Q3 2019 Earnings Call

Greetings and welcome to the go sudden churns third quarter 2019 earnings conference call. At this time, all participants Tony listen only mode. A question answer session will follow the formal presentation. If I know what should require operator assistance or the conference. Please press star zero on your telephone keypad otherwise.

This conference is being recorded it is on my pleasure to introduce your host Mr. Garrett Edson Senior Vice President of I see our thank you Sir you may begin.

Thank you and good morning, with us today or your host Mark Jones, Chairman and Chief Executive Officer, If you said, Michael Cobi, President and Chief operating Officer, and more Colby Chief Financial Officer by now everyone should have access to earnings announcement, which was released prior to its coal which may also be found on our website at <unk> IR deck, you said insurance dot com before we begin offering.

Works the need to remind everyone that part of our discussion today may include forward looking statements, which are based on the expectations estimates and projections of management has a today.

<unk> looking statements in our discussion are subject to various assumptions risks uncertainties and other factors that are difficult to predict which could cause actual results to differ materially from those expressed or implied in the forward looking statements. These statements are not guarantees of future performance and therefore undue reliance should not be placed upon that we were for all of you to our recent filings with the FCC for more.

Detailed discussion of the risk and uncertainties that could impact the future operating results in financial condition of Goose insurance, we disclaim any intention or obligation to update or revise any forward looking statements except to the extent required by applicable law.

Also like to point out that during this call will discuss certain financial measures that are not prepared in accordance with gap management uses these non-GAAP financial measures when planning monitoring and evaluating our performance. We consider these non-GAAP financial measures to be useful metrics for management and investors to facilitate operating performance comparisons for periods.

Period, excluding potential differences caused by variations in capital structures tax position depreciation amortization and certain other items that we believe or not representative of our core business for more information regarding our use of non-GAAP financial measures, including reconciliations of these measures to the most comparable GAAP financial measures, we refer you to.

Todays earnings release. In addition, this call is being webcast in an archived version will be available. Shortly after the call ends on the Investor Relations portion of the company's website at Www Dot Goose had insurance dotcom.

With that I'd now like turn call over to CEO Mark Jones. Please go ahead.

[laughter], Thanks, Garrett and welcome to our third quarter 2019 earnings call.

As we've done on previous calls I'll provide an overview of the quarter and year to date as well, let's discuss our long term strategy.

Ill, then hand, the call over to our President and Chief Operating Officer, Mike Colby, We'll update you on our technology development progress and how our ongoing innovation continues to support our high levels of sustained rapid organic growth and profitability.

Our CFO more koby will then follow and provide more detail about our third quarter and year to date results.

Let me start by focusing on the most important bellwether in assessing the strength of our core organic growth strategy premium growth.

During the third quarter, we delivered 44% organic premium growth over Q3 of 28 team to $202 million.

Revenue grew 32% from the prior year quarter to 21.2 million.

Year to date, we grew premiums in revenue by 45% and 40% to 543 million and $63.7 million respectively.

During the third quarter, two thirds of our premium growth was realized in our franchise channel, where our royalties are 20% of revenue for the first terminable policy and 50% on renewals as well.

Well this waiting of new business toward the franchise channel causes a gap between premium growth in revenue growth in the first term of policies. It creates a spring loading of top and bottomline future growth as new business converts to renewal.

We maintained our 88% client retention rate in the most recent quarter, which gives us a high degree of confidence in our ability to realize this mechanical revenue and earnings growth in the future.

Overall, our franchise channel continues to perform extremely well.

Accelerated growth we've achieved in this channel. This year is due primarily to investments we've made over the last several years in our talent and technology.

Investments in our corporate channel have also been critical to our success in the franchise channel.

Our corporate team drives the development of our intellectual capital tests, new ideas and technologies serve as trainers coaches and mentors to our franchise partners and set performance standards and best practices that make you said the envy of our industry.

