Q3 2023 Goosehead Insurance Inc Earnings Call

Okay.

Hello, and welcome to go State insurance third quarter 2023 earnings Conference call.

At this time all participants are in a listen only mode.

After the speaker's presentation, there will be a question and answer session.

Ask a question during this session you will need to press star one on your telephone.

You would then your automated message advising your hand is raised.

To withdraw your question. Please press star one again.

I would now like to hand, the conference over to your first Speaker, Dan Farrell you may begin.

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 different.

To predict and 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 them. There for all of you to our recent SEC filings for more detailed discussion of the risks and uncertainties that could impact future operating results and finance.

Condition.

In insurance, we disclaim any intention or obligation to update or revise any forward looking statements except to the extent required by applicable law.

I'd also like to point out that during the 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.

Militate operating performance comparisons for period to period.

Including 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 recent 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 In addition, this call is being webcast an archived version will be available.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 <unk> Dot Com now I would like to turn the call over to our chairman and CEO Mark Jones.

Thanks, Dan and welcome everyone on the call our third quarter results continued to demonstrate the strength and consistency of our business even in the face of substantial macro headwinds around both product availability and housing activity for.

For the third quarter of 2023 total written premiums increased 30%.

Total revenue grew 23%.

Adjusted EBITDA was up over 100% from a year ago with.

With adjusted EBITDA margin expansion of 13 point at 32%.

I'm very pleased that we've continued to make strong progress on the strategic goals, we laid out at the beginning of the year.

Driving producer productivity improvement in both corporate and franchise networks.

Upgrading the quality of our producer forced by raising the standards of our recruiting process to ensure the best possible talent acquisition for the company focusing our resources on scaling our highest potential franchise partners invest.

Investing in technology efforts to progress toward creating quota issue capabilities for our agents clients and carrier partners.

And strengthening our management capabilities to support accelerating growth and driving a culture of excellence throughout the organization.

Our results. This year are unfolding just as we expected.

The strategic actions around quality in every part of the organization have resulted in significantly higher margins and a stronger <unk>.

More sustainable base to support re accelerating growth.

As we continue improving the quality and consistency of our distribution force through the remainder of 2023 and beyond the next phase of our execution will be driving reaccelerate in new business production growth in 2024.

We expect the spring load into strong revenue and earnings growth in 2025 through a combination of producer head count growth.

Further agent productivity improvements, particularly in franchise distribution continued focus on retention and increasing momentum of our digital business and partnerships with our improved foundation. We're in a strong position to execute on these growth objectives and deliver a combination of head count and productivity.

And overtime that will support our goals of a 30 plus percent compounded annual growth rate and premium through at least 2027.

As our growth accelerates, we will be doing so at much higher margins than we have historically.

As we stated previously we believe long term margins will be in the 40% range let.

Let me take a moment and share some brief thoughts on key areas of the business and Mark Miller will provide more detailed comments in his remarks.

With the tremendous improvements we've made in corporate productivity. We were very excited again to start growing our corporate sales force. This quarter. Despite the addition of a significant number of new agents, we've continued to drive strong productivity growth.

With overall agent productivity up 42% compared to a year ago.

I am, particularly excited about the caliber of talent, we are attracting from college campuses, our ability to articulate the opportunity for businesses to ownership through our franchise offering.

It's a truly unique and extraordinary career opportunity with a clear path to a seven figure income and that is resonating incredibly well on campus.

Now operating at very high levels of corporate agent productivity, and we look forward to unlocking even stronger productivity as macro headwinds moderate.

Our scale corporate agent team is unique tissue said we.

We believe there is no other more productive group of agents in the personal line space.

Our corporate agency also serves as a rich recruiting pool for future franchise agents.

And the average corporate conversion to franchise is more than five times as productive as franchises, we hunt in the wild.

Accordingly, growing this talent pool is a strategic priority for us.

A key future growth driver.

Brian for Tullow has done a tremendous job turning our corporate distribution around to achieve record levels of agent productivity given his powerful contributions over time, we've promoted Brian to executive Vice President.

With oversight across both our corporate and distribution and franchise distribution networks.

I look forward to Brian continued leadership to drive overall growth and profitability.

And the franchise network, where continued continuing to improve the quality of our agent force and are seeing corresponding improvement in producer productivity.

During the quarter, our franchise, new business productivity increased 18% compared to a year ago and the runway for further franchise productivity growth is substantial.

We continue to put increased focus and resources on scaling our highest potential franchises, adding.

Adding 107 producers to existing franchises during the quarter.

As a reminder, agents that are added two successful franchises are substantially more productive than the average new franchise.

We also recently hosted a Mega agency retreat, which was focused on supporting our most promising free.

<unk> franchises and their expansion efforts and helping them leverage our accumulated experience from growing our corporate agency.

Shifting to technology, you've heard us speak of developing our quote to issue capabilities and the investment of time and money to make it a reality.

Has been very challenging this has taken longer than we'd like.

As we are inventing a truly unique business model that relies on heavy tech investment from ourselves and our carrier partners.

We have done it.

Since our Q2 call, we successfully launched clear cover and nationwide auto.

We're planning additional carrier launches for both home and auto products through the end of this year and look forward to ultimately having a majority of our carrier premium base enabled for quote to issue over the next 24 months.

We anticipate that we will be implementing an additional three to five carriers in the fourth quarter, which includes both home and auto lines of business and some of our largest volume carriers, including safeco nationwide and state sure.

We believe this technology will have a profound effect.

On the efficiency and quality of execution for our agents, allowing us to better and more quickly match risks with carrier underwriting appetite and to more efficiently execute on growing incoming partnership leads open new partnership opportunities over time and allow us to be very specific on the type of clients we onboard.

Again matching carrier, writing appetite with client demand.

Our carrier partners have devoted significant time and resources to developing quotes issued capabilities with us further underscoring the value they put on partnering with us as a consistent tech enabled large scale independent distribution partner and the confidence they have in the long term attractiveness of our personal lines insurance.

Place.

While the current hard P&C market has created product and profitability challenges for our carrier partners.

It has forced us to take our game to a higher level and for that I am grateful.

Also shown us who our friends are.

I take partnerships very seriously when you are a partner you back your partners play in good times, but more especially in challenging times, we will forever be grateful for the support we've received from companies like say sure Progressive Safeco and Mercury.

Been able to continue to succeed and grow because our Bart partners backed our play and we will reciprocate.

I am extremely pleased with the improvements we have achieved across people process and technology. This year that will allow us to drive very high levels of revenue and earnings growth many years into the future I feel incredibly excited about our ability to continue to execute on our strategy and continued to deliver for clients agents carriers.

And shareholders with that I will turn the call over to President and Chief operating Officer Mark Miller.

Thanks, Mark and good afternoon, everyone.

I am very proud of the progress our team has made on our key strategic initiatives for 2023.

In 2023, we have experienced the tightest insurance market in our company's 20 year history.

But our team has rallied and dialed in on the things we can control.

As a result, we have seen significant lift in our new business productivity levels from both corporate and franchise agents.

We have also refined and intensified our recruiting efforts to lock in a steady stream of high quality talent for 2024 and beyond.

Our service team is greatly improved many of our key performance indicators. We are now focused on driving cost efficiency across this team.

From a technology perspective, we have quickly built a world class team with technologists from outside the insurance industry.

This team is rapidly implementing our <unk> platform that will radically simplify the way insurance is sold and serviced in the future.

This technology will help agents come down the learning curve significantly faster and dramatically increase efficiency.

Instead of having learned 20 different carrier systems, our agents will utilize one integrated platform.

As compared to a year ago I believe the changes we implemented have significantly strengthened our core operations and positioned us to move quickly and effectively in coming years.

Turning to corporate distributions.

We are now in a very strong position with our corporate sales team for both the quality and new business productivity perspective.

We ended Q3 with 316 corporate agents up from a low of 250 agents in may.

With MJ noted average productivity is up substantially this year.

On a year to date basis, our new business productivity is up 28% for greater than one year agents and 73% or less than one year agents I'm, particularly.

Really excited about the caliber of the talent, we are attracting from college campuses.

Our ability to articulate the opportunity for business ownership through our franchise offering provides truly unique and extraordinary career opportunity with a path to a seven figure income.

This summer we have had large start classes.

These agents are some of the best we have recruited in years.

Give you a sense of their strong early performance our summer recruits. This year are producing nearly 50% more new business than last year's class.

And three of our new hires are pacing six figure incomes.

To give a quick example of the success our new corporate agents are having I'd like to highlight Bryce and Ramsey and our Austin office.

<unk> joined <unk> in June after graduating from Baylor University with a degree in business.

Since starting.

Pricing has well exceeded his monthly ramp up goals and is already activated six referral partners land.

Laying the groundwork for what we believe will be a fruitful career.

Most recently in September pricing exceeded our lofty ramp up goals by over 200% generating over $16000 in new business commissions and finishing in the top 10% of corporate agents.

We're very proud of prices accomplishments and look forward to his continued success.

