Goosehead Insurance, Inc. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019, compared with the three months ended March 31, 2018. Goosehead distributes personal and commercial property and casualty insurance through company-owned agencies and franchises. Because the company completed its IPO in May 2018 and consolidates Goosehead Financial, LLC while holding a minority economic interest, reported net income and income attributable to Goosehead differ; pre-IPO comparisons also reflect a different tax and ownership structure.
Financial performance
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Total revenue | $23.1 million | $14.6 million | +59% |
| Commissions and agency fees | $16.2 million | $9.6 million | +69% |
| Franchise revenue | $6.8 million | $4.9 million | +39% |
| Operating income | $8.7 million | $4.8 million | +82% |
| Net income | $7.3 million | $3.8 million | +94% |
| Net income attributable to Goosehead | $2.5 million | $0 | Not directly comparable |
| Basic / diluted EPS | $0.17 / $0.16 | Pro forma $0.08 / $0.08 | See ownership and tax caveat |
| Adjusted EBITDA (non-GAAP) | $9.5 million | $5.1 million | +86% |
| Adjusted EBITDA margin (non-GAAP) | 41% | 35% | +6 percentage points |
Growth reflected expansion in both channels, increased renewal revenue and contingent commissions, and a larger sales force and franchise network. Contingent commissions rose sharply: Corporate Channel commissions increased to $3.3 million from $1.1 million, and Franchise Channel contingent commissions to $4.2 million from $1.7 million. Employee compensation increased 34% to $9.2 million; general and administrative costs increased 87% to $4.4 million, attributed to hiring, franchise growth, technology investment and public-company costs. Interest expense fell 37% to $0.6 million following refinancing and lower applicable rates. Q1 2019 tax expense was $0.7 million; no tax expense was reported for Q1 2018, when the predecessor was generally treated as a pass-through entity.
Operations and material changes
- Total written premium placed increased 45% to $146.9 million; policies in force rose 45% year over year to 365,000.
- Operating franchises increased 47% to 501; the company sold 63 franchises during the quarter versus 58 a year earlier. Corporate sales headcount increased 52% to 184.
- New Business Revenue increased 36% to $5.2 million and Renewal Revenue increased 38% to $8.6 million. Client retention was 88%; premium retention was 93%.
- Corporate Channel Adjusted EBITDA increased 140% to $4.7 million; Franchise Channel Adjusted EBITDA increased 80% to $5.6 million. These are non-GAAP segment measures.
- On March 7, Goosehead Financial approved a $15.0 million extraordinary distribution to LLC unit holders. Goosehead Insurance declared a corresponding $0.41-per-share dividend to Class A shareholders. At quarter-end, $6.0 million was held by the transfer agent and $15.0 million was recorded as dividends payable; the dividend was scheduled to be paid by April 1, 2019.
Cash, debt and liquidity
- Cash and cash equivalents were $18.4 million at March 31, 2019; restricted cash was $0.4 million. Cash, including restricted cash, declined $0.2 million during the quarter.
- Operating cash flow was $1.8 million, down from $2.6 million. Investing cash outflow was $1.3 million, mainly for property and equipment and headquarters expansion. Financing cash outflow was $0.7 million.
- Debt principal was $48.5 million: $38.5 million on the term loan and $10.0 million drawn on the revolver. The balance sheet reported $48.0 million net of loan fees. Revolver capacity available was $2.6 million after a letter of credit. Debt bears variable LIBOR-based interest and is secured by substantially all company assets, including future commission rights.
- The term loan has a balloon maturity on August 3, 2021. Contractual debt obligations due in 2021 totaled $32.5 million. The company reported compliance with credit covenants at quarter-end.
- The company reported total assets of $48.4 million, total liabilities of $80.3 million, and total equity of negative $31.9 million, including substantial non-controlling interests. Deferred rent was $6.0 million, and the tax receivable agreement liability was $6.9 million.
- Future minimum operating lease payments were $23.6 million through 2029. Management said available cash, operating cash flow and revolver availability should fund working capital and commitments for the foreseeable future.
Outlook, risks and unusual items
The filing provides no specific numeric revenue, earnings or operating guidance. Management emphasized growth, agent and franchise expansion, technology investment, and increasing contribution from renewals. It cautioned that forward-looking results are subject to risks described in the company’s 2018 Form 10-K.
- The tax receivable agreement requires payment to pre-IPO members of 85% of certain realized tax savings. Payments depend on future taxable income, redemptions or exchanges, and other assumptions; the recorded liability increased during the quarter.
- Debt has variable rates, restrictive covenants and a 2021 balloon payment. A change of control could trigger default and acceleration. The company reported covenant compliance at March 31.
- The company expected adoption of the new revenue recognition standard to alter timing: commission revenue may be recognized earlier, contingent commissions more evenly through the year, and initial franchise fees generally over the contract term. The impact was still under evaluation.
- New lease accounting was expected to have a potentially significant effect given $23.6 million of future minimum operating lease commitments.
- Management said outstanding legal claims were not probable or reasonably estimable and did not expect their resolution to materially affect financial position or results. No material changes to previously disclosed risk factors or market-risk exposure were reported.
Investor verification points
- Assess the durability and timing of contingent commissions, which made a substantial contribution to year-over-year revenue growth.
- Reconcile consolidated net income with income attributable to Goosehead, non-controlling interests, and the pro forma prior-year EPS comparison.
- Verify dividend payment and its impact on cash, liquidity, and distributions permitted under the credit agreement.
- Review debt maturity, variable-rate exposure, covenant headroom and the 2021 balloon, alongside only $2.6 million of reported revolver availability.
- Monitor the tax receivable agreement obligation and the eventual effects of revenue-recognition and lease-accounting changes.