We believe these investments create increasingly insurmountable barriers for those who wish to challenge us.

Position us well for achieving our goal of industry leadership.

At the end of the quarter franchise unit count had grown 49% from Q3 28 team.

<unk> 828, well operating franchises grew 38% to 583.

Both the quantity and quality of business being generated by our new franchisees continues to grow.

Aided by our decision to Institute additional work modules prior to New agency owners attending an onsite training at our corporate headquarters.

In addition enhancements in recruiting Onboarding training co chance important technology or making a major difference in accelerating new franchisees productivity and contributions to give you said.

We also continued to retain a robust pipeline.

Franchises in the implementation phase.

[laughter] corporate sales head count grew 33% from 28 team to 232 as we continue to have another successful year of recruitment in that channel.

I'd like to highlight just one of our recent initiatives to leverage the resources of our corporate channel to drive accelerated growth in the franchise channel.

Earlier this year, we introduced a sales coaching pilot to our franchisees that is supported by some of our most talented corporate agents.

As part of the program a corporate agent will take on a group of franchise agents and provide them with detailed coaching on sales process lead development time management optimization closing best practices and referral partner relationship management.

This pilot program has developed tremendous traction in a short period of time.

Three months after completion, our franchisees participated in the program have increased their production by an average of more than 55%.

I'm frequently asked by investors, which distribution channel is our priority. The answer is both we could not achieved the results, we do and our franchise channel without our industry, leading corporate channel to support it.

We manage the business in a fully integrated manner across both channels and this creates incredible competitive advantage that is exceptionally difficult for potential competitors to replicate.

In addition to achieving great topline growth. We also saw strong earnings growth during the quarter and year to date.

Company by margin expansion.

During the third quarter adjusted EBITDA grew 37%.

Compared to the prior year period to $4.6 million well adjusted EBITDA margin expanded from 21% in Q3 of 20, 18% to 22% in 2019.

Profits generated by our renewal business more than offset our investments in technology and talent.

Year to date, adjusted EBITDA grew to $18.8 million, a 51% increase over 28 team and adjusted EBITDA margin expanded to 29%.

Policies enforced increased 45% from the prior year to 448000.

We once again maintained our industry, leading client retention rate of 88% and world class net promoter score of 90.

Our service teams ongoing commitment to excellence helps ensure that we're able to maximise client retention, which is a key driver of our long term growth and profitability.

With three quarters of 2019 now on the books, we're tightening our guidance for full year premiums Mark Koby will share details with you in a minute.

We expect to finish out 2019 strongly achieving what we set out to do at the start well ensuring that we remain well positioned to continue to rapidly and responsibly expand our market share and significantly grow our business and profitability over the longer term.

In summary, we had a very strong quarter.

We have a simple business with a clear strategy and our team continues to execute very effectively.

We have built extraordinary competitive advantage over time with human capital and technology that is without peer in our industry.

The result is a highly defensible competitive moat.

All that being said, we recognize the criticality of keeping the laser focused on the price of industry leadership.

And on keeping the pedal to the metal so as to create maximum distance between ourselves and others, who may wish to challenge for us.

We feel privileged to for the trust our investors placed in our team and you have our commitment to leave it all on the field everyday I'm proud of what we've accomplished but we are just getting started.

I'll now turn the call over to Mike to update you on the progress of some of our recent technology initiatives.

Thank you Mark and Hello to everyone over.

Over the course of 2019, we've made significant investments in our technology platform, including application and data source integrations migration to a cloud based voice solution deployment of artificial intelligence capabilities into our service center development, another client facing portal and cyber security enhancements.

Areas of focus, but a lot of us to sustain and build on our already considerable competitive advantage.

Today I'll provide you all with an update of the status of these areas of investment and exciting new developments within our technology roadmap.

Our integrated comparative rating technology has been rolled out and 44 states covering over 99% of our new business production for home and auto lines of business.

