Goosehead Insurance, Inc. — Q3 2019 Form 10-Q
Reporting period: Three and nine months ended September 30, 2019; comparative periods ended September 30, 2018. Amounts are in U.S. dollars. Unless stated otherwise, financial figures below are consolidated.
Business context
Goosehead distributes personal and commercial property and casualty insurance through company-owned agencies and franchises. It reported two channels: Corporate and Franchise. At quarter-end, it had 583 operating franchises and 232 corporate sales agents. Goosehead Insurance, Inc. consolidates Goosehead Financial, LLC but held 41.8% of its economic interest; the remaining interest is reported as non-controlling interest.
Financial performance and key metrics
| Metric | Q3 2019 | Q3 2018 | Change |
|---|---|---|---|
| Total revenue | $21.2 million | $16.1 million | +32% |
| Commissions and agency fees | $11.7 million | $9.8 million | +20% |
| Franchise revenue | $9.3 million | $6.2 million | +50% |
| Income from operations | $3.7 million | $2.7 million | — |
| Net income | $2.8 million | $0.8 million | +231% |
| Net income attributable to Goosehead Insurance, Inc. | $1.0 million | $0.2 million | — |
| Basic / diluted EPS | $0.07 / $0.06 | $0.02 / $0.02 | — |
| Adjusted EBITDA (non-GAAP) | $4.6 million | $3.4 million | +37% |
| Adjusted EBITDA margin (non-GAAP) | 22% | 21% | +1 percentage point |
For the first nine months, revenue rose 40% to $63.7 million. Net income was $12.9 million, compared with a $19.3 million loss in 2018; net income attributable to the Company was $4.4 million versus an $9.0 million loss. Adjusted EBITDA was $18.8 million, up 51%, and its margin was 29% versus 27%. The year-over-year profit comparison is heavily affected by $26.1 million of Class B unit compensation expense recorded in the first nine months of 2018.
Growth indicators included $202.1 million of total written premium placed in Q3, up 44%; 448,000 policies in force, up 45% year over year; and client retention of 88%. Premium retention was 92%, and NPS was 90. Management attributed growth to more sales agents and franchises, and to expanding renewal business.
Cash flow, debt and liquidity
- Cash and cash equivalents were $10.8 million at September 30, 2019, plus $0.7 million of restricted cash. Cash and restricted cash declined $7.5 million from year-end 2018.
- For the first nine months, operating cash flow was $16.5 million; investing cash outflow was $3.6 million, primarily for property, equipment and software; financing cash outflow was $20.3 million.
- Financing outflows included a $15.0 million extraordinary dividend and tax distributions to pre-IPO LLC members. The dividend was $0.41 per Class A share.
- Debt principal was $47.3 million: $37.3 million under the term loan and $10.0 million drawn on the revolver. The revolver had $2.6 million available, after a letter of credit. Debt bears variable interest and is secured by substantially all Company assets, including future commission rights.
- The term loan has a balloon payment due August 3, 2021. The Company reported compliance with its debt covenants at quarter-end. The balance sheet showed total liabilities of $72.3 million and a total equity deficit of $27.9 million.
- Current assets were $17.1 million and current liabilities were $9.5 million. Management said it expects cash, operating cash flow and available revolving credit to fund foreseeable requirements.
Material changes, outlook and risks
- Renewal commissions and franchise royalties grew strongly, supported by policy growth and the larger franchise network. Q3 corporate contingent commissions fell 40%, which management attributed mainly to lower payments from one carrier following weather-related losses, primarily in Texas.
- Operating costs increased with hiring, franchise growth, technology investment and public-company costs. The first-nine-month comparison also reflects the unusually large 2018 Class B unit compensation expense.
- The Company recorded a $12.7 million tax receivable agreement liability. Under the agreement, it may owe pre-IPO members 85% of realized tax savings associated with certain tax-basis increases. Timing and amount of future payments depend on factors including taxable income and redemptions or exchanges.
- Future minimum operating lease payments totaled $22.8 million through 2029. The Company said adoption of the new lease standard in 2020 could have a significant financial statement impact.
- The Company expected adoption of revenue recognition standard Topic 606 to increase accumulated deficit by an estimated $6 million to $10 million, with offsetting balance-sheet effects. It planned to use the modified retrospective method; comparative periods would not be restated.
- The filing disclosed a correction of prior-period equity allocations, which management concluded was not material to those prior periods. Management stated outstanding legal claims were not expected to have a material adverse effect, although potential losses were not reasonably estimable. No material changes to previously disclosed risk factors or market-risk exposure were reported.
- No formal revenue or earnings guidance was provided. Management’s liquidity statement is forward-looking and subject to risks, including business growth and spending needs, variable-rate debt, covenant restrictions, tax receivable agreement payments, and carrier and weather-related contingent commission variability.
Important facts for investors to verify
- Whether written-premium and policy growth convert into sustained revenue, renewal growth and cash generation.
- The sustainability and variability of carrier contingent commissions, particularly given weather-related loss experience.
- Debt repayment capacity and refinancing exposure ahead of the August 2021 term-loan maturity, including variable interest costs and covenant headroom.
- The timing and amount of tax receivable agreement payments, and how Topic 606 and lease-standard adoption affect reported results and balance-sheet obligations.
- How much of consolidated earnings and cash distributions accrue to public shareholders versus non-controlling interests; Q3 consolidated net income was $2.8 million, while $1.0 million was attributable to Goosehead Insurance, Inc.