The success of this year's new classes amplifying our value proposition at 12 College campuses. This fall as a recruiter scout for the class of 2024.

With all the changes we've made in sales management incentives process and career development.

We will be in an even stronger position to attract and retain the highest quality sales talent in the industry.

And longer term career paths for highly successful agents is even more compelling with the option to start their own successful franchise operation or to move into management ranks.

Moving to franchise.

We're making tremendous progress on our growth objectives, which include scaling our best and fastest growing franchises.

Converting corporate agents to franchises and driving significantly higher productivity among the franchises.

During the quarter, our existing franchises hired 107 producers to scale their businesses. Many of these hires were facilitated by our new franchise talent acquisition team.

We're continuing to add recruiters and infrastructure to this team to keep up with the increasing demand from our growth franchises.

We also had eight corporate agents convert to franchise ownership in the quarter and we expect about 30 conversions for the full year.

These conversions remained five times more productive at generating new business than our traditional franchise launches.

Although we've seen consistent franchise productivity improvements over the last couple of quarters, we still have significant untapped potential in our existing agent base.

Franchise productivity is still only about 51% of corporate agent productivity on average and we see no reason why this gap will not close meaningfully with better recruiting and support.

To give one example of what is possible with the <unk> franchise I would like to highlight the haynesville to an agency.

Chad and chance Hazel team two brothers founded a franchise seven years ago and their hometown in Sarasota, Florida.

Today, they have a $15 million premium book and they have grown by over 50% in the last 12 months.

That allows the Haynesville team agency to take home roughly $1 $3 million per year.

They currently have five producers that sell at equivalent levels to our corporate agents and recently added a new six producer.

We believe the best way to grow our franchise businesses by investing time and resources behind our very best franchise partners to help them grow scale businesses.

The hazelton to the type of owners that we want in the franchise community and we could not be prouder of what they've accomplished.

Last week marked <unk>, 20th anniversary and we're well on our way to achieving industry leadership.

We will continue to revolutionize the personal lines insurance brokerage experience with our talented employees disruptive technology and unique go to market approach.

I believe our employees will out hustle and out smart to competitors and we will grow more rapidly and profitably than any company has ever done in our industry.

This will provide amazing opportunities for our employees agency owners and shareholders.

We're in a great position as we closeout 2023 and moved towards higher growth in 2024 and beyond.

With that I'll turn the call over to Mark Jones Junior.

Thanks Mark.

Before touching on key areas of results I'd like to spend a moment on how we have been operating to mitigate the unique market headwinds on product availability and housing transaction declines.

Before touching on key areas of results I'd like to spend a moment on how we have been operating to mitigate the unique market headwinds on product availability and housing transaction declines.

As we have previously indicated product challenges are representing a larger headwind for our growth and the tailwind we've been experiencing from carrier pricing actions. These.

These headwinds have manifested in several ways.

Our pivot away from recruiting new franchises in certain geographies because of a lack of product and carrier appointments for new offices.

Some reduction in our bind rates in package rates on new business. Both measures that remained high but are down from historically very consistent levels.

And a modest decline in client retention, despite significantly improving our service function generating a net promoter score at 92 compared to <unk> 90, a year ago.

Our response to these challenges has been to improve our operations and processes across sales service and technology to gain increasing market share and relentlessly focus on serving the needs of our clients and partners.

On sales production year to date, we've added a record number of referral partners, despite intentionally reducing our producer head count.

Our lead generation is up 18% year to date, helping to offset the impact of lower bind rates in package rates amidst product challenges.

This is allowing many of our agents to achieve record new business generation. Despite unprecedented challenges in our 20 year history.

In this environment our value proposition is even more evident to our referral partners, because rising insurance costs and interest rates affect in individuals buying power and our agents are able to add more value at the home closing process.

We are also diversifying our lead generation from the housing transaction through partnerships and digital lead generation efforts.

And the service function, we have significantly reduced call wait times and increase the service head count by 50% to meet the demands of the environment.

We're pressing forward with increasing geographic service specialization. This quarter, we opened a service office in Orlando, Florida dedicated to meeting the unique needs of the Florida and East Coast markets.

Our service function is uniquely powerful in the industry and I have no doubt in a more normalized market or client retention will reach new highs, we see no long term structural impediment to getting our client retention into the ninety's over time and every point of retention has a meaningful impact on our long term economics.

In technology, our quote to issue efforts will revolutionize the way our agents serve clients and carrier needs the time and resources. Our carrier partners are putting towards this effort and an environment, where most are not looking to grow as a validation of the value of our scaled independent agent model brings and the long term attractiveness of the personal lines industry.

This technology over time will help us more efficiently match clients to carrier risk appetites across product lines and geographies.

Importantly, we believe these challenges in the marketplace will abate in time, and we are encouraged to be seeing some early signs of better underwriting profitability from our carriers, which may indicate we're beginning to see an inflection point with more products, becoming available in the near to medium term.

We have no doubt that our organization will act like a coiled spring for growth as market conditions, ultimately normalize across product and housing.

Our agents have taken this time to hone their sales scrap become more efficient and learn how to overcome more objections.

Operator: Hello, and welcome to Goosehead Insurance Third Quarter 2023 earnings conference call. At this time, all participants aren't a listen only mode. After the speaker's presentation, there will be a question and answer session.

We believe that the productivity gains we will see from improved product availability will be substantial.

Moving to our results in the third quarter, our total written premium the leading indicator for future revenue growth increased 30% to $803 million.

Operator: To ask the question during this session, you will need to press star 11 on your telephone. You will then hear automated message advising your hand is raised. To withdraw your question, please press star 11 again.

This includes franchise premium of $620 million up 34% and corporate premiums of $182 million up 21% from a year ago.

Daniel Farrell: I would now like to hand the conference over to you's first speaker, Dan Farrell, you may begin. Thank you a good afternoon. Before we begin our phone lower marks, 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 actual results to differ materially from those expressed or implied in the forward-looking statements. These statements are not guaranteed the future performance, and therefore, under relaunch should not be placed upon them.

Our policies in force at quarter end were $1 million 456000 up 18% from a year ago. We.

Daniel Farrell: We are for all of you to our recent SEC violence for more detailed discussion of the risks and uncertainties that could impact future operating results and financial condition of Goosehead Insurance. We display many intention or obligation to update and revise any forward-looking statements except to the extent required by applicable law.

We expect a reacceleration of the policy in force growth rate in 2024 as aggregate new business production increases more highly productive producers are added and we see retention rate improvement from a more normalized product environment.

Total revenue for the quarter was $71 million, an increase of 23% over the prior year period. This includes core revenue of $63 1 million up 22% driven by continued high client retention improvements in agent productivity and pricing tailwind.

Conversion of highly productive corporate agents to franchises will temporarily moderate our revenue growth, but should result in accelerating revenue and earnings growth longer term as these franchises onboard new producers.

Daniel Farrell: I would also like to point out that during the call we will discuss certain financial measures that are not prepared in accordance with GAP. Management uses these non-GAP financial measures when planning, monitoring, and evaluating our performance. We consider these non-GAP financial measures to be useful metrics for management and investors to facilitate operating performance comparisons per period period by including potential differences caused by variations in capital structure, tax position, depreciation, and amortization, and certain other items that we believe are not represented by our core business. For more information regarding the use of non-GAP financial measures, including recommendations of these measures to the most recent comparable GAP financial measures, we refer you to today's earnings release.

The effects from aggregate new business production acceleration in 2024, driven by increased product availability, new producer additions and increased agent productivity are not fully realized in the same year because the royalty fee rate on new business is 20% compared to the more favorable 50% on renewal business.

Our actions taken over the last 12 months to 18 months has set us up to drive accelerating revenue growth in 2025 and beyond.

Contingent commissions in the quarter were $4 8 million compared to $2 million a year ago.

We continue to expect full year contingent to be around 40 basis points of premium.

Shifting to expenses, we continue to perform well as we optimize expense discipline and reinvestments for growth.

Daniel Farrell: In addition, this call is being broadcast, and our type version will be available shortly after the call ends on the Investor Relations portion of the company's website at Goosehead.com.

Total operating expenses, excluding equity based compensation and depreciation and amortization were $48 6 million, an increase of 4% compared to the year ago quarter.

Mark Jones: Now, I'd like to turn the call over to our chairman and CEO, Mark Jones. Thanks, Stan, and welcome everyone on the call. Our third quarter results continued to demonstrate the strength and consistency of our business, even in the face of substantial macro-head wins around both product availability and housing activity.

Compensation and benefits, excluding equity based compensation increased 7% driven by our investments in partnerships technology marketing and service functions, partially offset by a decline in producer count.

Other G&A expense of $14 $8 million was up 10% from a year ago.

Mark Jones: For the third quarter of 2023, total written premiums increased 30 percent, total revenue grew 23 percent, adjusted EBITDA with up over 100 percent from a year ago, with adjusted EBITDA margin expansion of 13 points to 32 percent. I'm very pleased that we have continued to make strong progress on the strategic goals we laid out at the beginning of the year, driving producer productivity improvement in both corporate and franchise networks, upgrading the quality of our producer force by raising the standards of our recruiting process to ensure the best possible talent acquisition for the company, focusing our resources on scaling our highest potential franchise partners.