We're now turning our attention to what we call last mile integration, where agents can manage the entire sales process from quote to issuance within our proprietary platform eliminating the need to go to a separate carrier system to complete the process.

This project has a longer runway requiring deeper carrier integrations and additional data source integrations. However, we're well on our way to accomplishing this and ultimately, bringing the first choice model direct to consumer online via our customer portal, which I'll provide an update on later.

Additionally, we're focused on bringing other ancillary lines of business outside of just primary homeowners and auto to our comparative rater, starting first with flood insurance and extremely valuable line of business to anchor the client account and increased the likelihood of retention.

Direct integrations with flood insurance carriers, along with additional data source integrations to obtain flood zone determination are underway and will soon give us the capability to present buying double flood insurance quotes to our agents more efficiently during the homeowners quoting workflow.

Over the course of the third quarter. We've been has the capabilities of our mortgage activity database to include both the buy side and sell side real time information and the title company information for new mortgages, giving us a 360 to review of the home purchase transaction.

While we have lender data on 100% of the mortgage activity in the U.S.. We currently have the realtor data feed on 49% of all new home purchases up to 80% in some states and we're working on increasing as hit rate as more data becomes available.

The power of this data and how it amplifies our ability to execute our go to market strategy cannot be overstated.

We completed our voice solution migration to the Ringcentral platform and the integration of the solution into our Salesforce environment now our focus is the broader implementation into our service centers of more advanced Omni channel features including tax and chat and new features like voice analytics that allow us to monitor the customer experience more completely.

We expect these tools and not only allow us to continue to deliver best in class service for our clients, but you also realize scale benefits in the service center overtime.

We have successfully rolled out our first artificial intelligence application focused on client retention in the service center.

This required us to migrate the entire organization to compatible user interface within Salesforce build the client retention data model and develop work flow within the system that will display the retention drivers real time to the service agent and suggests next best actions to increase the likelihood of retention.

Our focus for the remainder of 2019 and into 2020 will be to enhance the predictive capabilities of the data model by including new relevant data points such as call sentiment during the client interaction provided by the voice analytic feature mentioned before.

As we accumulate more data the model continues to learn increasing the level of precision in the predictive analytics.

We also turned our attention to additional use cases for which there are many where we can apply this technology to drive business results.

As mentioned on our last call. We've developed the first version of our client portal focus on the Onboarding of new clients now all new clients are onboarded using our client portal, where they can sign their policy applications and easily upload supporting documents from day, one we set out to provide our clients and intuitive and robust experience in our client portal and were.

Now focusing on backend integrations with carriers that will allow us to broaden the online self servicing capabilities of the portal as well as eventually being able to quote and issued new policies in the portal.

These major technology initiatives allow us to compete with cutting edge tools that until now I've been unavailable and the choice model.

But as important as these major projects, we've completed over 1000 individual system enhancements through multiple releases this year that together, providing meaningful improvements to the efficiency of our system enter the user experience.

To accomplish this we've increased our internal development team by 50% so far in 2019, and it's also worth mentioning that many of the enhancements originated from agent feedback.

Our development efforts remain and high gear and our commitment to excellence and culture of continuous improvement keep our people highly engaged and enthusiastically supportive of the rapid innovation. The focus on technology is a big driver of our ability to compete aggressively in our space and win big overtime by providing the best possible customer experience and attracting.

The best and brightest talent into the business.

I look forward to updating you on continued progress on future calls and with that I'll turn the call over to Mark Colby to provide some color on our third quarter.

Thanks, Mike and good afternoon to everyone on the call.

For the third quarter of 2019, we grew revenue organically, 32% to $21.2 million compared to $16.1 million in the prior year period.

As noted in prior quarters, the improvement was driven by strong growth in both our franchising corporate channels from new and renewal business.

Total written premiums during the quarter, which is an important important leading indicator of our future revenue growth increased 44% year over year to $202 million.

