Q1 2022 Goosehead Insurance Inc Earnings Call
Thank you for standing by this is the conference operator, welcome to the Goose head insurance first quarter 2022 earnings call. As a reminder, all participants are in listen only mode and the conference is being recorded after the presentation there'll be an opportunity to ask questions.
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I would now like to turn the conference over to Dan Farrell VP capital markets. Please go ahead.
Thank you and good afternoon.
Before we begin our formal remarks I 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 as of today forward looking statements in our discussion are subject to various assumptions risks uncertainties and other factors that are difficult to predict and which could cause the actual results to differ.
Really 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 you refer all of you to our recent filings with the SEC for a more detailed discussion of the risks and uncertainties that could impact the future operating results and financial condition of <unk> insurance.
We disclaim any intentions or obligations to update or revise any forward looking statements except to the extent required by applicable law.
I would also like to point out that during this call. We will discuss certain financial measures that are not prepared in accordance with GAAP 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 from period to period.
By excluding potential differences caused by variations in capital structure tax position depreciation amortization and certain other items that we believe are not representative of our core business.
For more information regarding the use of non-GAAP financial measures, including reconciliations of these measures to the most comparable GAAP financial measures. We refer you to today's earnings release. In addition, this call is being webcast an archived version will be available. Shortly after the call ends on the Investor Relations portion of the company's website at Www Dot com.
Insurance dot com with that I'd like to turn the call over to our CEO Mark Jones.
Thanks, Dan and welcome to our first quarter 2022 results call I will provide a summary of our key results in the first quarter and we will discuss some strategic initiatives. We have underway to drive continued strong revenue and earnings growth over time, Vice President Brian for Tullow will then discuss some of our technology enhancements related to the digital age.
And then Mark Colby, our CFO will go into greater detail on the quarterly financials and our outlook for the rest of the year.
We delivered very solid first quarter results, demonstrating the incredible resiliency and consistency of our business and putting us in a great position for the remainder of 2022 and beyond.
Our total written premiums the key leading indicator of future revenue growth increased 41% for the first quarter with policies in force were up 39%.
Total revenue and core revenue were up 32% and 37%, respectively, an improvement over fourth quarter 2021 growth rates and excluding contingent commissions and roughly $2 million of costs related to our <unk>.
Send agent conference, which did not take place in 2021.
Our EBITDA margins improved nearly six points in the quarter.
So as an organization, we remain laser focused on delivering our core our three core drivers of growth.
Onboarding of high quality agents and franchisees ramping up their production and critically client retention.
Our renewal book continues to perform exceptionally well with client retention of 89% up from 88% a year ago.
In helping us deliver very strong overall premium and revenue growth.
Well the macro environment remains challenging for new business generation.
I'm encouraged by the improving productivity, we saw in the first quarter relative to the fourth quarter.
The rate of growth, both franchise and corporate productivity improved by mid single digits versus the fourth quarter.
While we cannot predict macro trends in the near term our year ago comparison, new business growth does begin to ease meaningfully as we progressed through the year I'm also encouraged by several other underlying factors, which remain squarely in our operating control first our cross selling and other referral efforts leveraging the digital age.
Remain in the early stages, but we're already beginning to see.
It bear fruit as we leverage our sizable book of business to drive existing growth with minimal acquisition cost.
We have seen sequential monthly acceleration, thus far in 2022 on our cross selling measures.
Second given our still tiny share of the market with roughly 3% of mortgage transactions and less than 5% of U S. Premium we continue our efforts to pivot to gaining market share through new referral partner relationships leveraging additional technology to assist agents in these efforts during the quarter we add.
Activated 45% more new referral partner relationships than the prior year and saw a reactivation rate of referral partners that hadn't sent us a leading over 90 days that was three times the prior year.
Lastly, our growing number of tenured franchises are continuing to scale their books of business and our corporate agents continue to provide important support in this area.
Benefits of this are just beginning to take hold but will become increasingly material overtime is there increasing levels of production convert to renewals at which time, both our revenue and earnings increased substantially.
Moving to agent Count total franchises increased 41% and operating franchises grew 28% in the quarter, we've been focusing on addressing the elongation. We've experienced in the launch process through increased engagement with signed but not yet launched agencies to drive faster launches.