Bad debts declined to 797 from $2 $3 million as we have substantially improved the quality of our signed but not yet launched cooler franchises.

Adjusted EBITDA in the quarter was $22 4 million up 104% from the year ago quarter, while adjusted EBITDA margin increased to 32% from 19% in the year ago period.

Our margin has been strong in the first three quarters of this year, given the timing of investments and normal revenue seasonality, we expect only moderate margin expansion for the fourth quarter over the previous year.

Looking further out we continue to expect to grow annual margin all of our 2023 base.

Our intermediate term margin goal remains 30% plus and our long term, we see our business operating around 40% margin.

Mark Jones: Investing in technology efforts to progress toward creating quote-to-issue capabilities for our agents, clients, and carrier partners and strengthening our management capabilities to support accelerating growth and driving a culture of excellence throughout the organization. Our results this year are unfolding just as we expected. The strategic actions around quality in every part of the organization have resulted in significantly higher margins and a stronger, more sustainable base to support re-accelerating growth. As we continue improving the quality and consistency of our distribution force, through the remainder of 2023 and beyond, the next phase of our execution will be driving re-accelerating new business production growth in 2024, which we expect to spring-load into strong revenue and earnings growth in 2025, through a combination of producer headcount growth, further agent productivity improvements, particularly in franchise distribution, continued focus on retention, and increasing momentum of our digital business and partnerships.

As of September 32023, we had cash and cash equivalents of $35 $2 million. Our unused line of credit was $49 8 million.

And total outstanding term notes payable balance was $79 4 million at quarter end.

With our net debt to trailing four quarter EBITDA at just <unk> seven times, we have substantial balance sheet flexibility to drive future value and returns to shareholders.

We are reiterating our guidance for the full year of 2023.

Total written premiums placed for 2023 are expected to be between $2 87 billion and $2 99 billion.

Representing growth of 29% on the low end of the range to 35% on the high end of the range.

Total revenues for 2023 are expected to be between $260 million and $267 million.

Representing growth of 24% on the low end of the range and 28% on the high end of the range.

Again, thanks to our team for their hard work discipline and focus delivering such strong financial results as we continue on our journey to industry leadership.

Mark Jones: With our improved foundation, we're in a strong position to execute on these growth objectives and deliver a combination of headcount and productivity improvement over time, that will support our goals of a 30-plus percent compound annual growth rate in premium through at least 20-plus years. As our growth accelerates, we'll be doing so at much higher margins than we have historically. As we stated previously, we believe long-term margins will be in the 40 percent range.

With that lets open the lineup for questions operator.

Thank you.

Ladies and gentlemen, as a reminder to ask a question. Please press star one on your telephone and then wait to hear your name announce to withdraw your question. Please press star one again please.

Please standby, while we compile the Q&A roster.

Okay.

Our first question comes from the line of Michael <unk> with BMO. Your line is open.

Mark Jones: Let me take a moment and share some brief thoughts on key areas of the business, and Mark Miller will provide more detailed comments and his remarks. With the tremendous improvements we've made in corporate productivity, we were very excited again to start growing our corporate sales force this quarter. Despite the addition of a significant number of new agents, we've continued to drive strong productivity growth, with overall agent productivity up 42 percent compared to a year ago.

Okay.

Hey, good afternoon.

I guess the first question.

Maybe.

On your comments reminding us about your 40% long term margin goal just just curious what.

Would you be able to share any.

Yeah.

Bread crumbs on what level.

Productivity lift that would imply versus kind of today's levels or any kind of credit comes around to help us kind of put.

Mark Jones: I'm particularly excited about the caliber of talent we're attracting from college campuses. Our ability to articulate the opportunity for business ownership through our franchise offering provides a truly unique and extraordinary career opportunity with a clear path to a seven-figure income, and that is resonating incredibly well on campus. We're now operating at very high levels of corporate agent productivity, and we look forward to unlocking even stronger productivity as macro headwinds moderate. Our scale corporate agent team is unique to Gooset.

Our heads around a 40% margin.

Hey, Michael This is Marty so in order to get to 40% you don't necessarily need to see massive productivity improvements now we've seen nice margin expansion. This year. Some of that is driven by productivity improvements and generating profitability on new business, but naturally the way. This business works as you get more and more renewal bias in the books.

Just become more profitable given that the servicing on our renewal policies significantly less at a new business policy is much less fulfillment effort all of those type of things and the compensation to an agent is roughly 50%. So over time as the renewal book becomes a larger and larger piece and you see the growth rate trend down naturally you get a lot of operating leverage out of the business.

Mark Jones: We believe there is no other more productive group of agents in the personalized space. Our corporate agency also serves as a rich recruiting pool for future franchise agents, and the average corporate conversion to franchise is more than five times as productive as franchise as we hunt in the wild. Accordingly, growing this talent pool is a strategic priority for us and a key future growth driver.

Okay, and maybe just sticking to productivity since it's been a big Guy.

A big plus.

Lately.

From your comments you expect it to continue to increase and I know that you gave is different.

Mark Jones: Brian Patelo has done tremendous job turning our corporate distribution around to achieve record levels of agent productivity. Given his powerful contributions over time, we've promoted Brian to executive vice president, with oversight across both our corporate and franchise distribution network.

You'd think about it definitely productivity franchise versus corporate but.

I guess, you you said that number of things about <unk>.

Productivity is likely to improve in the coming year, you talked about more product availability knock on wood.

The industry heels.

Mark Jones: Works. I look forward to Brian's continued leadership to drive overall growth and profitability. In the franchise network, we're continuing to improve the quality of our agent force and our seeing corresponding improvement in producer productivity. During the quarter, our franchise new business productivity increased 18% compared to a year ago, and the runway for further franchise productivity growth is substantial. We continue to put increased focus and resources on scaling our highest potential franchises, adding 107 producers to existing franchises in the quarter.

About <unk>.

D J.

Existing franchises being substantially more productive as they.

The higher new new folks.

And.

The corporate conversions being five times more productive.

And then I guess, there is <unk>, sorry, I know, there's a lot going on but.

It feels like there's a lot in the mosaic.

Kind of be more of a.

Big positive, but what are you characterizing things correctly and there is a kind of a lot of levers.

Yes, I think absolutely and I would point to the product's challenges, we're seeing today are dramatically.

Mark Jones: As a reminder, agents that are added to successful franchises are substantially more productive than the average new franchise. We also recently hosted a mega agency retreat, which was focused on supporting our most promising franchises in their expansion efforts and helping them leverage our accumulated experience from growing our corporate agency.

Hey, reducing where productivity could be today given the amount of leads we are receiving so we mentioned in the prepared remarks that lead flow is up 18% year over year in a pretty challenging housing environment now if we can get the product environment and carrier underwriting profitability back at a level, where there is a wide variety of carriers looking to grow there is no.

Mark Jones: Shifting to technology, you've heard a speak of developing our quote to issue capabilities and the investment of time and money to make it a reality. This has been very challenging and it's taken longer than we would like as we are inventing a truly unique business model that relies on heavy tech investment from ourselves and our carrier partners. Well, we have done it. Since our Q2 call, we successfully launched clear cover and nationwide auto.

The reason why we Shouldnt continue to see pretty strong productivity improvements on a year over year basis for a while to come along with all of the other technological efforts, we're making with UTI and partnerships and things like that.

This is mark Miller I would just add one thing on top of it one thing. We're also seeing is our retention rates of our.

Of our employees is increasing and as that happens are 10 year goes up and there's a direct correlation between tenure and productivity and so last year before that higher attrition rates lower attrition rates now so that also factors into your equation.

Mark Jones: We're planning additional carrier launches for both home and auto products through the end of this year and look forward to ultimately having a majority of our carrier premium base enabled for quote to issue over the next 24 months. We anticipate that we will be implementing an additional three to five carriers in the fourth quarter, which includes both home and auto lines of business and some of our largest volume carriers, including Safeco, nationwide and safe shore.

Okay, that's helpful and maybe lastly.

On Q Ti.

Yes, I think it is.

And I was tired looking in we appreciate youre, saying, it's a heavy lift.

And whatnot.

I guess, just trying to better articulate why its impact could be profound I guess, if a majority of your <unk>.

Mark Jones: We believe this technology will have a profound effect on the efficiency and quality of execution for our agents, allowing us to better and more quickly match risks with carrier underwriting appetite and to more efficiently execute on growing incoming partnership leads, open new partnership opportunities over time and allow us to be very specific on the type of clients we onboard. Again, matching carrier writing appetite with client demand. Our carrier partners have devoted significant time and resources to developing quotes issue capabilities with us further underscoring the value they put on partnering with us as a consistent tech enabled large scale independent distribution partner and the confidence they have in the long-term attractiveness of our personal lines insurance marketplace.

Carriers.

Went into a kind of a CPI type type kpis plug in what you are like is there what it Dave your average employee like X amount of minutes per day that they could use that save time to just.

