Goosehead Insurance, Inc. — Form 10-Q summary
Reporting period: Quarter and nine months ended September 30, 2018. The company brokers personal and commercial property and casualty insurance through company-owned agencies and franchises. It completed its IPO and related reorganization on May 1, 2018; prior-period results largely reflect its predecessor and are not fully comparable to post-IPO results, including for taxes and attribution of earnings.
Financial performance and position
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Total revenue | $16.1 million (+49%) | $10.8 million | $45.4 million (+44%) | $31.6 million |
| Operating income (loss) | $2.7 million | $0.9 million | $(15.3) million | $6.5 million |
| Net income (loss), consolidated | $0.8 million | $0.2 million | $(19.3) million | $8.3 million |
| Net income (loss) attributable to Goosehead Insurance, Inc. | $0.2 million | $0 | $(9.0) million | $0 |
| Adjusted EBITDA (non-GAAP) | $3.4 million; 21% margin | $2.4 million; 22% margin | $12.4 million; 27% margin | $8.4 million; 27% margin |
| Operating cash flow | Not provided separately | Not provided separately | $7.4 million | $12.1 million |
Q3 commissions and agency fees were $9.8 million (+46%); franchise revenue was $6.2 million (+53%). Q3 basic and diluted EPS were $0.02. Nine-month basic and diluted EPS were $(0.66); the company also reported non-GAAP Adjusted EPS of $0.18 for the nine-month period and $0.05 for Q3.
Nine-month results include $26.7 million of equity-based compensation, principally non-cash charges associated with the IPO reorganization and conversion of pre-IPO interests. This significantly affected GAAP operating results; Adjusted EBITDA excludes equity-based compensation and other specified items and is not a GAAP measure.
At September 30, cash and cash equivalents were $18.1 million, total current assets $21.9 million, and current liabilities $6.8 million. Principal debt was $49.5 million: $39.5 million term debt and $10.0 million drawn on the revolver. A $13.0 million revolving facility had $2.5 million available after a $0.5 million letter of credit. The debt is secured by substantially all company assets, including future commission rights. Nine-month investing cash use was $1.3 million and financing cash provided was $7.0 million. Total equity was negative $26.5 million, including a $109.5 million non-controlling interest deficit.
Changes, operating metrics, and outlook
- Growth was supported by 310,000 policies in force (+50% year over year), 424 operating franchises (+59%), and 174 corporate sales agents (+55%). Total written premium rose 50% in Q3 to $140.3 million and 48% for the nine months to $373.9 million.
- Client retention was 88%; trailing-twelve-month premium retention was 94%. Management reported NPS of 88, up from 86 at year-end 2017.
- Q3 Adjusted EBITDA rose 42%, while its margin declined one percentage point to 21%. Management attributed corporate-channel margin pressure to hiring and technology investment, with franchise-channel margin benefiting from renewal revenue and contingent commissions.
- Management cited softness in the housing market late in Q3 and expected it to continue into Q4, while stating that steps were being taken to mitigate the headwind. No numerical revenue or earnings guidance was provided.
- Management stated that cash, working capital, operating cash flow, and revolver availability were expected to meet foreseeable liquidity needs. The August refinancing lowered borrowing costs by 300 basis points, but shortened term-loan maturity to three years; a balloon payment is due August 3, 2021. The company was in compliance with debt covenants at quarter-end.
- Operating leases require $24.1 million of future minimum payments through 2029. The credit agreement includes leverage and fixed-charge covenants, distribution restrictions, and change-of-control provisions.
Risks, contingencies, and unusual items
- Disclosure controls were reported ineffective at September 30 because previously identified material weaknesses in financial statement review, accounting-policy review, and IT general controls remained unremediated. Remediation actions were underway, but effectiveness had not yet been tested over a sufficient period.
- The company’s variable-rate debt exposes it to interest-rate changes. It must maintain specified financial ratios and faces potential acceleration of debt after certain defaults or change-of-control events.
- The company entered a tax receivable agreement requiring payment to pre-IPO members of 85% of certain realized tax savings. No tax-basis adjustment-triggering redemptions or exchanges occurred during the reported period.
- Management said litigation losses were not probable or reasonably estimable and did not expect outstanding claims to materially affect financial position or results. No material changes to previously disclosed risk factors or market-risk exposure were reported.
- The company expected to adopt the new revenue recognition standard in 2019. It anticipated possible timing changes for commissions, contingent commissions, and franchise fees, but had not quantified the overall impact.
Key facts for investors to verify
- How much of the nine-month GAAP loss reflects IPO/reorganization-related equity compensation and other nonrecurring charges, and how do non-GAAP adjustments reconcile?
- Whether the housing-market softness persisted beyond Q3 and how it affected new business, policies, and premium growth.
- Progress in remediating and independently testing the material weaknesses in internal controls.
- Debt covenant headroom, variable-rate interest exposure, and the ability to repay or refinance the 2021 balloon maturity.
- The future cash cost of tax receivable agreement payments and the effects of potential LLC-unit redemptions or exchanges.
- The actual timing and magnitude of revenue recognition changes under the new accounting standard.