We've also shifted compensation for our recruiting team during the quarter towards successful launches of franchises to better in line with this objective going forward I'm encouraged with some of the recent Kpis, we have seen and believe this will translate to improved operating franchise growth as we progress through the year in April for example.
We observed a 44% increase in launched franchises versus a year ago month unscheduled may and June launches also reflect strong continued momentum.
During the height of the pandemic, we temporarily limited terminations of some underperforming franchises, but it would be good.
Recently, managing them out of our system, using our traditional standards and thereby reducing drag on our resources. Accordingly, we experienced a higher number of operating franchise terminations and transfers during the quarter, which slightly reduced operating franchise growth.
Fortunately the short term decrease in operating growth has not materially impacted franchise premium growth, which was up 48% in the quarter.
Terminated franchises made the minimus contributions to premium and revenue growth.
Corporate agent growth in the quarter was up 35% to 490 <unk> as a reminder, we onboard the majority of our corporate agents in the second and third quarters of the year around college recruiting.
Corporate channel plays a critical role in supporting the development of the franchise channel through process and Tech development training and mentoring.
While we expect both the corporate and franchise channel to continue to grow the corporate footprint is beginning to achieve a size, where we expect to start achieving some scale benefits over time.
We will remain active in recruiting new corporate agents, but we'll also identify strong corporate managers and producers that we feel could be exceptional owners and operators of franchises and there would be well suited to build your own sales teams and provide a pathway for them to become franchisees.
A number of our most productive franchises are owned by former corporate producers we.
We do not expect this to have a material impact on 2022.
But could provide efficiency and growth benefits in the intermediate to long term.
The launch of our digital age and is significantly enhancing our clients' experience and improving our agents' ability to drive revenue beyond our existing go to market strategy. There is literally nothing like it in the market.
The next phase of our digital agent work is to provide a full online quote to bind experience for clients, who prefer to shop in this way.
We recently launched our first of several carriers with the ability to go quote to issue it.
Ian <unk>, who will provide more detail on this in his remarks.
I've said before we believe the potential of this platform is significant as we build out and continue to invest in digital marketing and actively explore possible partnership opportunities that would embed our digital agent into partners client acquisition processes well. This new channel is in early stages of development.
I have been very encouraged by some of the partnership discussions.
Of which I had been apart there is nothing remotely competitive to our value proposition in the market.
I want to thank our employees and franchise agents for their tireless efforts in delivering another strong quarter in an environment that remains challenging I'm excited.
For our many long term strategic initiatives the initiatives to take hold.
We press along our highly enviable runway for sustainable high levels of both revenue and earnings growth with that I'll turn the call over to Brian .
Thanks, Mark and Hello to everyone on the call I'm excited to announce that in Q1, we enhanced our consumer facing quoting platform to allow a complete online checkout experience for our first carrier partner consumers.
Consumers can now get the benefits of the choice model with the convenience of an all digital experience to understand the significance of this technology. It's critical that recognize how the extreme fragmentation of the U S. Personal lines market has created a cumbersome shopping process. There are currently over 400 insurance carriers 100.
<unk> 50 of whom have greater than $100 million in premium.
The complex regulatory environment and differences in carrier underwriting appetite have created wide pricing disparity where no. One carrier is the right fit for more than a small fraction of the market. Even more rare is finding one option who is best for both home and auto insurance most.
Most consumers shop with single carrier platforms, such as captive agents or direct to consumer options, but they often only check with three or fewer carriers before picking one.
This means they have shopped with less than 1% of the market virtually guaranteeing they end up overpaying for insurance or having to make coverage tradeoffs.
The best current solution is to contact an independent agent you can shop for then the problem is that in most independent agencies consumers are required to have a lengthy call to relieve their information and then wait for a call back in the next few days with the quote the modern consumer wants an easier and faster solution to quickly identify the insurer.
<unk> company, who will provide the coverage they need at the best available price without having their data. So that's exactly what our digital agent platform does we.
We have now launched our first carrier who allows consumers to go all the way through the process to buy home auto and umbrella insurance online during the checkout process consumers can make coverage adjustments at discounts to the start date and enter their payment information and less than two minutes after receiving the initial quote.
This boat quote to issue option is provided in instances, where the carrier ranked as the best price for their clients.