Sell more or is that the way we should think about or is there is it.

Is it more profound didn't have then.

Saving timing.

And.

And giving them more.

More time to sell otherwise.

Yes. This is mark Miller again, I would say in this world current state today, I would think of it as a significant efficiency play for the sales team. So all the trailing paperwork and everything else that has to happen. After the sale of the policy and helps with that greatly and then the service team that has the service. It afterwards today they have to go into.

Mark Jones: While the current hard P&C market has created product and profitability challenges for our carrier partners, it has forced us to take our game to a higher level and for that I'm grateful. It's also shown us who our friends are.

Our native system of the carrier what we want to do in the future is the <unk> connections are the same ones that you would have to use in the service side to get into service a policy so great.

Great efficiency savings and I think we mentioned it will help direct.

Exact type of customer to the exact type of policy wont, we wont in the future.

Mark Jones: I take partnerships very seriously. When you are a partner, you back your partners play in good times, but more especially in challenging times. We will forever be grateful for the support we receive from companies like SafeSure, Progressive, Safeco and Mercury. We've been able to continue to succeed and grow because our partners backed our play and we will reciprocate. I'm extremely pleased with the improvements we've achieved across people, process and technology this year that will allow us to drive very high levels of revenue and earnings growth many years into the future. I feel incredibly excited about our ability to continue to execute on our strategy and continue to deliver for clients, agents, carriers and shareholders.

Yes, I think Theres also kind of an ancillary benefit here that this is a technology that doesn't exist anywhere else in the marketplace and so as you go to acquire new talent and people evaluate their options for an independent agency why would you ever choose anywhere else. It has lesser technology and something that they don't even have a roadmap to be able to accomplish we already have it we've got.

First mover advantage there.

Interesting. Thank you.

Thank you.

Please standby for our next question.

Our next question comes from the line of Paul Newsome with Piper Sandler Your line is open.

Okay.

Secondly, if you're on mute.

Mark Miller: With that, I'll turn the call over to President Chief Operating Officer Mark Miller. Thanks Mark and good afternoon. Good afternoon, everyone.

Paul are you there.

Mark Miller: I'm very proud of the progress our team has made on our key strategic initiatives for 2023. In 2023, we have experienced the tightest insurance market in our company's 20 year history. But our team has rallied and dialed in on the things we can control. As a result, we have seen significant lift in our new business productivity levels from both corporate and franchise agents. We've also refined and intensified our recruiting efforts to lock in a steady stream of high quality talent for 2024 and beyond. Our service team has greatly improved many of our key performance indicators and we're now focused on driving cost efficiency across this team.

Please standby for our next question.

Okay.

Our next question comes from the line of Brian Meredith with UBS Securities. Your line is open.

Hey, Thanks, a couple of quick ones here for you first one.

Just trying to understand a little bit the margin guide that you've got further for the fourth quarter, just modest increase given what we saw this quarter. It looks like comp and benefits has stayed relatively low and usually we see a ramp up there is there some seasonality or something going on there.

Just not seeing.

Yes. So typically if you look at the seasonality of revenue from Q3 to Q4, you don't see a big lift in revenue from Q3 to Q4, and if you think about our revenue guide you can get to where you would expect that to be for the fourth quarter on the cost bar I'm not expecting a big move from the third quarter to the fourth quarter.

Mark Miller: From a technology perspective, we've quickly built a world-class team with technologists from outside the insurance industry. This team is rapidly implementing our QTI platform that will radically simplify the way insurance is sold and service in the future. This technology will help agents come down the learning curve significantly faster and dramatically increase efficiency. Instead of having to learn 20 different carrier systems, our agents will utilize one integrated platform.

So you can come up with what you should expect a margin number to be for Q4 I think.

Got you I appreciate that and then secondly, I'm just curious.

Gave contingent Commission guide I guess for the year, but it was pretty strong in the third quarter I'm. Just curious what's driving that contingent commission I know last quarter, you talked about some volume benefits but.

Mark Miller: As compared to a year ago, I believe the changes we implemented have significantly strengthened our core operations and positioned us to move quickly and effectively in coming years. Turning to corporate distribution, we are now in a very strong position with our corporate sales team for both a quality and new business productivity perspective. We ended Q3 with 316 corporate agents up from a low of 250 agents in May. As MJ noted, average productivity is up substantially this year.

<unk> really stepped up again.

Yes, so there's a couple of things going on there one being you write more volume benefits. So the majority of our contingencies are made up of a handful of carriers and it's the premium and those carriers grow faster than the premium of the whole book Youll see slightly outsized contingency. The other thing is there is a couple of smaller <unk>.

<unk> fees that our loss ratio base that we are it looks like now at this point tracking to get in the way that the revenue recognition would work on that is you've got to wait until you have that information to actually record it and so that could look more like nine months of contingency in the third quarter as opposed to an even distribution throughout the year that you would see from a growth base contingency.

Mark Miller: On a year-to-date basis, our new business productivity is up 28% for greater than one-year agents and 73% for less than one-year agents. On particularly excited about the color of the talent we are attracting from college campuses. Our ability to articulate the opportunity for business ownership through our franchise offering provides truly unique and extraordinary career opportunity with a path to a seven-figure income. This summer we have had large start classes and these agents are some of the best we have recruited in years. To give you a sense of their strong early performance, our summer recruits this year are producing nearly 50% more new business than last year's class, and three of our new hires are facing six-figure incomes.

Gotcha and then last question I'm, just curious geographically if you kind of look at.

Geographically, where things are is there any kind of area that you see opening up a little bit more from a product perspective carrier perspective versus others in other areas of the country.

Yes.

It's pretty tight across the board.

I think we're doing a good job of adding products, where we can whether that'd be admitted product oriented product and we have a few really really good carrier partners that are keeping us.

<unk> opened in places, where they have shut down other agents.

The value of our model.

Great. Thank you.

Mark Miller: To give a quick example of the success our new corporate agents are having, I would like to highlight Bryson Ramsey and our Austin office. Bryson joined Goosehead in June after graduating from Baylor University with a degree in business. Since starting, Bryson has well exceeded his monthly ramp up goals and has already activated six referral partners. Lying the groundwork for what we believe will be a fruitful career. Most recently in September, Bryson exceeded our lofty ramp up goals by over 200% generating over $16,000 in the new business commissions and finishing in the top 10% of corporate agents. We're very proud of Bryson's accomplishments and look forward to his continued success.

Thank you.

Please standby for our next question.

Okay.

Our next question comes from the line of Mark Hughes with tourists Securities. Your line is open.

Yes. Thank you good afternoon.

Okay.

In times past, you've given the source of new business I think you.

Early on it was the kind of 60% came from the mortgage market.

Eric Youre, saying that you are looking at expanding that going through other electronic sources.

Is there an updated.

Mix.

New business, you might be able to share.

So today, that's still about right, where it is in excess of 50% of the lead generation from new business comes out of mortgage transaction, we're building up the partnership and the digital lead.

Mark Miller: The success of this year's new class is amplifying our value proposition at 12 college campuses this fall, as a recruiter is scouted for the class of 2024. With all the changes we've made in sales management, incentives, process and career development, we will be in an even stronger position to attract or retain the highest quality sales talent in the industry. In longer term, career paths for highly successful agencies, even more compelling, with the option to start their own successful franchise operation or to move into management ranks.

Generation efforts, which I think thats why it's even more impressive that our lead flow is up 18% year over year with fewer agents and considerably less housing transactions. Our agents have just been doing a really good job marketing out there and the value to our referral partners today as we mentioned in our prepared remarks is never more evident than it's been.

It's been in our history.

Insurance costs on a mortgage transaction now as a real consideration, especially with rising interest rates and so we're able to provide a really differentiated service today in the face of those headwinds.

Mark Miller: Moving to franchise, we're making tremendous progress on our growth objectives which include scaling our best and fastest growing franchises, converting corporate agents to franchises and driving significantly higher productivity among the franchises. During the quarter, our existing franchises hired 107 producers to scale their businesses. Many of these hires were facilitated by our new franchise talent acquisition team. We're continuing to add recruiters and infrastructure to this team to keep up with the increasing demand from our growth franchises.

A question about the geography of the flow and the.

Income statement, when we think about renewal Commission say for this quarter.

The line items that flow into that would be renewed.

Renewal commissions in this quarter last year, presumably that business will be renewing again.

And then the new business commissions.

Those would also be up for renewal and therefore would be reflected in the <unk>.

Mark Miller: We also had eight corporate agents convert to franchise ownership in the quarter and we expect about 30 conversions for the whole year. These conversions remain five times more productive at generating new business than our traditional franchise launches.

Renewable conditions in fact right at those.

Two categories from last year.

Flow into that.

The renewal commissions this year and Thats, all corporate agent activity that correct.

Yes, that's the right way to think about it.

Mark Miller: Although we've seen consistent franchise productivity improvements over the last couple of quarters, we still have significant untapped potential in our existing agent base. Franchise productivity is still only about 51% of corporate agent productivity on average, and we see no reason why this gap will not close meaningfully with better recruiting and support.

