ deficit of $37.4 million. Term debt was $49.5 million, including $0.5 million current, at a floating rate of LIBOR plus 5.5% (7.20% at quarter-end). The company reported $2.5 million available under its revolving facility, net of a $0.5 million letter of credit, and compliance with debt covenants. Operating leases represented $15.6 million of disclosed future minimum payments.
Material changes and operating trends
- Total Written Premium grew 43% to $100.9 million; Policies in Force rose 33% year over year to 251,972.
- Corporate sales headcount increased 61% to 121, while operating franchises increased 55% to 341. Franchise locations sold during the quarter totaled 58, versus 38 a year earlier.
- Corporate Channel Adjusted EBITDA increased 35% to $2.0 million; Franchise Channel Adjusted EBITDA increased 110% to $3.1 million. Franchise performance benefited from growth in royalties, initial fees, renewals, and contingent commissions.
- Employee compensation and benefits rose 40% to $6.8 million, largely reflecting headcount growth. Interest expense rose 87% to $1.0 million, attributed to additional term debt and higher LIBOR. Depreciation and amortization increased 145% to $0.3 million.
- Operating cash flow improved, but was affected by a $2.8 million increase in other assets, primarily capitalized IPO costs, and higher receivables. Investing cash outflow was $0.6 million, primarily for property, equipment, software, and restricted cash; financing outflow was $0.6 million, including $0.55 million in dividends.
Outlook, risks, contingencies, and unusual items
- No quantified financial guidance was provided. Management said it expects cash, working capital, operating cash flow, and the revolver to fund foreseeable working-capital needs and commitments.
- Management said contingent commissions are typically received largely in the first quarter, making their timing and amount relevant to interpreting quarterly results. Growth plans require continued hiring and franchise expansion; new corporate agents initially increase costs as they ramp.
- Debt is secured by substantially all company assets, including future commission rights. The term loan has a $47.25 million balloon payment due in October 2022. The agreement includes financial covenants and change-of-control provisions that could trigger acceleration.
- Management reported no material change in disclosed risk factors. Litigation was described as ordinary-course; loss amounts were not probable or reasonably estimable, and management did not expect a material adverse effect. No material off-balance-sheet arrangements were reported beyond disclosed commitments.
- Disclosure controls were deemed ineffective as of March 31, 2018, due to continuing material weaknesses involving executive review of GAAP financial statements, accounting-policy review, and IT access and change-management controls. Remediation was underway, but effectiveness had not yet been tested over a sufficient period.
- After quarter-end, the May 1 IPO generated approximately $87 million of net proceeds. The filing reports subsequent compensation expense of $6.2 million and $19.8 million associated with equity conversions in the reorganization. A tax receivable agreement entitles pre-IPO members to 85% of specified cash tax savings actually realized.
- The company was evaluating the impact of the new revenue-recognition standard, effective for it January 1, 2019; the filing did not provide a clear estimate of the impact.
Important facts for investors to verify
- How durable revenue growth and contingent commissions are, given their seasonality and dependence on carrier results.
- Whether agent and franchise expansion converts into sustainable renewal revenue and margins while controlling compensation and overhead.
- Debt-service capacity, floating-rate exposure, covenant headroom, and the 2022 balloon maturity.
- Completion and testing of internal-control remediation, and the accounting and cash-flow effects of the IPO, equity conversions, and tax receivable agreement.
- Whether cash-flow growth continues as receivables and other assets rise, and how much IPO proceeds are ultimately used for debt repayment versus other purposes.