Thank you for standing by. This is the conference operator. Welcome to the Goosehead Insurance Second Quarter 2021 Earnings Conference 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, VP Capital Markets. 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; Mark Colby, Chief Financial Officer; and Brian Pattillo, Vice President. 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 is subject to various assumptions, risks, uncertainties and other factors that are difficult to predict, and which could cause the 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 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. An archived version will be available shortly after the call ends on the Investor Relations portion of the company’s website at www.GooseheadInsurance.com. Today on the call, we will be providing a short video demo of our Digital Agent Platform, which will be going live in the coming weeks. If you are dialed into the call by phone, you will be unable to view the demo and will experience a few minutes of silence between the start of the video demo and our Q&A. As such, we encourage everyone to go to the webcast link for the earnings call, which is posted on our IR website at IR.GooseheadInsurance.com. Also, if you’re using a mobile device, you may need to press play when the video appears. With that, I’d like to turn the call over to our CEO, Mark Jones.

Thanks, Dan, and welcome to our second quarter 2021 results call. We had another outstanding quarter of very strong growth. On this call, I will provide a summary of our key results and highlight the meaningful investments we’re making today that will be significant drivers of growth in our business for many years. Our CFO, Mark Colby, will then walk you through some greater detail on our financial results during the quarter and the declaration of a special dividend. We will then hand it over to President and COO, Mike Colby, who will discuss our new Digital Agent Platform that will be available to consumers in the coming weeks and will provide a demonstration of this truly unique and powerful technology. Before discussing the quarter, I would like to spend a minute on a critical element of our competitive moat, our vast accumulated experience. We are a client-focused tech-enabled company. Note the order of priority, clients first, technology second as an enabler. You will see this on vivid display when we demo our Digital Agent Platform. There is nothing like it on the market. It is simple and comprehensive, and importantly, informed by artificial intelligence, leveraging millions of actual quotes by our professional agents. There is no shortcut to gaining and being able to leverage that experience. It can’t be replicated by newcomers to the industry. I strongly encourage interested people to try as many competitive shopping offerings as they’re willing to endure and see what is actually available, then try our digital platform. You will be amazed. I’d also like to say a word about margins. Our business model has a very long tail. The biggest growth investments we make this year won’t begin to start showing up significantly in our revenue until 2024 and thereafter. We’ve modeled out…

Thank you, Mark, and hello to everyone on the call. As a reminder for anyone that may have joined late, you will be unable to see or hear the demo of our new Digital Agent Platform, if you only dialed in. As such, we encourage everyone to use the webcast link which is available at ir.gooseheadinsurance.com. For the second quarter of 2021, total written premiums, the leading indicator of our future core and ancillary revenue growth increased 46% to $399 million. This included franchise premium growth of 50% to $286 million in corporate segment premium growth of 36% to $112 million. This growth is being driven by increasing 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 implies 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 872,000 policies in force, a 48% increase from one year ago and another leading indicator of the momentum of our business. Revenues were $38.2 million for the quarter, an increase of 28% from the year ago period, while core revenues grew 40% to $34.7 million for the quarter. Ancillary revenue, which includes contingent commissions, was $1.7 million in the quarter compared to $4.1 million a year ago. Given the weather events thus far in 2021, we anticipate that some of our contingents may trend below average as a percentage of premium for the year, with most of the contingents coming in the fourth quarter as our results with the carriers are finalized. The franchise channel generated core revenue growth…

Thanks, Mark, and hello to everyone. We are extremely excited to be approaching the official launch of our Digital Agent Platform. And we appreciate the opportunity to preview this technology for you today. As I’ve mentioned previously, this platform will provide an effortless and completely differentiated client experience compared to the incredibly cumbersome process buyers face today, shopping for personal lines insurance. The online market for personal lines insurance today includes: one, direct-to-consumer insurance companies; two, lead generators; and three, online independent agencies. Each of these options have inherent deficiencies that negatively impact the client experience, resulting in a customer that is oftentimes frustrated, underinsured and paying too much for their insurance solution. Direct carriers are structurally disadvantaged and that they offer only one product option with what is usually a lengthy process of gathering personal information that can include upwards of 100 questions, many of which the client will not easily be able to answer. For choice shopping experience, the process would then have to be repeated with many different insurance carriers to determine the appropriate coverage at the best possible price. Throughout this process, clients will be presented with options to increase or decrease their cost based on coverage additions or subtractions, choices that can be confusing and at times overwhelming to the buyer. This is precisely where getting the advice of an expert agent is critical and gaining access to agent advice on these platforms can be difficult, if offered at all. Lead generators, digital independent agencies or some hybrid of the 2 create an even more frustrating experience for the customer, by misleading them to think that they’re being shot and will be presented with accurate price quotes. A similar lengthy information gathering exercise is required to start the process. Then, only a few options are…

