Goosehead Insurance, Inc. — Q2 2018 Form 10-Q
Business context and reporting period. This unaudited filing covers the quarter and six months ended June 30, 2018, compared with the same periods in 2017. Goosehead distributes property and casualty insurance through company-owned agencies and franchises. It completed its IPO and related reorganization on May 1, 2018; Goosehead Insurance, Inc. controls Goosehead Financial, LLC but held a 37.3% economic interest at quarter-end, with 62.7% reported as non-controlling interest.
Key financial results
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Total revenue | $14.8 million | $10.9 million | $29.4 million | $20.8 million |
| Operating income (loss) | $(22.7) million | $2.8 million | $(18.0) million | $5.6 million |
| Net income (loss) | $(23.9) million | $5.8 million | $(20.1) million | $8.1 million |
| Adjusted EBITDA | $4.0 million | $3.2 million | $9.1 million | $6.1 million |
| Adjusted EBITDA margin | 27% | 29% | 31% | 29% |
- Q2 revenue grew 36%; first-half revenue grew 41%. Q2 commissions and agency fees rose 27% to $8.7 million, while franchise revenue rose 50% to $6.0 million.
- Losses included $26.4 million of equity-based compensation, primarily associated with the IPO reorganization and conversion of pre-IPO interests. Adjusted EBITDA excludes equity-based compensation and other specified items; it is a non-GAAP measure.
- The prior-year periods included a $3.5 million gain from a franchisee buyout, excluded from Adjusted EBITDA.
- First-half operating cash flow was $7.3 million, versus $7.5 million in 2017; investing cash flow was $(1.0) million. Financing provided $7.7 million, including IPO proceeds and substantial distributions.
- At June 30, cash and cash equivalents were $18.9 million; current assets were $22.8 million and current liabilities $6.4 million. Total assets were $32.0 million.
- At June 30, term-loan principal was $49.4 million, with $0.5 million current; the balance-sheet carrying amount was approximately $48.5 million after unamortized fees. The company had a $3.0 million revolving facility, with $2.5 million available after a letter of credit. Debt was secured by substantially all assets, including future commission rights.
Business trends and changes
- Policies in force reached 282,369, up 49% year over year. Total written premium increased 52% in Q2 and 48% for the first half.
- Operating franchises increased 58% to 385; corporate sales headcount increased 74% to 148. Growth in new business, franchise fees and renewals supported revenue and adjusted EBITDA.
- Client retention was 88%; premium retention was 95%. Net Promoter Score was 87, compared with 86 at year-end 2017.
- Corporate Channel Q2 adjusted EBITDA was approximately flat year over year at $1.9 million, while Franchise Channel adjusted EBITDA rose 75% to $2.2 million. Consolidated Q2 adjusted EBITDA margin fell to 27% from 29%, primarily reflecting corporate-agent hiring and ramp-up costs.
Outlook, risks and unusual items
- Management said available liquidity sources should be sufficient for working capital and commitments in the foreseeable future. It expects new corporate sales agents to ramp up and contribute to future corporate-channel margin expansion. The filing gives no specific numerical revenue or earnings guidance.
- On August 3, 2018, the company refinanced its facilities with a $40 million term loan and a $13 million revolver, seeking a more favorable interest rate. The new term-loan rate initially was LIBOR plus 2.50%, subject to leverage-based pricing; $10 million was drawn on the revolver and $2.5 million remained available at that date. The term loan matures in 2021, with a balloon payment due at maturity. The company reported covenant compliance as of August 3.
- The new credit agreement includes financial and other covenants, restrictions on distributions and change-of-control provisions; breach could permit acceleration of debt. The filing also identifies operating lease commitments of approximately $15.7 million as of June 30.
- Management expects adoption of the revenue-recognition standard on January 1, 2019, using the modified retrospective method, to materially change the timing of contingent commission and initial franchise fee revenue recognition; the impact was still being evaluated.
- A tax receivable agreement requires payment to pre-IPO members of 85% of qualifying cash tax savings actually realized. No related tax-basis increase-triggering redemptions or distributions occurred in the period.
- Disclosure controls were deemed ineffective at June 30 because previously identified material weaknesses in financial-statement review, accounting-policy review and IT general controls had not yet been tested over a sufficient period. Remediation was underway. Management said outstanding legal matters were not expected to materially affect financial position or results.
Investor facts to verify
- How much of the reported GAAP loss reflects IPO-related equity compensation, and what recurring compensation expense and operating margins look like after the reorganization.
- Whether rapid hiring and franchise growth translate into sustained policy, premium and renewal growth, while maintaining retention and channel profitability.
- The post-refinancing debt drawn, available revolver capacity, interest costs, covenant headroom and ability to meet the 2021 term-loan maturity.
- The eventual timing and financial-statement effects of the new revenue-recognition standard and the tax receivable agreement.
- Whether management’s remediation of the disclosed internal-control material weaknesses is effective after sufficient testing.