Okay, and playing with the renewal royalty fees that that renews.

But the new business royalty fees a step up.

Kind of the 5% to $2, 50% retention versus 20%.

Right. So the way the math of the royalty fees as you would just gross them up so you with your new business royalties. Our portion of that is only the 20%. So you gross that up and then same thing on the renewals are portions that to 50% and then to get to the next year as you obviously, just multiply that by 50% of your airports.

Mark Miller: To give one example of what is possible with the Goosehead franchise, I'd like to highlight the Hazeltoon agency. Chad and Chance Hazeltoon, two brothers, founded a franchise seven years ago in their hometown of Sarasota, Florida. Today they have a $15 million premium book and they have grown by over 50% in the last 12 months. That allows the Hazeltoon agency to take home roughly $1.3 million per year. They currently have five producers that sell at equivalent levels to our corporate agents and recently added a new sixth producer.

Yes, yes, exactly okay and then one other quick question just the <unk>.

Great contribution to growth, but any meaningful changes this quarter by that I mean that kind of pricing.

Premiums that the policyholders are paying for auto and homeowners insurance.

Net contribution changed perhaps.

We're still seeing price inflation, but in our minds the product availability. That's the other side of that price inflation has been a bigger headwind than the price inflation has been a tailwind.

Mark Miller: We believe the best way to grow our franchise business is by investing time and resources behind our very best franchise partners to help them grow scaled businesses. The Hazeltoon's are the type of owners that we want in the franchise community and we could not be proud of what they've accomplished.

And you can see that in retention you can see that in some stat that we track internally like policies per lead we mentioned defined rate in packets right as well in our prepared remarks so.

We believe that the product environment as more of a headwind today that price inflation has been a tailwind.

Mark Miller: Last week, Mark Goosehead's 20th anniversary and we're well on our way to achieving industry leadership. We will continue to revolutionize the personalized insurance brokerage experience with our talented employees, disruptive technology, and you need to go to market approach. I believe our employees will out hustle and outsmart the competitors, and we will grow more rapidly and profitably than any company has ever done in our industry.

Thank you.

Thank you.

Please standby for my next question.

Our next question comes from the line of Meyer Shields with Keefe Bruyette <unk> Woods.

Okay.

Great. Thank you.

Mark Miller: This will provide amazing opportunities for our employees, agency owners and shareholders. We're in a great position as we close out 2023 and move towards higher growth in 2024 and beyond.

A couple of small questions.

Are there additional expenses.

Associated with pursuing leads through the partnerships and digital channels that T&D.

Equation at all.

Mark Jones: With that, I'll turn the call of the Mark Jones junior. Thanks, Mark. Before touching on key areas of results, I'd like to spend a moment on how we have been operating to mitigate the unique market headwinds on product availability and housing transactions to clients. As we have previously indicated, product challenges are representing a larger headwind for our growth than the tailwinds we've been experiencing from carrier pricing actions. These headwinds have manifested in several ways.

No. So we the digital channels, our digital agent as well as leads from our partnerships.

And in other organizations.

Digital age and all of that is already built in from previous spending.

<unk> there is some reciprocal dollars that flow back and forth, but there's not any more customer acquisition costs and what your traditional go to market strategy.

Okay excellent.

Mark Jones: I pivot away from recruiting new franchises in certain geographies because of a lack of product and carrier appointments for new offices. Some reduction in our bind rates and package rates on new business both measures that remain high but are down from historically very consistent levels. In a modest decline in client retention, despite significantly improving our service function, generating a net promoter score at 92 compared to 90 a year ago. Our response to these challenges has been to improve our operations and processes across sales, service and technology to gain increasing market share and relentlessly focus on serving the needs of our clients and partners.

Going back to the contingents.

I am probably a step behind but yes.

The increasing certainty with regard to lawsuits with contingents is what drove the quarter certain that on a year to date numbers imply more than 40 basis points for the full year.

Yes.

The language, we use is around 40 basis points.

Yes, things could still happen in the fourth quarter that could have adverse impact on that.

But we feel comfortable that we will be at at least a 40 basis points.

Okay. No that's helpful I think.

Just final question, just because I don't know if there was a comment I think mark you talked about.

Mark Jones: On sales production, year-to-date we've added a record number of referral partners, despite intentionally reducing our producer headcount. Our lead generation is up 18 percent year-to-date helping to offset the impact of lower bind rates and package rates amidst the product challenges. This is allowing many of our agents to achieve record new business generation despite unprecedented challenges in our 20 year history. In this environment, our value proposition is even more evident to our referral partners because rising insurance costs and interest rates affect an individual's buying power and our agents are able to add more value at the home closing process.

Some initial signs of carrier appetite expanding is there any initial.

Change or inflection in.

What youre seeing with regard to housing.

We have not seen.

Sort of a turnaround in the housing market.

<unk>.

Okay, I wish it were different but its mark.

Absolutely understood.

Thank you.

Please standby for our next question.

Mark Jones: We are also diversifying our lead generation from the housing transaction through partnerships and digital lead generation efforts. In the service function, we have significantly reduced call wait times and increased the service headcount by 50 percent to meet the demands of the environment. We're pressing forward with increasing geographic service specialization. This quarter we open to service office in Orlando, Florida dedicated to meeting the unique needs of the Florida and East Coast markets.

Okay.

Our next.

Comes from the line of Paul Newsome with Piper Sandler Your line is open.

Well check to see if you're on mute.

Please standby for our next question.

Mark Jones: Our service function is uniquely powerful in the industry and I have no doubt in a more normalized market our client retention will reach new highs. We see no long-term structural impediment to getting our client retention into the 90s over time and every point of retention has a meaningful impact on our long-term economics. In technology, our quote to issue efforts will revolutionize the way our agents serve clients and carry your needs. The time and resources our carrier partners are putting towards this effort in an environment where most are not looking to grow is a validation of the value our scaled independent agent model brings and the long-term attractiveness of the personal lines and History.

Our next question comes from the line of Scott <unk> with RBC capital markets. Your line is open.

Yes. Thanks, I was just wondering with the <unk>.

Franchise reductions probably just about over it seems like at least that's kind of what you had said on the last quarter call.

Can you just comment on the franchisee inquiries that youre getting and your plans to expand that in 2024 and beyond and just any kind of information or backlog information you cannot can share on the franchise side.

Yes, Scott just to clarify one point on the last call. We said we were over the halfway point in franchise terminations and those calling efforts. So in this quarter, we had 89 terminations.

Mark Jones: This technology over time will help us more efficiently match clients to carrier risk appetites across product lines and geographies. Importantly, we believe these challenges in the marketplace will abate in time and we encourage to be seeing some early signs of better underwriting profitability from our carriers, which may indicate we're beginning to see an inflection point with more products becoming available in the near-to-medium term. We have no doubt that our organization will act like a coiled spring for growth as market conditions ultimately normalize across product and housing.

We still think it will be high in the fourth quarter higher than the historical average we believe in 2024, we will trend back down towards that historical average of 15% and we don't see a reason why kind of the medium term it should be higher than a 10% to 15% range as we gross up the gene.

Yes, Scott this is mark Miller.

So if we just go back and think about franchises in general the way that I think about it it's not about the absolute number of franchises. It's more about how many agents we have and so where we're really doubling down is adding franchises are adding agencies back into the franchises that we feel really strongly about what youre seeing is in the numbers as kind of a.

Mark Jones: Our agents have taken this time to hone their sales craft, become more efficient, and learn how to overcome more objections. We believe that the productivity gains we will see from improved product availability will be substantial. Moving to our results in third quarter, our total revenue growth increased 30% to $803 million. This includes franchise premium of $620 million dollars, up 34% in corporate premiums of $182 million, up 21% from a year ago.

Net out numbers, so you're losing about quite a few agents that aren't very productive and replacing them with highly productive agents and that includes corporate agents that are converting to franchise ownership. We're also being very very selective in the franchises that we're putting into the community now.

So the number of launches you will see our greatly reduced from what it was last year, but they're much more productive than they are in the geos that we want and I think the final part of your question was how many kind of inbounds or we're getting now we've transformed the way we hunt for franchises. If you will instead of doing a lot of outbound calling about.

Mark Jones: Our policies in force at quarter end were $1,456,000 of 18% from a year ago. We expect a re-acceleration of the policy in force growth rate in 2024 as aggregate new business production increases. More highly-productive producers are added and we see retention rate improvement from a more normalized product environment. Total revenue for the quarter was $71 million in increase of 23% over the prior year period. This includes core revenue of $63.1 million, up 22% driven by continued high client retention, improvements in agent productivity, and pricing tailwinds.

50% of our leads will be coming from in this quarter from inbound digital marketing type of capabilities, which is a new muscle for us in working tremendously well at finding really high quality franchises.

Okay. That's that's helpful detail and then just the agent franchise conversions. You said you expect to do 30 for this year is there any kind of target you have in mind, just just annually annual conversions kind of going forward is that is that kind of a good number to use just assume you over the next few years.