Each client is assigned to an agent who will review the policy and be available to discuss any recommended adjustments every goes it agent has their own unique link and QR code to wrap clients directly to them through this platform.
This enhanced capability allows our agents to provide clients a full omnichannel experience, whether consumers prefer to speak with an agent the entire time get a quote and then finish with an agent or buy online we can accommodate each.
We are working with other carriers to offer the full quote to issue experience and will add several more over the course of this year.
As Mark mentioned this technology is built to connect and be embedded into any other platform.
Any business he wants to offer insurance to their clients can now leverage our technology to do so this can be done by creating a cobranded linked to our platform from their site or by leveraging an API that enables partners to return close without ever leaving their platform.
In many cases these partners already have the data needed to get quotes such as name date of birth and address making the process even easier for consumers.
Servicers can leverage this technology to allow customers to get quotes and switch out their home insurance policy renewal with a few clicks mortgage originators builders and real estate companies can allow homebuyers to get their home insurance setup for closing without ever leaving their platform.
Online fintech platforms and banks can now offer insurance to their clients without the complexity of having to build their own agency. We are starting to discuss this opportunity with several potential partners the ability to provide a full online checkout experience powered by an agent informed choice model is critical to the success of these opportunities.
We are incredibly excited about the roadmap ahead for our digital agency and we'll keep you updated on our progress in future calls I will now turn it over to Mark Colby to review, our Q1 financial results.
Thank you Bryan and Hello to everyone on the call.
For the first quarter of 2022 total written premiums the leading indicator of our future core and ancillary revenue growth increased 41% to $451 million. This included franchise premium growth of 48% to $341 million and corporate premium growth of 24% to one.
Hundred and $10 million.
This growth is being driven by strong franchise, new business generation, new corporate and franchise agent growth and increased retention.
Our book is also becoming increasingly diversified with Texas accounted for 51% of the total written premium compared to 57% in the year ago quarter.
This continuing trend should help with contingent commission volatility year to year and further diversify our overall book of business as we race towards our goal of industry leadership.
Revenues were $41 $3 million for the quarter, an increase of 32% from the year ago period, while core revenues were up 37% to $36 $5 million, both revenue metrics growing faster than fourth quarter 2021 results.
Ancillary revenue, which includes contingent commissions was $2 $2 million in the quarter compared to $2 $8 million a year ago.
The decrease driven by true up adjustments booked in 2021 'twenty 'twenty contingencies.
On a normalized go forward basis, we believe it is reasonable to assume around 80 to 85 basis points of contingent as a percentage of annual premium however, any given year can vary significantly from this level.
Franchise generated core revenue of $18 $3 million during the quarter, an increase of 54% from the year ago period at the end of the first quarter. We had in 2298 total franchises up 41% from the prior year and 268 operating franchises up 28% from a year ago.
Franchise core revenue growth is driven by strong new business production from franchisees increased retention to 89% from our already industry, leading levels and growing franchise count.
We remain encouraged by the increased contributions in revenue from our tenured franchisees as they continue to ramp their production and higher new sales agents within their franchise.
As Mark indicated we have increased our engagement with signed but not loss franchises and made adjustments to our compensation to align with the goal of improving operating franchise launch time.
We are seeing encouraging signs in the franchise kpis that indicate improving trends as we progress through the year.
Our April launched franchises were up 44% versus the year ago, and we are seeing nice momentum in scheduled launches for May and June .
Additionally, it is critical that we focus our investments towards our most successful franchises.
Part of ensuring that focus requires evaluation of our lowest performing franchises as a result, the pace of our terminated and transferred operating agencies has returned to pre pandemic levels of around 15% annualized attrition.
Do you view this level of churn is healthy for our high performing sales organization and importantly, our churn continues to account for less than 1% of our new business generation.
Corporate sales head count at the end of the first quarter was 490, an increase of 35% from the year ago quarter.
Corporate core revenues were $18 $2 million in the first quarter, an increase of 23% compared to the year ago period.
Corporate investments have been critical in scaling and improving productivity of franchise sales.
While we will continue to grow both corporate and franchise head count meaningfully we do believe we can gradually realized some scale benefits over time, given the size of the corporate producer for us and a significant office expansion from 2021.
We are also reaching a scale at corporate where we feel more comfortable proactively identifying corporate agents that would be highly successful starting in scaling your franchise opportunity.
