Business context and reporting period
Goosehead Insurance, Inc. filed its Form 10-K for the fiscal year ended December 31, 2019. It distributes personal and small-commercial insurance through company-operated agencies (Corporate Channel) and franchisees (Franchise Channel); it does not underwrite insurance risk. The company reported under ASC 606 for the first time in 2019, using the modified retrospective method, so reported revenue and profit are not directly comparable with 2018 without adjustment.
Financial and operating performance
| Metric | 2019 | 2018 |
|---|---|---|
| Total revenue, reported | $77.5 million | $60.1 million |
| Net income (loss), consolidated | $10.4 million | ($18.7 million) |
| Net income (loss) attributable to Goosehead Insurance, Inc. | $3.6 million | ($8.9 million) |
| Adjusted EBITDA (non-GAAP) | $17.5 million; 23% margin | $14.8 million; 25% margin |
| Net cash from operating activities | $21.2 million | $10.3 million |
| Cash and restricted cash at year-end | $15.3 million | $19.0 million |
| Total debt at year-end | $46.2 million | $48.4 million |
Revenue under ASC 605, the prior accounting basis, would have been $84.1 million in 2019, up 40% from 2018. On that basis, 2019 net income would have been $15.3 million and Adjusted EBITDA $22.9 million, or 27% of revenue. The filing attributes much of the reported-versus-legacy difference to timing of recognition for franchise fees and contingent commissions.
Total Written Premium rose 45% to $739.0 million; Policies in Force increased 44% to 482,000. Franchise Channel premium grew 56%, versus 28% in the Corporate Channel. At year-end, the company had 614 operating franchises and 334 signed franchises still in implementation, and 248 Corporate sales agents. Core Revenue increased 36% to $67.6 million; Renewal Revenue rose 39% to $30.5 million. Client retention was 88% and premium retention 91%; NPS was 89.
Current assets were $26.7 million and current liabilities $13.4 million. Total assets were $64.6 million, total liabilities $95.6 million, and total equity was negative $31.0 million. The company reported $21.2 million of operating cash flow, $4.1 million used in investing, and $20.9 million used in financing, including a $15 million extraordinary dividend. Debt included a $40 million term loan and $10 million drawn on a revolving facility; approximately $2.7 million remained available under the revolver at year-end.
Prior-period changes and unusual items
- Reported 2019 net income improved by $29.0 million from 2018. The 2018 result included $26.1 million of Class B unit compensation, largely non-cash, associated with the IPO-related reorganization.
- ASC 606 reduced 2019 reported revenue by $6.6 million versus the legacy accounting presentation and reduced reported net income by about $4.9 million. It also changed the timing of recognition for initial franchise fees and contingent commissions; operating cash flow was unchanged by adoption.
- The 2019 Adjusted EBITDA margin was 23%, versus 25% in 2018 under reported accounting. Management said the margin would have been 27% in 2019 under ASC 605, and cited investment in hiring and technology alongside growth in renewal revenue.
- The company recorded a $15 million extraordinary dividend in 2019. It also recognized $13.4 million of liabilities under its tax receivable agreement following LLC-unit redemptions.
Outlook, risks and contingencies
Management provided no specific numerical revenue or earnings guidance. It expects to continue expanding agent and franchise recruitment, investing in technology and support, and growing national franchise penetration. Management sees potential for margins to expand as policies renew, particularly because the franchise royalty rate rises from 20% on first-term policies to 50% on renewals; it emphasized prioritizing organic growth.
Key risks include insurance-premium and commission-rate cycles, housing-market dependence and seasonality, natural disasters that can affect contingent commissions, reliance on a limited number of carriers, and franchisee recruitment, performance and retention. The company also highlights regulatory and licensing requirements, litigation and errors-and-omissions claims, cybersecurity and third-party technology risks, and debt covenants and variable interest rates. It reported no material legal proceedings and stated it was in compliance with debt covenants at December 31, 2019.
Subsequent event: on March 6, 2020, the company refinanced its facilities with an $80 million term loan and a $25 million revolver. At that date, $5 million was drawn on the revolver and $19.7 million was available; the new facilities mature in 2023 and are secured by substantially all company assets. The filing also identifies LIBOR transition uncertainty and significant lease commitments: $22.3 million of future minimum operating lease payments at year-end.
Important facts for investors to verify
- Compare growth and profitability on a consistent accounting basis: 2019 uses ASC 606, while 2018 was not restated; review the filing’s ASC 605 reconciliations and non-GAAP definitions.
- Assess the quality and sustainability of reported growth, including franchise implementation-to-opening conversion, agent productivity, renewal growth, and client and premium retention.
- Review contingent-commission estimates and collections, given their volatility and the $3.6 million receivable for 2019 commissions at year-end.
- Confirm debt terms, covenant headroom, interest-rate exposure and use of proceeds following the March 2020 refinancing.
- Evaluate the effects of the $13.4 million tax receivable agreement liability, negative consolidated equity, and future distributions or dividends.