Mark Jones: Conversion of highly productive corporate agents to franchises will temporarily moderate our revenue growth but should result in accelerating revenue and earnings growth longer term as these franchises on board new producers. The effects from aggregate new business production acceleration in 2024 driven by increased product availability, new producer additions, and increased agent productivity are not fully realized in the same year because the royalty fee rate on new business is 20% compared to the more favorable 50% on renewal business.

It is our best source of high quality franchises I'd love to ramp that up but I also don't want to jeopardize the health of the corporate business. So a lot of it depends on how big the incoming class is going to be which we mentioned.

Doing really really well on college campuses, we're still in the budget process and so we literally budget out how many people we want to convert and how much we can take out of the corporate business, but I would say consistent with this year. It would be a good estimate for next year until we have better information and if the class grows bigger and we have more qualified people I'd certainly like to up that but right now I would use.

Mark Jones: Our actions taken over the last 12 to 18 months have set us up to drive accelerating revenue growth in 2025 and beyond, contingent commissions in the quarter were $4.8 million compared to $2 million a year ago. We continue to expect full-year contingents to be around 40 basis points of premium. Shifting to expenses, we continue to perform well as we optimize expense discipline and reinvestments for growth. Total operating expenses, excluding equity-based compensation and depreciation and laborization, were $48.6 million an increase of 4% compared to the year ago quarter.

What we had this year.

Okay that makes sense and then just final last question just the product availability that you're citing I'm, assuming that's in Florida, California, and Texas are you seeing that anywhere else or is it just mostly just those three states.

Hey, this is Brian so it's really across the board those are certainly the most difficult states, California, and Florida and get to call for a long time in fact, California, we've actually seen in many ways a better market because of many of the large captive carriers have shut down new business, which has given us actually a lift on that but.

Mark Jones: Compensation and benefits excluding equity-based compensation increased 7% driven by our investments in partnerships, technology, marketing, and service functions partially offset by decline in producer count. Other G&A expense of $14.8 million was up 10% from a year ago. That debt declined to $797,000 from $2.3 million as we have substantially improved the quality of our signed but not yet launched pool of franchises. Adjusted EBITDA on the quarter with $22.4 million, up 104% from the year ago quarter, while adjusted EBITDA margin increased to 32% from 19% in the year ago period.

Really its across most states, we're seeing many of the carriers are looking to slow down growth as they seek to restore profitability. So almost every single state has been challenged from a product perspective, you saw more pronounced than others.

Okay.

Appreciate it thanks.

Thank you.

Please standby for our next question.

Okay.

Our next question comes from the line of Josh Shanker with Bank of America. Your line is open.

Yes. Thank you good evening everybody.

A couple of quick numbers questions, what we're on boarding the quarter and how many contracts for new franchises deal pending.

Mark Jones: Our margin has been strong in the first three quarters of this year. Given the timing of investments and normal revenue seasonality, we expect only moderate margin expansion for the fourth quarter over the previous year. Looking further out, we continue to expect to grow annual margin of our 2023 base. Our intermediate term margin goal remains 30% plus, and our long term we see our business operating around 40% margin. As of September 30th, 2023, we had cash and cash equivalence of $35.2 million.

Hey, Josh we launched 30 franchises in the quarter and.

I believe the signed but not yet launched pause in that in the two hundreds.

Okay.

I'm looking back to 2019 before the pandemic shook everything up and by my count It seems like.

This is a winner or loser type of environment, you guys operate and maybe about 30% of franchises didn't make it out of their first year.

Mark Jones: Our unused line of credit was $49.8 million, and total outstanding term notes payable balance was $79.4 million at quarter end. With our net debt to trailing four quarter EBITDA at just 0.7 times, we have substantial balance reflexibility to drive future value and returns to shareholders.

Get traction is that a good way to think about long term how the company operates.

Among among new hires our new franchisee hires.

Josh This is mark Miller.

I would assume that we can bring that number down with the way that we're like corporate franchises.

Mark Jones: We are reiterating our guidance for the full year of 2023. Total written premiums placed for 2023 are expected to be between $2.87 billion and $2.99 billion, representing growth of 29% on the low end of the range to 35% on the high end of the range. Total revenues for 2023 are expected to be between $260 million and $267 million, representing growth of 24% on the low end of the range, and 28% on the high end of the range. Again, thanks to our team for their hard work, discipline, and focus delivering such strong financial results as we continue on our journey to industry leadership.

Our corporate agents that convert into franchise ownership are not going to fail at the same rate.

And we're bringing in much higher quality franchises. So we would certainly expect to bring that number down over time.

Yes, and I would point to in this quarter franchises, we launched in Q3 of 2023, 48% more productive excluding the corporate launches suggest once we hunted in the wild compared to last year, 48% more productive. So the quality of the franchise pool is going up dramatically, which helps that we don't need as much volume.

Still would like to see some increase in volume on new franchises.

But the productivity is so high at this point that we feel very good about the success rate of new launches.

Operator: With that, let's open the line up for questions.

Operator: Operator? Thank you. Ladies and gentlemen, as a reminder to ask the question, please first start 1-1 on your telephone, and then wait to hear your name announce. To withdraw your question, please first start 1-1 again. Please stand by while we compile the Q&A roster.

And then Mike productivity correlates directly to the success like Theyre going to stay.

Hey on the system a lot longer if they're more profitable.

And if I can get one more in you talked about.

The opportunity to earn a seven figure annual compensation.

From a college hire just to understand the pathway. So someone joins as a corporate agent. They prove successful you convert them into a franchise agent.

Michael Saredsky: Our first question comes from the line of Michael Saredsky with BMO. The line is open. Take good afternoon. I guess first question, maybe on your comments, reminding us about your 40% long-term margin goal. Just curious, would you be able to share any breadcrumbs on what level of productivity lift that would imply versus today's levels, or any kind of breadcrumbs around to help us put our heads around a 40% margin? Hey, Michael.

And they worked for a number of years and get up there.

And do we have examples of corporate agents, who have become seven figure earners.

Yes, yes, we do and it's a pretty clear path of these are typically people that have had a team underneath him before they know how to recruit they know how to onboard and to get people not a ramp and so it's a relatively.

Say easy proposition, but it's simple for them to understand they know how to be a good producer they know how to get people up to be a good producer. So you don't need very.

Aggressive hiring targets to get there.

Clear path and we have examples of it in the past.

Michael Saredsky: This is March, Jr. So in order to get to 40%, you don't necessarily need to see massive productivity improvements. Now, we've seen nice margin expansion this year. Some of that is driven by productivity improvements and generating profitability on new business. But naturally, the way this business works, as you get more and more renewal bias in the books, you just become more profitable given that the servicing on a renewal policy significantly less than a new business policy.

Michael Saredsky: There's much less fulfillment effort, all of those type of things, and the compensation to an agent is roughly 50%. So over time, as the renewal book becomes a larger and larger piece, and you see the growth rate trend down. Naturally, you get a lot of operating leverage out of this. Business. Okay, and maybe just sticking to productivity since it's been a big, a big plus lately. From your comments, you expected to continue to increase, and I know that you gave different, you know, that you think about a definitely productivity franchise versus corporate.

Are they corporate agents still about seven figure earners are the franchisees at this point.

Franchisees.

Okay alright, thank you.

Thank you.

Please standby for our next question.

Okay.

Our next question comes from the line of Pablo Cingal with J P. Morgan Your line is open.

Hi, Thanks.

Mark Junior if I heard you correctly I think you suggested revenues and costs will be roughly consistent sequentially and when we're thinking about <unk>.

Then suggest a similar margin profile for the fourth quarter are there discreet items that we should think about.

Yes, so we've got the revenue guidance for the full year I would point you to that for the fourth quarter revenue numbers.

Cost bar perspective, those should be relatively consistent with the third quarter now we've on boarded a few people, but nothing thats going to move the employee comp and benefits line too dramatically.

Michael Saredsky: But I'm, I guess, you know, you said a number of things about why productivity is likely to improve. In the coming year, you talked about more product availability, knock on wood, if, you know, the industry heals. You talked about the existing franchises being substantially more productive as they hire new folks. And the corporate conversions being five times more productive are, are, and then I guess there's QTI too. So I know there's a lot going on.

I would just point you to the way seasonality looks from Q3 to Q4 historically, our revenue guidance and then a relatively consistent cost bar from Q3 to Q4.

Okay, Yes.

Thanks.

And then as I look at the employee comp maybe beyond the fourth quarter right. So clearly this quarter good mature than revenues I think part of the year, reflecting with you said about.

The renewal book hitting a much leaner expense base.

Do you think you can surf maintained this comp ratio as you scale up in 'twenty, one 'twenty five or.

Is there some give back as you ramp up hiring.

Michael Saredsky: But what, you know, are, it feels like there's a lot in the mosaics that's going to be more of a big positive. It's what you, am I characterizing things correctly? And there's kind of a lot of levers. Yeah, I think absolutely. And I would point to the products challenges we're seeing today are dramatically, I think, reducing where productivity could be today, given the amount of leads we're receiving. So we mentioned in the prepared remarks that lead flow is up 18% year over year, and a pretty challenging housing environment.