Total operating expenses for the first quarter of 2022, excluding equity based compensation were $40 million up 38% from a year ago.
Compensation and benefits expense, excluding equity based compensation was $25 $7 million for the quarter up 33% from the year ago period.
The increase in compensation and benefits is being driven by our ongoing investments in head count across the organization, particularly the hiring of corporate agents and support our franchise channel growth.
Service agents to manage our largest revenue stream renewals.
Recruiting and Onboarding functions to continue our growth trajectory and.
In systems developers to ensure our technologies on the cutting edge for our clients and internal users.
General and administrative expenses for the quarter were $13 5 million, an increase of 46% from a year ago.
Growth in G&A expenses was due to an expanding real estate footprint higher travel and entertainment expense and marketing expenses around our digital agents initiatives.
Additionally, our annual conference ascend, which was not held in 2021 was approximately $2 million of expense.
Excluding ascend our G&A growth rate would've been approximately 24%.
Total adjusted EBITDA in the quarter was $1 $3 million compared to $2 $1 million in the year ago period.
EBITDA margin was 3% versus 7% a year ago excluding.
Excluding contingent commissions are margins expanded one point, even including approximately five points of margin impact from our sand conference versus a year ago period.
We expect the many investments we made in 2021 to continue to scale nicely through the remainder of this year as new offices that producers and new opportunities from the digital agent, particularly in the areas of cross selling and client referrals begin to ramp up and help offset an initial and ongoing development costs.
As we have said previously we believe it is strategically more important to focus on investing for growth now, which we believe will drive long term long term margin improvement.
At a high growth rates most expenses are largely variable. However, this year, we continue to anticipate significant growth in EBITDA and strong EBITDA margin expansion.
As a reminder, the first quarter is seasonally our weakest earnings quarter of the year, given the historical seasonality of our insurance sales and lack of ability to recognize any material contingencies. This early in the year.
Net EPS for the quarter was a loss of <unk> 11 versus.
Versus a loss of <unk> in the year ago period.
Adjusted EPS was <unk> versus <unk> in the year ago period.
The reason for the wider gap between net and adjusted EPS is due to higher equity stock compensation, which was 16 cents of EPS versus five in the year ago period.
The change in this noncash item relates to the black sholes valuation of options, which takes into account stock price on the grant date and historical volatility among other inputs.
More importantly, our option grants this year accounted for roughly 2% of shares outstanding similar to historical demand levels.
As of March 31, 2022, the company had cash and cash equivalents of $21 7 million.
We have an unused line of credit of $24 8 million at year end.
The total outstanding term note payable balance was $98 1 million as of March 31 2022.
For the full year 2022, we are reiterating the companys outlook for premium and revenue.
Total written premiums placed for 2022 are expected to be between 2.086 billion and $2 215 billion.
Representing organic growth of 34% from the low end of the range to 42% on the high end of range.
Total revenues for 2022 are expected to be between $197 million and $212 million, representing organic growth of 30% on the low end of the range to 40% from behind overage.
Driven by high levels of core revenue growth and historically average contingent commissions.
We also continue to expect significant EBITDA growth and EBITDA margin expansion for the full year 2022.
And what remains a challenging macro environment, we have continued to deliver strong and consistent growth.
Have started to see signs of margin expansion in the business.
Additionally, recent kpis as well as an easing comparisons in the back half of the year position us very well as we move through 2022 and beyond.
I want to thank everyone for their time and with that let's open up the lines for questions operator.
Thank you we will now begin the question and answer session to join the question queue. You May Press Star then one on your telephone keypad, you'll hear a tone acknowledging your request. If you are using a speakerphone. Please pick up your handset before pressing any keys to withdraw your question. Please press Star then two we will.
For a moment as callers join the queue.
Yeah.
Our first question comes from Paul Newsome of Piper Sandler. Please go ahead.
Thank you and good morning.
Afternoon pardon me.
Could you talk a little bit more about expenses and the run rate prospectively.
You know it.
That seems to be the main consideration I think in terms of getting the EBITDA up for the remainder of the year and maybe just.
Maybe I'm wrong with that.
You could talk about that is is there you know.
Run rate, that's less than what we did we see in the quarter or.
I'll, let you just answered the question.
Thanks, Paul Yeah, it's good to hear from you.
