Thank you for standing by. This is the conference operator. Welcome to the Goosehead Insurance First Quarter 2021 Earnings Call. As a reminder, all participants are in listen-only mode and the conference is being recorded. After the presentation, there will an opportunity to ask questions [Operator Instructions] I would now like to turn the conference over to Dan Farrell, Vice President of Capital Markets, for opening remarks. Please go ahead.

Thank you, and good afternoon. With us today are Mark Jones, Chairman and Chief Executive Officer of Goosehead; Michael Colby, President and Chief Operating Officer; and Mark Colby, Chief Financial Officer. By now, everyone should have access to our earnings announcement, which was released prior to this call, which may also be found on our website at ir.gooseheadinsurance.com. 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. The 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 guarantees of future performance and therefore, undue reliance should not be placed upon them. We refer all of you to our recent filings with the SEC for a more detailed discussion of the risks and uncertainties that could impact the future operating results and financial condition of Goosehead Insurance. We disclaim any intentions or obligations to update or revise any forward-looking statements, except to the extent required by applicable law. I would also like to point out that during this call, we will discuss certain financial measures that are not prepared in accordance with GAAP. Management uses these non-GAAP financial measures when planning, monitoring and evaluating our performance. We consider these non-GAAP financial measures to be useful metrics for management and investors to facilitate operating performance comparisons from period-to-period by excluding potential differences caused by variations in capital structure, tax position, depreciation, amortization and certain other items that we believe are not representative of our core business. For more information regarding our use of non-GAAP financial measures, including reconciliations of these measures to the most comparable GAAP financial measures, we refer you to today's earnings release. In addition, this call is being webcast and archived version will be available shortly after the call ends on the Investor Relations portion of the company's website at www.gooseheadinsurance.com. With that, I'd like to turn the call over to CEO, Mark Jones.

Thanks, Dan, and welcome to our first quarter 2021 results call. We had another quarter of accelerating growth. In addition to reviewing our results, I'll provide a summary of building blocks we've recently laid to support continued accelerating growth at Goosehead. I'll also delineate and explain some of the core strategic trade-offs we make as a company. I'll then hand it over to Mike Colby, our Chief Operating Officer, to update you on some of our technology efforts in the quarter. Our CFO, Mark Colby, will then go into greater detail on first quarter results. Let me start with a reminder that our largest shareholder block by far is our management team. Our Goosehead Holdings represents majority of our individual networks. We think and act like long-term owners because that is what we are. When we make strategic decisions we do so, well informed and in a very real way with our own money. In the first quarter, we delivered accelerating growth and made a number of critical investments that we believe will support ongoing growth acceleration. Let me take a moment to highlight some of these. Premium growth, the leading key indicator of future revenue growth has continued to accelerate year-over-year on a larger base. In Q1, 2021, premiums increased 49% compared to 46% for the first quarter of 2020, while policies in force grew 49% compared to 45% for the first quarter of last year. Our premiums in the franchise channel grew 55% for the quarter, providing excellent visibility into strong and accelerating embedded revenue growth as those policies convert to renewal and our commission share jumps to 50% versus the 20% we earn on new business. Core revenues increased 47% over the prior year period compared to 32% growth for the first quarter of 2020. Our total…

Thanks, Mark, and hello to everyone. On past calls, we've discussed our plans to take the proprietary comparative quoting platform we built for agents and pointed towards prospective clients. In the first quarter, we made significant progress on this project. We're beta testing it now and plan to release this technology as well as a complete rebuild of our website in the third quarter. To better understand how this is so completely differentiated, let me walk you through the process of shopping for insurance online today and how our quoting platform delivers an effortless online shopping experience that most importantly is informed by expert agent intelligence and nearly two decades of accumulated experience. When shopping for insurance online today, clients come across several options. One, direct-to-consumer insurance companies two, lead generators; or three, digital independent agencies. Direct-to-consumer insurance companies are structurally disadvantaged from providing the best experience because they only provide one product option, requiring the client to shop the market for themselves to find the right policy at the best price. With each insurance company, the consumer completes a lengthy questionnaire, providing the site with their personal information and information about their home and vehicles. This interview process can include upwards of 100 questions, many of which the client will not know how to answer or they will not have easy access to the required information. For example, does their home have a hip or gable roof? What is the distance from their home to the closest fire hydro [ph]? What is the VIN number on their vehicle? They want to complete this process with many different insurance companies to determine if they're getting the appropriate coverage at the best price, and there are over 400 home and auto insurance companies in the U.S. The client is then presented…