Our franchise channel total written premium once again grew 55%, implying significant embedded future revenue growth as new business premiums convert to renewal premiums after one year and we increase our royalties from 20% to 50% on an ongoing renewal basis.

At the ended the quarter, we had over 448000 policies in force a 45% increase from one year ago.

We continue to generate consistent rapid year over year growth positioning us well for long term success.

Total adjusted EBITDA grew 37% year over year to $4.6 million.

Driven by higher margin renewal revenue in both channels.

Adjusted EBITDA margin likewise expanded to 22% from 21% in the prior year period.

As higher margin renewal revenue, particularly in the franchise channel more than offset additional employee compensation and benefits related to investing in the hiring of corporate sales agents franchise sales agents and ongoing investments in technology.

We continue to significantly invest in our talent and technology to support our high levels of agent in franchise growth and as a reminder, the cost of most of these investments immediately run through the piano.

We also continued to expand investing in our corporate agents role to further support high levels of productivity within our franchise channel.

We remain confident these investments will help fuel sustained revenue growth and Mark long term margin expansion as the new business premiums, we are winning reliably convert to more profitable renewal premiums.

Our franchise channel generated revenues of $9.8 million in third quarter, a 47% improvement from the prior year period.

Driven by the greater royalty fee generated on renewal business versus new business higher royalty fees from a larger number of operating franchises.

And higher initial franchise fees driven by an increase in franchises onboarded.

We believe the consistent outstanding growth in our franchise channel. This year is a direct result of the investments we've made and talent recruitment technological innovation and ongoing support of our franchise agents over the past few years.

This bodes very well for a long term prospects.

The ability to generate high margin sustainable revenue growth as new business converts to renewal and our share of revenues gross to 50% from our new business share of 20%.

As of September Thirtyth 2019, we had 828 total franchises up 49% from the prior year and 583 operating franchises up 38%.

We are continuing to see significantly higher levels of franchise production in recent months, thanks to our targeted support investments and improved onboarding processes in terms of launching franchises.

Our franchise pipeline remains robust.

And we are continuing to grow our franchise recruiting team to advance this channels rapid growth.

Adjusted EBITDA for the franchise channel in the third quarter was $2.9 million.

56% from the prior year period, while adjusted EBITDA margin was 29% versus 28% in the prior year period.

Thanks to higher margin royalties related to policies in the renewal terms more than offsetting our investments.

It was a banner quarter for our franchise channel and we believe the best is yet to come as this channel continues its strong growth trajectory.

In the third quarter of 2019, our corporate segment grew revenues, 21% over the prior year period to $11.3 million.

This growth was driven by a 23% increase new business revenue, primarily due to a rising corporate agent headcount and a 23% increase in renewable revenue due to sustained high levels of planned retention.

Our net promoter score, which is the key metric of our service team into key driver of our exceptional retention remains at 90.

As of September Thirtyth 2019, we had 232 corporate sales agents up 33% from one year ago.

Driven by new hires during our seasonally strongest recruiting months.

It was another solid year for agent recruitment and as a reminder, given our long term strategy you focused on ramping up our new agents production overtime typically two to three years.

These increasing levels of production predictably convert into higher margin renewal revenue.

Resulting an enviable levels of sustainable profitability.

Additionally, as Mark noted in his remarks, our corporate channel doubles, the backbone for our franchise channels rapid expansion.

We were fine best sales and training practices in beta test, our technological innovations with our corporate team before rolling out our initiatives nationally to our franchise channel.

It is crucial to our success and provides us with a fortified barrier to entry for potential competition.

Adjusted EBITDA in the corporate channel was $2.3 million compared to $2 million in the prior year period, while adjusted EBITDA margin was 20% versus 21% in the prior year period.

Primarily due to the company's continued investments in growth of corporate sales agent headcount in the scope of their responsibilities.

Net income in the third quarter 2019 was $2.8 million up from point $8 million in the prior year period.

Adjusted EPS in the third quarter of 2019, which backs out equity based compensation was eight cents per share.