So yeah, we do expect significant.
The margin expansion this year and we've started to see that in the first quarter. You know if you exclude contingencies, we saw EBITDA margin expansion of 1%, but further than that if you exclude the annual meeting that we had that.
It would've been 6% EBITDA margin expansion at that we didnt have that last year because of Covid. So we're starting to see some trends there and thinking bigger picture and longer term for the year. I think consensus has is currently around 19% to 20% EBITDA margins, which we feel is a reasonable assumption or.
Without giving guidance for the year.
And then that can break.
That pretty substantially but again, if you exclude contingencies, we do expect some significant margin expansion.
So, but if we don't have.
You can see expansion would be not have margin.
EBITDA margin as well.
Or is it.
Yeah. So remember last year was historically, a very very bad contingent commission year at 65 basis points. So.
Yeah.
Hopeful that we can we can get back to the at least the average of 80 to 85.
Basis points, but.
I think even with contingencies as a percentage of premium still staying flat, we still think margin should expand given some.
Some of the scale, we're seeing on our on our comp and G&A This year.
Great. Thank you I'll, let some other folks ask question I appreciate the help.
Okay.
Our next question comes from Mark Dwelle of RBC capital markets. Please go ahead.
Yeah I guess my question was more my first question was meant more or less the same as Paul's just in terms of as you think about it.
Looking ahead over the course of the year are there any other you know.
Notable items like your agency.
Meeting and things like that like one time things that it'll either be added into the mix or expenses you incurred in the year ago run rate, we should consider and subtracting out of the mix as we think about.
EBITDA progression over the balance of the year.
No I don't think so I think it's just continued scale you know last year thinking back we significantly expanded our office footprint we should.
We continue to grow into that cost throughout the year head.
Head count costs continue to scale.
For the business.
So I don't think theres any any other big drivers at this time you know one of the reasons. We don't guide to earnings is because we want to leave some flexibility there. So I'll leave some flexibility for any kind of an interesting investments that we see coming along that will be sure to.
Bring those to everyone's attention as we learn of them, but the annual meeting and during the first quarter is a big expense item.
That's done now and there won't be another equivalent this year.
Okay. That's helpful on that and then as you think about.
On the digital agency rollout.
Are you able to I guess the thing I've always.
Wondered on that is really how you were able to tell that you're getting incremental new customers as compared to customers that you might would have just gotten in the ordinary course.
Really I guess, what I'm talking about is channel conflict or cannibalization.
You gave a way that you can kind of track that and itemize. The degree to which you are kind of getting distinct new business volume off of that channel.
Absolutely you remember, we're not really investing digital marketing right now it just to drive people to <unk> Dot com, it's a lot more targeted than that so initially the campaigns are cross sell and client referral campaigns, where someone clicks that email and goes through the process. It creates a weed and salesforce that we tie directly back to that and we're all.
Are you seeing seen really good traction through the first quarter of the year and through April as well. So it's not a material part of our kind of new business, yet, but we feel like as that continues to scale throughout the year.
It could contribute nicely.
And at any time.
Go ahead, Mark I'm, sorry, sorry, and also with the strategic partnerships that we've talked about again.
Most likely 2023 before there was a really material but.
We'll have ways to directly tie any traffic from those partnerships directly to those efforts Mark This is mark Jones.
The corporate partnerships, we're actually really excited about that as a new channel that could create a really attractive growth vector, which we created we invented this digital agent there is nothing like it in the marketplace no one can even come close.
You've seen the demo of it.
And we have.
We have put one of our most senior sales leaders in charge of building out a corporate partnership channel, where we would embed that digital agent and other companies' client acquisition processes.
And there's a lot of companies that would really like to tangentially get in the insurance business without getting in the insurance business and this provides a way to do that create more monetization opportunities for their clients, but you know as we've had discussions with.
Some pretty large organizations.
It Shouldnt really admit this in a public forum.
We're learning how truly differentiated our product offering is in sort of a number of these folks had thought well maybe I can.
Maybe I can get in the insurance business myself, some subtle make it easy I can create a franchise.
Sort of deal with my sort of new client acquisition opportunities that way, but the key thing that they don't have as deep local market expertise and product and we have that across the country and literally nobody else does that that has a large.
Scale agent force that can handle leads that would come in at a at a big scale, we've got 2500, or so agents scattered across the country with deep expertise and deep products.