Thank you, Mike, and hello to everyone on the call. For the first quarter of 2021, total written premiums, the leading indicator of our future core and ancillary revenue growth, increased 49% to $319 million. This included franchise premium growth of 55% to $230 million and corporate segment premium growth of 35% to $89 million. This accelerating growth is being driven by continued high retention rates, strong new corporate and franchise agent growth and increasing agent productivity in the franchise channel. The continued shift in our mix of business towards the faster-growing franchise channel imply significant embedded future revenue growth as the new business premiums reliably convert to renewal premiums, at which time our royalty fee increases from 20% to 50% for ongoing renewals for the life of the policy. At quarter end, we had roughly 788,000 policies in force, a 49% increase from one year ago and another indicator of increasing momentum in our business. Revenues were $31.2 million for the quarter, an increase of 53% from the year ago period, while core revenues increased 47% to $26.7 million for the quarter, both growth rates accelerating from the first quarter of last year. Ancillary revenue, which includes contingent commissions, was $2.8 million in the quarter compared to $1.1 million a year ago. I'd like to remind everyone of the cadence of our ancillary revenue from contingent commissions throughout each year under ASC 606. In the second quarter, we expect to book minimal contingent commissions as we will not have sufficient insight into loss ratios and other drivers of our contingent revenue to meet GAAP thresholds for recognition. The third quarter should have some additional contingent commissions as our profitability with our carriers comes more into focus. The fourth quarter should have the majority of our contingent commissions as our…

[Operator Instructions] The first question comes from Meyer Shields with KBW. Please go ahead.

Great, thanks. I had two questions on, I guess recent Texas or not so recent Texas freeze. I was hoping first that you could walk us through the timing like if that impacts contingents, does that impact this year or next year? And the second question is, what you're seeing in response in terms to increased shopping, following what has to have been a huge number of claims?

Yes, I guess, first, on contingents, Meyer. This is Mark Colby. It's still really too early to tell. What we do know about the Texas storm is that it was considered a catastrophic event, which helps us with contingencies, but again, it's a little bit too early to tell. As far as the shopping experience for a lot of those clients, I can't really speak. I don't think we've seen like a noticeable uptick in that. I think given our go-to-market strategy of being home closings, not necessarily online shoppers. I think, for us, it was a little muted.

We've certainly seen heightened claims activity, and it's not the first time we've been through a major event. We've been through many major events in our - in the course of business. So while that creates a certain level of taxation on the - the service team, we're well equipped to handle that, well equipped to deliver great experience. I mean look, our Net Promoter Scores increased over the quarter from the year-end and retention held steady. So there's no indication that we've seen an increase in our clients shopping. The other thing I'll note there Meyer, is that compared to a couple of years ago, in 2020, in the first quarter of 2021, Texas only makes up roughly 60% of our premium, which is way down from prior year. So as we get more and more diversified throughout the country that, certainly helps the contingencies as well.

And they were named catastrophic storms as well.

Which are typically excluded from contingency calculations.

Okay perfect. No, I appreciate the clarification. One related question I guess, when you got that level of activity, does that impact the expenses associated with servicing claims?

No, no it doesn't - at all. We were able to, especially with our service center in Henderson, Nevada, we have a load balancing capability with our workforce management, and it's just a matter of how we're prioritizing service work. So it does not increase the cost of delivering service.

The clients seem to feel good because their net promoter score went up.

Right, no certainly is working I just want to know whether how to back to that into neutral assumptions.

The next question comes from Mark Dwelle with RBC Capital Markets. Please go ahead.

Yes, good afternoon. And I guess, in the course of your discussion, I think you made fairly clear that you're prepared to focus on growth, and you're investing heavily in the business at this point is understandable? I guess what I'm trying to get my arms around is, are you messaging that there will not, in fact, be any margin improvement this year that we should think about last year's margin as sort of the foreseeable run rate while you make these investments? Or do you think there's a degree to which there's enough leverage in the business that you can get some both?

Yes, I think, again long-term, we feel that margins can be over 40%. We don't guide to margins for a reason because we want to keep that flexibility, and again 2020 was a record year for contingencies. So, all I kind of has to keep in mind with how you look at us for 2021 and beyond.