For the nine months of 2019, our revenues grew by 40% to $63.7 million driven by higher commissions agency fees franchise royalty fees generated by renewal business and an increase in contingent commissions received.

Total adjusted EBITDA for the nine months of 2019 rose, 51% to $18.8 million, while our adjusted EBITDA margin was 29% up from 27% in the prior year period.

Even while absorbing public company cost for an entire year in 2019.

Total written premiums for the first nine months of 2019, outgrown 45% from the prior year to $543 million.

We remain uniquely positioned to grow rapidly and responsibly over the long term.

As of September Thirtyth, we had cash and cash equivalents of $10.8 million as well as 46.9 million of debt outstanding.

Because of our continued strong adjusted EBITDA growth our leverage ratio has further shrunk to approximately 2.0 times from 2.2 times in the prior quarter.

We expect to further de Levered during the remainder of 2019.

And we'll evaluate our leverage and cash position in early 2020.

Finally, as Mark noted in his remarks, we're raising our full year 2019 outlook with respect to our total written premiums and maintaining our outlook for revenue.

Because of increases in the franchise channels total written premium we now expect total written premiums placed for 2019 between 715 and $730 million representing organic growth of 40% on the low end of the range to 43% on the high end of the range.

The previous range was between 700 million and $725 million of total written premiums place.

We expect total revenues for 2019 between $80 million and $85 million, representing organic growth of 33% on the low end of the range to 41% behind the range.

We continue to deliver outstanding results in 2019, setting us up for continued success in 2020 and beyond.

As noted before our 2019 revenue guidance is based on assay six so five accounting.

We will report under assay six so six on the Form 10-K for the year ended December 30, Onest 2019.

But we will provide a reconciliation at that time, so investors can understand our performance under assay six so five.

With that thank you for your time, we'll now open up the call for Q in there.

Operator.

Thank you we will now be conducting the question and answer session. If he would like to ask a question. Please press star one on a telephone keypad. The confirmation from the indicate that your line is my question Q.

Let's start to if he would like to move your question from the Q4 participant.

It may be necessary to pick up your handset for pressler Sarkies one moment. Please let me pull for questions.

Right.

Thank you. Our first question comes from Christopher Campbell with KBW. Please proceed with your question.

Good morning, gentlemen.

Hey, Chris Chris and I guess first question is on the distribution growth is a little bit lower than we were expecting.

And in kind of I just had a numbers question in there too so.

I'm looking at the Texas operating franchise count it looks like that declined quarter over quarter.

Look like last quarter. It was too low to and then this quarter. It was 195. So I guess just you know what drove that decline within the within the market and then just how should we think about you know on distribution growth going forward any change in each channel.

Hey, Chris This is Michael as it relates to the Texas operating franchisees, we've made a very focused effort to diversify our production outside of the state of Texas in fact over 90% of our new agent growth is coming from outside of the state and the reason for that is because we're trying.

To provide a more diversified book of business with our our key carrier partners.

Important to them to provide a book of business that has uncorrelated.

Underwriting risk and we can we can do that by growing outside of outside of Texas. So we've actually have not had any focused proactive recruiting efforts taking place in the state of Texas.

This year now that being said I think we're getting to a point where.

The book is being sufficiently diversified and we're planning to re purpose some of our recruiting.

Resources back towards the state of Texas, but thats strictly a an effort to provide our carriers with a more diversified book of business.

Got it and then I guess just in terms of the agent count like how big can you get how big can like Texas. The for you just I mean is it like 300 400 age.

Let me, Texas, we've been operating in Texas since inception, it's our largest concentration of agents.

And we're in less than 1% of Texas households.

If you we didnt been deploying our go to market strategy in Texas.

Longer than anywhere else.

And we are go to market strategy is executed more in a more sophisticated way than any of our competitors and we were only involved in less than 14% of new new home loan transactions year to date. So we have an incredible runway for growth still in Texas, but again, our growth efforts and recruit agent recruiting specific.