In every market and I'm just you know when I look at this business I look at it.
Like like I did when we got into the franchise business is this is this is an opportunity to really create a another growth vector.
As you know these the sort of the negotiations on the implementation of these things take a little bit of time, we have a few small partners that we're working with now that we're in implementation and we're going to kind of learn what works how to optimize the value proposition.
We are really excited about that opportunity that potential there.
Okay. Thanks for that that's a that's a great update.
Stop there.
Thanks, Mark Thanks, Mark.
Our next question comes from Meyer Shields of K B W. Please go ahead.
Thanks, two quick questions first I think Mark you mentioned that you were something of a catch up on underperforming agents.
Terminate or franchises I should say termination in the quarters any way of quantifying that.
Like the impact yeah. It really just just.
With the with the increase in our termination rate you know the last year or two really since COVID-19 , that's trended down to 10%.
We've tried to be nice, yeah, just being patient and understanding that the <unk>.
<unk> they are facing.
Since the Cobra to cloud as well.
Lifted for all intents and purposes, I think I feel like we can start getting back to our.
To our high standards and working these folks upper out and during.
During the first quarter, we saw that result in.
Our attrition rate going from 10% to more normal 15% kind of annualized rate.
Okay.
Again. They are these are these are these franchises are really not contributing anything in terms of new business. These are people typically that are devoting his full time efforts to their business and we're.
Cleaning them out so that they don't absorb resources of the company anymore to Mark's point, they make up less than 1% of the new business that's being produced.
Okay. That's helpful.
They drag a lot more than it had been 1% of the resources and so.
Again, I feel like it's the right call.
Yeah, No no doubt.
I'm, just trying to sort of quantify the improving productivity that mark you talked about in the franchise channel. If we take that component out or if that's a reasonable way to look at things.
Yeah really what we're seeing is improving.
Kind of compared to the fourth quarter trends that we saw productivity can vary throughout the year. So you know we disclose that once a year in our 10-K, we will continue to give updates throughout the year, but now we're really encouraged by the franchise productivity, especially among our 10 year cohorts the continuing year after year, even though the ones 2015 and prior can.
<unk> year after year to growing their their contributions to new business.
And same store sales growth as well.
Okay perfect. Thank you.
Thanks Mark.
Our next question comes from Ryan Tunis of Autonomous Research. Please go ahead.
Yes.
Hey, Thanks first.
First question I guess.
Relative to your guidance seen the total written premium your full year guidance. This quarter. It came in at kind of the high end of what you're thinking right north of 40%.
When you think about the headwinds versus a tailwind.
Yours discussed or you know it.
The headwind clearly is.
Mortgage environment real estate environment, but also the tailwind.
Friend pricing market in personal lines.
When we look at the total written premium growth kind of at the higher end.
Is it safe to conclude that the you know the hard market in personal lines is having more of a positive impact than the you know the negative stuff going on in the real estate side.
Yeah.
Yes, I think we're seeing you're correct, we're seeing a harder market, but we've also increased our client retention from 88% to 89%.
So net net maybe it's an incremental positive it's something that it's too early in the year at this time to kind of update our guidance for the year and we'll have some additional thoughts on that.
In the second and third quarters, but yeah.
Yeah, we're seeing we're seeing positive trends there on the premium side.
Also in terms of dealing with the headwinds, though I mean, where we are activating a lot more referral partner relationships.
She was up 45%, 45% of during the first quarter of New referral partners, who had never sent US a week before and then we reactivated meaning these referral partners had incentives. So we didn't over 90 days, we reactivated three times more than we did in Q1 of last year. So again win.
Really the housing market impacts our total revenue bar maybe it's.
It's the only about 20% of our revenue that's exposed to the housing market. So when we see kind of declines like we've seen we pivot we go to gain more share and we're starting to see the fruits of those efforts pay off we also as we've discussed in the past we feel like we can mitigate some of those housing market headwinds with the cross selling campaign.
The digital age and stuff that we're working on again.
Again, the new channel partnerships.
Mark mentioned earlier all of these things are are what will help offset that over time.
Got it and then I think in your prepared remarks, you talked a little bit about.
Acceleration franchise.
Launches from implementation operation that coming months can you just give us a little bit more detail on when that dynamic. Please.