Okay. On the direct consumer product that you've been working on, is there any time line related to the rollout of that or is that still kind of work in progress?

Hey Mark, this is Mike. Yes, as we said, it's a 3Q deliverable this year for us.

Okay.

And as I mentioned, we'll be scheduling a broadcasted demonstration of the product before launch so, excited for you all to see the new interface, the technology. There is truly nothing like it on the market. It is an effortless, transparent experience. It's a digital agent experience.

Apart from the cost, you've obviously been incurring to build and ramp. Will there be any particular incremental costs in the third quarter such as advertising or anything like that, that will be associated with the launch?

Yes, I think you're starting to see that already with the hiring of Ann Challis as our CMO, and as you mentioned, a lot of the developer time. So we've already started to make those investments. Really, I mean going to the SEO route, things like that, trying to compete with those $1 billion ad budgets is not our plan. Our plan is to be strategic in our investments and to invest in our return. So we'll have some more detail about that when we release the product.

And we do think the market will create new channel opportunities for us, but initially, we look at it as a great tool to augment our existing channels, which is the real estate mortgage focused client acquisitions and customer referrals. We actually think there's a big opportunity to leverage this to make that referral process easier for existing customers who are saying, overwhelmingly, based on our Net Promoter Scores that they're willing to refer friend or family members. So, we want to take advantage of that, but we consider that low-hanging fruit.

Okay. And then related to - I mean, it sounds like - I mean, you've continued to expand on the corporate channel. As you listed out the number of new or potential offices, it seems like a somewhat longer list than the last one I recall hearing. Is there is a roadmap in terms of how many kind of corporate offices or corporate hubs that you hope to eventually have? It's a pretty material expansion in the last two years really?

As we've said in the past, the corporate channel is - we invest there to drive growth in the franchise channel to drive success with our franchise partners. So we're strategically placing infrastructure is in markets where we're growing that agent footprint rapidly. We know that agents who are closer in proximity to a corporate facility perform better than the agents who are further away. So this is an opportunity for us to put resources out in the regions where we're seeing franchise growth that - where franchisees can leverage easy access to our corporate team who are performing at the highest level of the game. And who have a very defined scope of work to transfer that knowledge, transfer that best practice to the franchise channel.

Okay, thanks for the answers.

[Operator Instructions] Next question comes from Katie Sakys with Autonomous Research. Please go ahead.

Thank you, good afternoon. I'm hoping you can provide some additional color for us around franchise productivity. Tenured agents in Texas last year had productivity of about $120,000 of new business, which is impressive, being that it's almost close to the level of corporate agent productivity? However, we've noticed that the tenured corporate agent productivity topped out at around $125,000. Is there some kind of practical ceiling at that $125,000 level or do you think the average tenured agent productivity can grow to something even higher?

Yes, I mean, if you look at agents who are exclusively focused on sales activity. We have not seen a peak in productivity. In fact, our most tenured agent, 14-year corporate agent, has seen productivity increases over the recent years until we moved him into a franchise - full-time franchise support capacity. So we have not seen the productivity capabilities peak. What you're seeing in the numbers is again, a deliberate investment. We're making a deliberate trade-off to bring high-caliber talent in the corporate channel and make that talent available in the franchise channel to drive success through training, through lead sales leadership, coaching, mentorship, marketing support. It's very tangible and defined scope of work in a very deliberate investment that we're making. That's - so when you think about the scope, their franchise support scope growing, you would naturally expect to see that manifest in the productivity numbers. And that's a trade-off that we're very willing to make, and we think it's clearly providing ROI for us when you look at franchise performance.

Got you, got you thank you. My next question is about mortgage originations. What's your best estimate of what your mortgage and real estate [ph] and market share in Texas is?

I don't believe we disclosed that, do we?

I think we want, but we can. I mean I think we've said in the past, it's - in any given year between 13% and 14%, and it's been holding steady at that rate for the past two years.

Yes, and not that we haven't been growing in the state of Texas, but - the mortgage market is very strong. More importantly though nationally, it's less than 3%, I believe last I checked.

So big runway.

Even in Texas.

Okay, great. Thank you so much.

This concludes the question-and-answer session. I would like to turn the conference back over to Mark Jones, Chief Executive Officer, for any closing remarks.

We'd like to just thank everyone for their time and interest, and we look forward to continuing to drive accelerating growth.

This concludes today's conference call. You may disconnect your lines. Thank you for participating and have a pleasant day.