Good afternoon. My name is Brian Pattillo. And I’m excited to demo our brand new Digital Agent Platform. As you will see, we have built a quoting platform that provides an effortless experience for the client at every step of the process. Although less than 10% of consumers buy home insurance online, many will start their research using comparison sites. As Mike mentioned, these platforms are fundamentally broken, and most of these experiences end with a client’s data being sold. Our platform is completely different than anything on the market today, providing the shopping experience consumers are looking for, while making sure their privacy is protected. It all starts when the client visits Goosehead.com or the unique link provided to each one of our agents, which routes directly to them. Our mobile-first design provides an extremely simple and intuitive interface, catering to the modern consumer. After starting to type their address, we finish the pre-fill and immediately start pulling data about the home. We will ask if it’s a new purchase and confirm ownership details, then display some of the most important property data where the client can update if needed or simply proceed to the next step. At this stage, we pull in the names of the client and spouse, they enter their date of birth. And we then search for any additional drivers in the household. And they can easily add with one click. On the next screen, we pull in any vehicles registered to the client, so they can quickly select the vehicles they want to insure. All these data integrations provide a more convenient user experience and increase the accuracy of the quotes they are about to see. The client is now done with their portion, allowing us to take the data they provided and then…

We will now begin the question-and-answer session. [Operator Instructions] The first question comes from Ryan Tunis with Autonomous Research. Please go ahead.

Yeah, thanks. Just a couple on the margin front. First of all, it looks like adjusted EBITDA margins are down about 9% year-over-year. Is that a good way to think about how that’ll probably trend in the back half of the year as well [we’re out of the 2020?] [ph]

Yeah. Hey, Ryan, this is Mark Colby. So specifically for this quarter, we had significantly less contingent commissions than we did last year, just given where kind of economies opening back up, we are no longer in the COVID environment, people are driving again. And so, that was the main driver of the kind of margin decrease, along with some investments that we’re making in things like real estate. And, again, the economy is opening back up, so we’re resuming a lot more travel, and meals and entertainment, and those investments that we did not make last year. As far as margins go there, yes, it’ll be challenging to grow EBITDA this year, just given the tough comparison to last year with contingent commissions and the much lower expense level than we thought was going to happen last year. So overall, we’re continuing to hold true in our message of driving high levels of premium and revenue growth. But it will be a little more challenging year for earnings, specifically EBITDA.

Got it. And thinking about 2022, that’s helpful, you mentioned that you don’t expect the same ramp-up in real estate costs and some of their stuff associated with comparative rater. Could you give us an idea of what that step-up this year was though in real estate costs, and the comparative rater across as well, just so we can kind of think about that order of magnitude out to 2022?

Yeah, we are – I don’t know the specific number top of mind, but probably adding 25% to our real estate at least, square footage this year with these new office openings. And, our plan for next year is not to open any additional offices or any expansion. So the level that you’ll see by the end of the year, once all these office openings happen, is kind of going to be the level for next year as well. And as far as the client rater, it’s something we’ve been investing in for years now. Say, specifically this quarter, it was to the tune of several hundred thousand dollars of investment that will continue as we roll out the product. And that will be kind of more of a steady state going into next year as well. We’ll continue to maintain it and add new developments. And I’m sure some additional developments will come to us next year. But again, this is one of the bigger pieces of technology we’ve ever rolled out, probably the biggest. So it’s hard to imagine anything to this level would happen again next year. And all this spending again, I mean, this revenue, revenue, which we’re very, very excited to scale out next year.

Yeah, so on the total written premium growth, another pretty good quarter there, 46% year-over-year growth, so the guide is for 40% to 45%. So, I mean, I guess, that implies some deceleration. I’m not seeing recruiting slow. So, I mean, why are you thinking that that number is going to decelerate in the back half of the year? Like what do you have your eye on?

For guidance, specifically for premium guidance, we really don’t want to get in the habit of changing it every single quarter. We had a very strong first quarter and we’re able to rise the guidance and that was kind of it for the first half of the year for us. We’re going to continue to wait and see. You’re right, recruiting momentum is continuing as is new business generation. Another reason that we’re not rising it even higher yet is just some of this COVID delta variant is, it just creates some uncertainty for us. And again, we want to be conservative in our guidance and give you guys numbers that we’re extremely confident we can hit.

Got it. Thank you.

Thanks, Ryan.

RBC Capital Markets, please go ahead.

Yeah, good afternoon. A couple of questions. Firstly, related to the dividend, I mean, it’s a substantial dividend, but I mean it seems like it’s more than your cash earnings over the last year to year-and-a-half. I mean, with so much investment going on right now, why effectively borrow to pay a large dividend?