Sure so so.
We identify like the rest of you that the backlog that we saw growing the last couple of quarters and took some steps during the first quarter to help mitigate that we redesigned some franchise sales business processes or sales processes, we redesign their compensation to align more with the launches and the signing of a contract and we knew that those were going to pay off this quarter.
Necessarily but we're starting to see those pay off in the second quarter with April launches up 44% year over year May and June scheduled launches are continuing the momentum there.
It might not show up in the operating franchise count number immediately we need a few more quarters of that.
And we're also kind of working to to manage out some of the underperforming franchises as we've discussed but really the operating franchise number. There is just one piece of the puzzle we need.
Well performing healthy franchises in our organization not just the large number of franchises. So that's continuing to be a focus of ours on investing in the best franchises and evaluating the lowest performing franchises.
Thank you.
Thanks Ryan.
Our next question comes from Josh Shanker of Bank of America. Please go ahead.
Yeah. Thank you for taking my question can.
Can we talk a little more about the SKU long duration versus close franchises versus the possibility that with the economy reopening and people maybe not working from home as much wage inflation that there's people who signed contracts with you that just don't plan to open a goose egg franchise.
I mean, if we're trying to put things in different buckets are there are you know what how much of the lack of conversions.
People you long gating, how much is franchise actually closing and how much is maybe you haven't been notified that they're not actually going to open a franchise.
Yeah. So so we don't terminate a franchise contract until we're 100% sure that theyre not going to launch.
And to my point earlier that that's been a priority.
A shift in focus for the franchise sales team to continue to reach out to the backlog of folks that we've signed historically and haven't yet launched in our system and we're actively engaging with them to either launch in our system, we're going to completely restart the recruiting process over with them.
It will require a new contract.
And.
Historically, there's always been some percentage of signed contracts that haven't launched we.
We might see that increase a little bit with our kind of COVID-19 signings during 'twenty, 'twenty and 2021, but I think importantly.
We don't feel like that's going to slow down our ability to launch franchises throughout the year, we're continuing to not only chase that backlog, but also recruit brand new agencies and franchises in the system and we feel like.
2022 signings will continue to make up a large portion of the operating franchise growth this year.
And prior is on my understanding of the franchise Salesforce was prior compensated on.
On the number of contracts that they got signed rather than the number of open franchise and now you're changing the compensation model.
It was a mix, but we've shifted that mix too much more heavily weighted towards the launch and the signing.
And again to redistribute the sales process as they go through to make sure that if you sign a contract with US you are planning to launch within a reasonable timeframe in our minds.
It makes sense and.
As you're closing these franchises.
You get to accelerate the amortization of the initial franchise fees at the present and have you close them I guess, you're going to see a a surge in earnings I think we can see it and those numbers are up dramatically.
So what is how are you over earning on the initial franchise fee line item and how long will that persist for.
Well in my mind, we're significantly under earning on the initial franchise fees given the change to ASC 606 does franchise fees are collected when they come to training. They are fully earned when they come to training and nonrefundable under the new revenue recognition. We just have to extend that over a 10 year period. So again in my mind, those should be recognized upfront, but GAAP joke a little.
So I don't think Theres any kind of you know.
Surge or anything in our franchise revenue from from those terminations and material, it's getting back to that normalized level as well and it's not like.
We saw terminations and nutrition to go up to 50% or anything it just got back to normalized levels.
And for a I know this is my last one I promise for a franchisee who is just not working out with you all who thought they might write a few policies and get a book of business and enjoy stream renewal income and you say look you're not working anymore. We're gonna shut you down.
And then he was gone I'm looking to get some.
Revenue stream for life so to speak.
Is there any legal action from the closure of franchises.
That people feel like they they their franchise was closed and they didn't understand or they didn't know or they feel that they have rights that you can't force them to close or maybe that doesn't happen at all.
Josh typically.
When we terminate if theres any appreciable policies in force there is a very active secondary market for that book of business internally. It goes said with other franchise owners.
So they are easily able to sell that and monetize it.
Yeah, and most of the time, it's not like us just forcing them out or we're helping them to come to a realization that they're not successful in our model for various reasons and the best course of action for them is to is to either sell their book of business or walk away.
Well I appreciate all your answers thank you very much.
Sure.