Our efforts have been outside of the state to accommodate a more diversified book with our carriers.

Yes, we have we have an incredible runway for growth here in Texas still.

Okay got it Thats very helpful and then I guess.

I'm sorry.

Yes. This is mark Jones.

One other things I think thats important to.

Take into account is if you look at.

The large kept as you look at.

State farm or Allstate, and you look at the number of agents that they have.

In the state of Texas or in any state.

Those.

Numbers are bounded by the portion of the market for which there product is a good match so they're very limited because they're a single carrier platform and they have a.

More finite addressable market.

On the other had have a very broad base of carriers and our ability to address.

Somewhere between 80, and 90% of the market with our carrier portfolio. So.

We've got literally for five more times.

Growth opportunity than even the sort of the captives currently represent.

Okay, Great and then just to just outside of taxes I mean, it sounds like you guys have had what 90% of the new agent growth is coming from outside on taxes. So I guess what percentage premiums are our non Texas. These days versus a year ago, but we've got about yeah, it's about 30% Chris.

All right excuse me, 96% of the franchises that we launched in Q3 were outside of Texas.

But total written premium in Texas still makes up about 70% of our book.

Okay, and what was that a year ago.

With that I'd, probably a lot higher right.

It's about 75% to 80%.

Okay.

Okay got it and then I guess, how did the commission levels vary between taxes are they similar.

They are.

Commish Commission levels are similar.

Premium average premiums for homeowners and auto vary across states.

Got it and that's the average commission level you guys have these days.

So it's roughly 15% on new business and I think it's approximately 14% on renewal.

Yes.

Are you seeing any upward pressure in that as as some of the auto some of the personal lines carriers get more adequate in auto and then there they're kind of switching to a growth mode are you seeing like are you starting to see a benefit in terms of it as carriers being willing to pay higher commissions for growth.

I wouldn't say were weren't necessarily feeling that we're also not feeling kind of any type of.

Kind of movement in and rates.

Our levels of growth, where we where we see growth as we see growth by adding.

Talent, bringing non top talent.

In our agent force and by growing productivity and that's really what we're focused on.

Okay got it and then I know probably a little bit early that I mean are there any like guidelines, we should start thinking about in terms of like 2020 guidance relative to 2019 in terms of premiums revenue growth.

Yes ill talk I in Q4 about our guidance for 2020.

We're continuing to invest and we continue to expect high levels of growth.

Into the foreseeable future past 2020.

Okay got it not just one last one are you seeing yet.

Thanks, Rob that's good for mortgage volumes of mortgage lenders are you seeing like a benefit in the sales pipeline.

You are seeing your normal seasonality.

Certainly the seasonality has been a little muted.

This year, it's certainly compared to last year.

And I would I would suspect that rates have something to do with it.

Okay got it and so just just to make sure I understand so that means I typically this would be like a low time of year right.

Well, it's typically right, it's typically you're going into your low season for the housing market.

But I would say 10 of the seasonal decline may be less.

Driven by.

Mostly driven by rates.

Yes, that's the reason that we always talk about looking at us year over year, rather than sequentially quarter over quarter and so.

Just kind of continue to focus on that and compares to Q3 last year year to date last year.

As we move into Q4.

Okay. Okay, well. Thanks, all the answer is back to lock in the fourth quarter [noise].

Hi, Thanks, Chris.

Thank you once again, ladies and gentlemen, if he would like to ask a question at this time. Please press star one on your telephone keypad. Please hold while we pull for additional questions.

Ladies and gentlemen at this time there are no further questions. So I'd like to pass the floor back over to Mr., John for any additional concluding comments.

Thank you, we just like to express our appreciation for your support.

And look forward to a strong fourth quarter. Thank you.

Ladies and gentlemen, this does conclude today's teleconference. We thank you for your participation and you may disconnect your lines at this time.