Goosehead Insurance, Inc. — Q3 2020 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2020. Goosehead distributes personal and commercial property and casualty insurance through corporate-owned agencies and a franchise network. Unless noted, amounts below are in millions. 2020 results use ASC 606; 2019 comparatives use ASC 605, so reported growth is affected by accounting differences.
Financial performance
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Total revenue | $32.0 | $21.2 | $82.4 | $63.7 |
| Operating income | $7.0 | $3.7 | $14.8 | $16.2 |
| Net income | $6.7 | $2.8 | $13.8 | $12.9 |
| Net income attributable to Goosehead, Inc. | $3.3 | $1.0 | $6.5 | $4.4 |
| Adjusted EBITDA (non-GAAP) | $9.3 | $4.6 | $20.3 | $18.8 |
| Adjusted EBITDA margin (non-GAAP) | 29% | 22% | 25% | 29% |
| Diluted EPS | $0.17 | $0.06 | $0.36 | $0.27 |
Q3 revenue increased 51% as reported; on a comparable ASC 605 basis, it grew 42%. Nine-month revenue grew 29% as reported and 30% on a comparable ASC 605 basis. Q3 net income was 21% of revenue. Adjusted EBITDA and margin are non-GAAP measures and should not be treated as substitutes for GAAP results.
Revenue growth reflected higher renewal and new-business commissions and franchise royalties, alongside increases in agent headcount, operating franchises and policies. Q3 total written premium rose 49% to $301.0 million; nine-month premium rose 45% to $788.9 million. Policies in force reached 657,000, up 47% year over year. There were 823 operating franchise locations versus 583 a year earlier, and 371 corporate sales agents versus 232.
Cash flow, balance sheet and liquidity
- Cash flow, nine months: Operating cash flow was $15.0 million, compared with $16.5 million in 2019. Investing outflow was $5.1 million versus $3.6 million; financing outflow was $3.9 million versus $20.3 million. Cash and restricted cash increased by $6.1 million to $21.3 million, including $20.0 million unrestricted cash.
- Debt: At September 30, debt comprised a $79.0 million term note and $5.0 million drawn on the revolver. The $25.0 million revolving facility had $19.7 million available after a $0.3 million letter of credit. Debt bears variable, LIBOR-based rates; the company reported covenant compliance.
- Liquidity: Current assets were $39.4 million and current liabilities $14.2 million. Management said cash, operating cash flow and revolver availability should be sufficient for foreseeable needs.
- Equity and tax obligations: Total consolidated equity was negative $49.4 million. The tax receivable agreement liability was $42.2 million; under the agreement, the company generally pays former LLC members 85% of realized tax savings associated with specified tax-basis increases.
Material changes, outlook and risks
- Revenue accounting: ASC 606 changed recognition timing, notably accelerating contingent commission recognition and recognizing initial franchise fees over the franchise agreement term. Q3 contingent commissions were $4.2 million under ASC 606 versus $0.6 million in 2019; under ASC 605, 2020 Q3 contingent commissions would have been $0.002 million. The filing says ASC 606 also increased Q3 2020 reported revenue and Adjusted EBITDA relative to ASC 605. Comparisons should account for this timing effect.
- Profitability trend: Nine-month operating income declined to $14.8 million from $16.2 million, while Adjusted EBITDA rose to $20.3 million from $18.8 million. The company attributed pressure in part to lower contingent commissions versus 2019 and increased staffing and operating costs.
- Dividend and borrowing: Goosehead declared and paid a $42.0 million extraordinary dividend in August 2020 ($1.15 per share of Class A stock). During the first nine months, it drew the remaining $37.9 million of its term loan; the term note includes a $68.0 million maturity in 2023.
- COVID-19: Operations were largely uninterrupted, and management reported no observed adverse effect to date on receivable collection, new business, franchise additions or retention. It cautioned that effects could emerge later through economic conditions, home sales, consumer spending, mortgage defaults or continued remote work. Management also said lower loss ratios may have increased expected contingent commissions.
- Outlook: The filing provides no specific numerical revenue or earnings guidance. Management cited continued business strength and expected liquidity sufficiency, while noting uncertainty around COVID-19 and contingent commissions. Contingent commissions are unpredictable and depend on carrier results and other factors.
- Other obligations and contingencies: Operating lease commitments totaled $20.5 million. Management said pending legal matters were not expected to have a material adverse effect; loss amounts were not probable or reasonably estimable.
Investor verification points
- Assess underlying growth using ASC 605-comparable figures, especially for contingent commissions, initial franchise fees and Adjusted EBITDA.
- Verify the sustainability and cash realization of contingent commissions, including the effect of carrier loss ratios and COVID-related conditions.
- Review debt repayment capacity, variable-rate exposure, 2023 maturities, covenant headroom and the impact of the extraordinary dividend.
- Evaluate the collectability and timing of franchisee receivables, deferred franchise revenue and the $42.2 million tax receivable agreement liability.
- Track operating costs, agent and franchise productivity, retention, and whether rapid policy growth converts into profitable renewal revenue.