Our next question comes from Mark Hughes of choice. Please go ahead.
Yeah. Thank you good afternoon.
Did you provide them our number for the Oh, Hello could you provide a number for the onboarding franchisees in the quarter or should we get that out of the queue.
Yeah that that'll come out in the queue.
And you don't care to give us a sneak peak rents.
[laughter] not until not until tomorrow.
Okay.
Very good and then.
In the discussion with the potential partners I think you said your.
Hum.
And some discussions with maybe smaller players that will create another growth vector for you what kind of what is the economic model look like in that case, you know, presumably the those partners or.
Wanted to participate in those those conditions, how do you envision that model developing over time.
Its deal specific we know what.
Economic model.
Works for us.
<unk>.
We're committed to.
Building out a business that has more attractive.
Mark at least as attractive or more attractive margin profile than the existing business, but those deals. They are all they are different and we.
We are in implementation with some smaller partners, we're talking to some really big ones.
Yeah.
The economics will be what we end up negotiating.
With different partners different things matter, so we got it.
We've got to be.
Sort of.
With what they need and different partners gonna have different quality of leads that will have to take into consideration as well.
Understood.
You mentioned, how you're kind of identifying corporate agents that you think would be successful as franchisees.
When you make that transition of I don't know, if it's going to be material enough.
The details have been worked out but when they make that transition how does that impact the P&L.
So for their existing book of business stays in house.
And we do allow them to keep their kind of resources in their referral partners, but they start over from scratch when they leave so on.
On that existing book of business, we do see a.
And our bottom line going forward the franchise economics are richer, there's some consideration for the overhead that it takes two to manage that person or.
And everything else that don't exist, if they owned and franchise.
And then any sense of how material you know what kind of numbers is that.
Maybe a few point on particular here and there.
No not material at this point and again there's.
As we go on kind of in future years really it.
It might be coming more and more material.
A portion of the franchises that we launch, but specifically for 2022. It is not it won't be material for 2022, but if we look at the kind of the scale of our corporate agency, we really do feel like we're in a position where we can be a lot more open.
To.
Enabling people to have that career path.
Becoming a.
Sort of a franchise owner and over time, it actually could be quite material.
You know what we've seen is corporate producers that have.
Open franchises are among our most successful and they when they open their they're opening at that script.
Our amp up their opening new dead sprint so they're there.
Great partners. It also creates a very lucrative career path for them that we can use in recruiting to continue to kind of manage at the June four of our corporate agents and continue to get better and better people in the door and get them to stay with us longer.
Great. Thank you appreciate it.
It's mark.
Our next question comes from Pablo <unk> of Jpmorgan. Please go ahead.
Hi, Thanks for squeezing me in so first question is within your homeowners book, what percentage of new sales, it's really a do refinance versus purchase mortgage originations and what does that mix last year and how do you see it this year.
Yes, low single digits and Thats been consistent.
For a long time, so really we're not seeing any kind of <unk>.
Housing market impact specifically related to refinance activity and our new business.
Got it.
And then second question.
Have you seen a wage inflation, having any impact on your recruitment efforts and any impact that you're seeing in your expense base today.
We've had we have a pretty good that's a very good and lucrative compensation model for for our company across all departments. So.
I don't think we're really feeling that it's not a company historically were.
They can't go out and get a better job day, one that make more money, that's not our value proposition to them our value proposition is 345 years and with the renewal book of business, That's where you really start to earn the real economics that are competitive across several different industries. So.
We really haven't seen that to date I think.
We consistently keep an eye on them and.
We will continue to monitor that but today really you know I think it's it's hasnt hasnt shown itself again, yes, I will say.
The flip side of that.
How does our employee value proposition look.
With our service center I'm going down Friday to visit our service center in San Antonio on our employee value proposition down there is unbelievable, we've got almost no turnover grades.
It's.
Great base of potential employees.
High number of them with Spanish speaking skills, we're really excited to grow that that San Antonio operation and make it a.
Large service labor market conditions down there are wonderful for us.
Got it thanks for your answers.
Thanks Paula.
This concludes the question and answer session I would like to turn the conference back over to Mr. Jones for any closing remarks.
Thanks, everyone for joining us on the call today and have a good evening.
This concludes today's conference call you may disconnect. Your lines. Thank you for participating and have a pleasant day.
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