Do more investments.

Yes, so as we stay laser focused on productivity, specifically with corporate agents that will help make sure we don't see that employee comp and benefits start to lose scale the.

The other big piece of that and actually the biggest piece of that is the service department and so making sure. We can drive efficiencies in scale out of the service Department will keep that employee comp and benefits line, continuing as a smaller and smaller piece of of total core revenue.

And then we will obviously, we will make investments in areas that we need to make investments in things like technology and the partnerships Department franchise development those type of areas.

Michael Saredsky: Now, if we can get the product environment and carrier underwriting profitability back at a level where there's a wide variety of carriers looking to grow, there's no reason why we shouldn't continue to see pretty strong productivity improvements on a year of year basis for a while to come, along with all of the other technological efforts we're making with QTI and partnerships and things like that. And this is Mark Miller. I would just add one thing on top of it.

But you Shouldnt see us losing scale dramatically and employee benefits as we onboard new agents were just to focus on productivity to let that happen.

Okay, and then last question for me.

The employee comp.

Look at stock comp as a percentage of overall employee comp.

Increased from let's call it high single digits to the mid teens level now.

Michael Saredsky: One thing we're also seeing is our retention rates of our employees is increasing. And as that happens, your tenure goes up, and there's direct correlation between tenure and productivity. And so last year, you're before that higher tuition rates, lower attrition rates now. So that also factors in your equation. Okay, that's helpful. And maybe lastly, on QTI, and I think it's, you know, since an outsider looking in, we appreciate you're saying it's a heavy lift and whatnot.

Is that a consistent ratio to think about right. So say mid teens for the foreseeable future.

So we've talked about stock comp a lot in the way we think about it is the dilution effect on the total share count and so what we've said historically is that 1% to 2% dilution rate in annual stock option.

Awards.

Obviously, the GAAP recognition of that as a black sholes valuation, which has other factors outside of our control that drive that compensation number itself.

As you go forward on an annual basis, you should expect a share count dilution and the 1% to 2% range.

Michael Saredsky: But I guess just trying to better articulate why its impact could be profound. I guess if a majority of your carriers, you know, went into kind of a QTI type type, you know, I guess KPI or plug-in with you all, like is there, would it save your average employee like X amount of minutes per day that they could use that save time to just sell more? Or is that the way we should think about our, is it more profound than just saving time and giving them more time to sell otherwise?

And the Black Shoals calculation will be would it be depending on volatility in the stock market and risk free interest rates.

Got it thank you.

And it is a noncash expense.

Thank you.

At this time I would now like to turn the call back over to CEO, Mark Jones for closing remarks.

Okay.

Thanks, everyone for your time and participation and we appreciate it and hope you have a good day.

Ladies and gentlemen, this concludes today's conference call. Thank you Sir you may now disconnect.

Michael Saredsky: Yeah, this is Morgan, I would say in this world current state today, I would think of it as a significant efficiency play for the sales team. So if you, all the trailing paperwork and everything else, it has to happen after the sale of the policy, it helps with that greatly. And then the service team that has the service it afterwards, today they have to go into a native system of the carrier.

Okay.

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Michael Saredsky: What we want to do in the future is the QTI connections are the same ones that you would have using the service side to get into service of policy. So great efficiency savings and I think we mentioned, you know, it will help direct that type of customer to the exact type of policy we want. We want the future. Yeah, I think there's also kind of an ancillary benefit here is this is a technology that doesn't exist in your else in the marketplace and so as you go to acquire new talent and people evaluate their options for an independent agency, why would you ever choose anywhere else that has lesser technology and tell me that they don't even have a roadmap to be able to accomplish we already have it. We've got first moved revenge there. Interesting. Thank you.

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Operator: Please say bye for our next question.

Okay.

Okay.

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Yeah.

Paul Newsome: Our next question comes from the line of Paul Newsome with Piper Sandler.

Operator: Your line is open. Check to see if you want me to fall. Follow you there.

Operator: Please stand by for our next question.

Brian Meredith: Our next question comes from the line of the Brian Mertis with UBS Securities. Your line is open. Hey, thanks a couple of quick ones here for you. First one, I'm just trying to understand a little bit the margin guide that you've got further for the fourth quarter, just modest increase given what we saw this quarter. It looks like top and benefit to stay relatively low and usually we see a ramp up there.

Brian Meredith: Is there some seasonality or something going on that just not seeing. Yeah, so typically if you look at the seasonality of revenue from Q3 to Q4, you don't see a big left in revenue from Q3 to Q4 and if you think about our revenue guide, you can get to where you would expect that to be for the fourth quarter on the cost bar. I'm not expecting a big move from the third quarter to the fourth quarter. So you can come up with what you should expect a margin number to be for Q4, I think. Gotcha.

Brian Meredith: Appreciate that. And then second, I'm just curious. You gave contingent commission guide, I guess for the year, but it was pretty strong in the third quarter. Which drive in that contingent commission? I know last quarter talked about some volume benefits, but you know, really stepped up again. Yeah, so there's a couple of things going on there. One being you write more volume benefits. So the majority of our contingencies are made up of a handful of carriers.

Brian Meredith: And if the premium and those carriers grow faster than the premium of the whole book, you'll see slightly outsized contingency. The other thing is there's a couple of smaller contingencies that are lost ratio based that we are, it looks like now at this point, tracking to yet in the way that the revenue recognition would work on that is you've got to wait until you have that information to actually record it. And so that could look more like nine months of contingency in the third quarter as opposed to an even distribution throughout the year that you would see from a growth based contingency.

Brian Meredith: Gotcha. And then last question to curious geographically, if you kind of look at, you know, geographically where things are, is there any kind of area that you see opening up a little bit more from a product perspective, carry perspective versus others, other areas of the country. It's pretty tight across the board, but what I think we're doing a good job on the adding product where we can, whether that be admitted product or an S product. And we have a few really, really good carrier partners that are keeping us open in places where they've shut down other agents. I think it's just the value of our model.

Operator: Great, thank you. Thank you.

Mark Hughes: Please stand by for our next question.

Mark Hughes: Our next question comes from the line of Mark Hughes with truer security. Your line is open. Yeah, thank you. Good afternoon. In the past, you've given the source of new business. I think you earlier on it was kind of 60% came from the mortgage market. I hear what you're saying that you're looking at expanding that, going through other electronic sources. Is there an updated mix of new business? You might be able to share.

Mark Hughes: So today, that's still about right, where it's an access of 50% of the lead generation from new business comes out of mortgage transaction. We're building up the partnership and the digital lead generation efforts, which I think that's why it's even more impressive that our lead flow is up 18% year over year with fewer agents and considerably less housing transactions. Our agents have just been doing a really good job marketing out there, and the value to referral partners today, as we mentioned in our prepared remarks, is never more evident than it's been in our history. The insurance cost on the mortgage transaction now is a real consideration, especially with rising interest rates. And so we're able to provide a really differentiated service today in the face of those headwinds.

Mark Hughes: A question about the geography or the flow in the income statement. When I think about renewal commission tapered this quarter, the line items that flow into that would be renewal commissions in this quarter last year, presumably that business would be renewing again. And then the new business commissions, those would also be up for renewal and therefore would be reflected in the renewal commissions. Is that right? It's those two categories from last year that flow into the renewal commissions this year.

Mark Hughes: And that's all corporate agent activities. That's correct. Yep, that's the right way to think about it. Okay. And same with the renewal royalty fees that renews with the new business royalty fees, they step up, you know, kind of the five to two, 50% retention versus 20%. That's right. So the way you do the math of the poor LTPs is you would just grow some up. So you would do your new business royalties.

Mark Hughes: Our portion of that is only the 20%. So you gross that up and then same thing on the renewals, our portion is the 50%. And then to get to the next year, as you obviously just multiply that by 50%. That would be our portion. Yeah. Exactly. Okay.

Mark Hughes: And then one other quick question. Just the rate contribution to growth, any meaningful change of this quarter, by that I mean that kind of pricing the premiums that the policyholders are paying for auto and homeowners insurance. How is that contribution changed perhaps? We're still seeing price inflation, but in our minds, the product availability, that's the other side of that price inflation, has been a bigger headwind than the price inflation has been a tailwind.

Mark Hughes: And you can see that in retention, you can see that in some stats that we track internally like policies per lead. We mentioned fine rate and package rate as well in our prepared remarks. So we believe that the product environment is more of a headwind today than price inflation has been a tailwind. Thank you.

Operator: Please stand by for our next question.

Meyer Shields: Our next question comes from the line of Meyer Shields with Keith Grett and Woods. Great. Thank you.

Meyer Shields: A couple of small questions. First, why are there additional expensive associated with pursuing leads to the partnerships and digital channels that change the equation at all? Now, so we, you know, the digital channels, AR Digital Agent, as well as leads from our partnerships, the events and other organizations. The digital agent, all of that is already built in from previous spending. The partnership leads. There's some reciprocal dollars that flow back and forth, but there's not any more customer acquisition costs than would traditional go-to-market strategies.

Meyer Shields: Okay, excellent. And I'm going to actually contingent. I'm probably a step behind, but if the increasing certainty with regard to loss-resubate contingents is what drove the contingent in the quarter, certain that and the due-to-date numbers imply more than 40 basis points for the full year. Yeah, you know, the range, the language we use is around 40 basis points. You know, things could still happen in the fourth quarter that can have adverse impact on that, but we feel comfortable that we will be at at least at 40 basis points.

Mark Jones: Okay, that's helpful. And I think it's kind of a question just because I don't know if there's an important comment. I think Mark, you talked about some initial signs of carrier and abstract expanding. Is there any initial change or impression in what you're seeing with regard to housing? We have not seen a sort of a turnaround in the housing market yet. No. Okay, I wish it were different, but it's not. That's what we understood.

Operator: Thank you. Please stand by for our next question.

Paul Newsome: Our next question comes from the line of Paul Newsom with Piper Sandler.

Operator: Your line is open. I'll check to see if you're on mute. Please stand by for our next question.

Scott Heleniak: Our next question comes from the line of Scott Hellenek with RBC capital markets. Your line is open. Yeah, thanks. I was just wondering with the franchise reductions, probably just about over, it seems like at least that's kind of what you had said on the last quarter of the call. Can you use comment on the franchise inquiry that you're getting and your plans to expand that in 2024 and beyond and just any kind of information or backlog information you can share on the franchise side?

Scott Heleniak: Yeah, Scott, just to clarify one point, on the last call, we said we were over the halfway points and franchise terminations in those calling efforts. So, you know, in this quarter, we had 89 terminations. We still think it will be high in the course of quarter higher than historical average. We believe in 2024, we will trend back down towards that historical average of 15 percent and we don't see a reason why kind of medium term, it should be higher than a 10 to 15 percent range as we gross up the gene pool.

Scott Heleniak: Yeah, Scott, this is Mark Miller. So, if we just go back and think about franchises in general, the way that I think about it, it's not about the absolute number of franchises. It's more about how many agents we have and so, where we're really doubling down is adding franchises or adding agencies back into the franchises that we feel really strongly about. What you're seeing is in the numbers is kind of a net out number so you're losing about quite a few agents that aren't very productive and replacing them with highly productive agents.

Scott Heleniak: That includes corporate agents that are converting to franchise ownership. We're also being very, very selective in the franchises that we're putting into the community now. So, the number of launches you'll see are great reduced from what it was last year, but they're much more productive and they're in the GOs that we want. And I think the final part of your question was how many kind of imbalance are we getting now? We've transformed the way we hunt for franchises, if you will, instead of doing a lot of outbound calling.

Scott Heleniak: About 50 percent of our leads will be coming from in this quarter from inbound digital marketing type of capabilities, is a new muscle for us and working tremendously well at finding really high quality franchises. Okay, that's that's helpful detail. And then just the the agent to franchise conversion, you said expect to do 30 for this year, is there any kind of target you have in mind just just annually and no conversions kind of going forward?

Scott Heleniak: Is that is that kind of a good number to use you know, just assume you have next next few years or I mean it is our best source of high quality franchises I'd love to ramp that up, but I also don't want to jeopardize the health of the corporate business. So it a lot of it depends on how big the incoming class is going to be which we we mentioned. We're doing really really well on college campuses.

Scott Heleniak: We're still in the budget process and so we literally budget out how many people we want to convert and how much we can take out of the corporate business. But I would say consistent with this year would be a good estimate for next year until we have better information and and if the class grows bigger and we have more qualified people I'd certainly like to up that but right now I would use what we what we had this year.

Scott Heleniak: Okay that makes sense. And then just finally last question just the product availability that you're citing and I'm assuming that's in Florida California Texas. Are you seeing that anywhere else or is it just mostly those those three states. It's really across the board those are certainly the most difficult states you know California in Florida in difficult for a long time. It's not California we've actually seen in many ways a better market because of many of the large captive cars have shut down new business which has given us actually a lift on that but really it's across most states.

Scott Heleniak: We're seeing you know many of these carriers are looking to slow down growth as they hit their store profitability. So almost every single state has been challenged from a product perspective to some more pronounced others. Okay. Appreciate it. Thanks. Thank you. Please stand by for our next question.

Josh Shanker: Our next question comes from the line of Josh Shanker with Bank of America. The line is open. Yeah thank you.

Josh Shanker: Good evening everybody. A couple of quick numbers questions. What we're onboarding from the quarter and how many contracts for new franchises do you have pending? Hey Josh we launched 30 franchises in the quarter and I believe the side but not yet launched was in the in the 200s. Okay you know I'm looking back to 2019 before the pandemic shook everything up and by my count it seems like you know this is a winner loser type environment that you guys operate and maybe about 30% of franchises didn't make it out of their first year.

Josh Shanker: If that is a good way to think about a long term how the company ought to operate among among new hires, a new franchisey hires. I mean Josh this is Mark Miller. You know I would assume that we can bring that number down with the way that we're like corporate franchises are that are corporate agents that convert into franchise ownership are not going to fail at the same right. And we're bringing in much higher quality franchises so we would certainly expect to bring that number down over time.

Josh Shanker: Yeah I would point you in this quarter franchises we launched the Q3 of 2023 or 48% more productive excluding the corporate launches. So just ones we hunted in the wild compared to last year 48% more productive. So the quality of the franchise pool is going up dramatically which helps that we don't need as much volume. We still would like to see some increasing volume on new franchises but the productivity is so high at this point that we feel very good about the success rate of new life.

Josh Shanker: Yeah, and I'll be productive right more like directly to the success like they're going to stay stay in the system a lot longer if they're more profitable And if I get one more and you talked about the opportunity to earn a seven figure annual compensation from a college hire just to understand the pathway so someone joins as a corporate agent they prove successful you convert them into a franchise agent and they work for a number of years and get up there you know and do we have examples of corporate agents who have become seven figure earners yes yeah we do and it's a pretty clear path of you know these are typically people that have had a team underneath them before they know how to recruit they know how to onboard and to get people down the ramp and so it's a relatively I won't say easy proposition but it's simple for them to understand they know how to be a good producer they know how to get people up to be a good producer so you don't need very aggressive hiring targets to get there it's a very clear path and we have examples of it in the past are the corporate agents still both seven figure earners or they franchise these at the point franchisees okay all right thank you thank you please stand by for our next question and next question comes from the line of Pablo Singson with date team Morgan you line is open um hi thanks Mark junior if I heard you correctly I think he suggested revenues and costs would be roughly consistent sequentially when you were thinking about the fourth you would have been suggested similar margin profile for the fourth quarter or are there discrete items that you should think about yeah so we've got the revenue guidance for the full year I would point you to that for the fourth quarter revenue numbers from a cost bar perspective those should be relatively consistent with the third quarter and we've onboarded a few people but nothing that's going to move the employee comment benefits line two dramatically yeah so I would just point you to the ways these analogy looks from Q3 to Q4 historically our revenue guidance and then a relatively consistent cost bar from Q3 to Q4 okay yeah that's your thanks and then as I look at the employee comp maybe beyond the fourth quarter right so clearly this quarter grew mature than revenues I think partly reflecting what he has said about you know the renewal book heading on much leaner expense base do you think you can surf maintain this comp ratio as you scale up in 2024 25 or is there some give back as you you know ramp up hiring and you know do more investment yeah so as we stay laser focused on productivity specifically with corporate agents that will help make sure we don't see that employee comp benefits start to lose scale the other big piece of that and the actually the biggest piece of that is the service department and so making sure we can drive efficiencies and scale out of the service department we'll keep that employee comp benefits line continuing as a smaller smaller piece of total core revenue and then we'll obviously will make investments in areas that we need to make investments in things like technology in the partnerships department franchise development those type of areas but you shouldn't see us losing scale dramatically and employee type of benefits as we on board new agents we're just too focused on productivity to let that happen Okay, and then last question for me, I also did the employee comp. If you look at stock comp as a percentage of overall employee comp, it's increased from, let's call it high single, the just the mid team level now.

Josh Shanker: Is that a consistent ratio to think about, right? So say mid team further for the both feature. So we've talked about stock comp a lot the way we think about it is the dilution effect on the total share count. And so what we, what we've said historically is that one to two percent dilution rate and annual stock option awards. Obviously the gap recognition of that is a black sholes valuation, which has other factors outside of our control that drive that compensation number.

Josh Shanker: And so as you go forward on an annual basis, you should expect a share count dilution in the one to two percent range. And the black sholes calculation will be what it be, depending on volatility in the stock market and risk for interest rates. Got it. Thank you. And it is a non cash expense. So. Thank you.

Mark Jones: At this time, I would now like to turn the call back over to CEO Mark Jones for closing remarks. Thanks everyone for your time and participation. We appreciate it.

Operator: Hope you have a good day. Ladies and gentlemen, this includes today's conference call. Thank you for the presentation.

Operator: May now disconnect. Thank you.