That’s been a consistent part of our balance sheet strategy since we went public, Mark, is we’re going to have an efficient capital structure, which involves some debt. And we delever so quickly in our business that periodically from time to time we’re going to increase that leverage we did, recently up to 4 times. And to your point, we don’t need this cash for operating expenses or future growth. So we are going to return it to who it belongs to, and that’s shareholders.

Okay. I mean, I saw the video on the new technology that’s, I mean, it’s pretty cool. One question I have related to that is, how do you – I mean, there’s a lot more I could say. I’m going to try to keep focused on the questions rather than like my impressions. It’s just that…

Well, I appreciate that, Mark. But it’s hard for me not to – this is Mark Jones. It’s hard for me not to sort of [chocolate that with] [ph] the description of pretty cool. We would beg everyone in the – anyone that has any interest in this at all to drag themselves through the competitor offerings. Each one of which is singularly horrific, and then, try ours at the end. There is nothing like – this is a complete game-changer for the industry, a complete game-changer.

As you know, I’m one of those people who like looks at those competitor websites for a living. So I’ve been to most of them. So I do know cool when I see it. But the question that I had was really one. I guess, it’s kind of an internal channel conflict question, which is to say, so if I operate your website from where I happen to live in, in Virginia, I mean, who will get the commission credit within Goosehead for the sale I eventually place? Will that be somebody in my local market, a franchisee I maybe have never met? Or will it go through the corporate channel and be house sales so to speak?

Hey, Mark, this is Mike Colby. I think, it’s important to understand that one is technology cannot be developed without input and years of accumulated experience from expert agents. And secondly, it will continue to be refined and to be developed to be even more powerful with the contribution from our agents. And ultimately, the client experience can’t be delivered without your agents’ fulfillment and agent execution. So, no way, are we trying to create a conflict that would undermine our agents’ experience. This is simply a different way to engage with customers who prefer to engage with us digitally. That’s very important. But one if you’re an existing client, you come to our site; our system smart enough to allow you to your existing agent. So if you’re new to Goosehead, you’re exploring Goosehead options. We’ll start with your local area. And then we’ll be distributing leads through a round robin distribution for agents who qualify based on certain qualitative metrics. So we want to distribute the leads to agents who are going to capture the most value and deliver the highest level of lifetime customer value. I view that is a very powerful currency to encourage improvement in performance across our agent force. And our agents will – you’re not still undermined or you will not be created any channel conflict with the agent, we believe in the role of the agent and we believe this is a powerful tool to augment our agents’ efforts.

And will be [indiscernible] agnostic.

Yeah, that’s what I was going to say, Mark, we’re going to be agnostic by channel. So what we want is the – we want the agent that’s going to do the very best job with the lead to get the lead. And that, so we’ll be looking at things like net promoter scores and other sort of cross selling retention numbers, all those things that create the best client experience, but also create the best lifetime client value. And so, we are sort of stepping over dollars to pick up dimes, if we’re worried about for shunting them, just in house. We believe, and it’s always been our experience that if you do the right thing for the client, the money always takes care of itself. And that that’s our approach here to. The good question, though.

Okay. That’s helpful. And one last one on that, if I may. Just any reactions from your carrier partners, I know a lot of them in the past have been, I’m going to say resistant or concerned about being presented in comparative fashions like this? If you’ve gotten any feedback or any pushback from any of your carrier partners related to this?

Mark, this is Mike, again. I agree, I think carriers are very reluctant to be presented in a fashion like this with the options that are currently available on the market. The key differentiator with us again is expert agent intelligence. We’re able to using our tool, using our data, using our agents; understand how to more efficiently match risk with risk appetite. And, in fact, our agent or insurance company partners are very excited about that. But again, with the absence of the agent, you’d have a very hard time convincing insurance companies that this is in their best interest. I mean, I think he go back just not even 10 years. And you see kind of the Google insurance shopping experience, which was quickly folded, really within 18 months. It was because the carriers were very concerned about the type of business they were looking at. And quite frankly, the transaction costs that when we have an agent seamlessly integrated into the process, and we can deliver high levels of close rates, or we can be very precise with the company, the products that we’re presenting to the customer based on the insurance company’s risk appetite, it’s a win-win for both of us. So I would say our partners are very excited about this kind of new tool that we’ll be able to use to drive agent productivity and create incremental revenue opportunities through new channels. We have a track record of delivering profitable growth. And they look at this as another kind of foundational tool to continue on that trajectory in the partnership.

Thanks for that. And I appreciate the color and I let somebody else jump on, so they express their enthusiasm emphatically than I did.

I’m just giving you a hard time, Mark. If you weren’t my friend I wouldn’t.

The next question comes from Meyer Shields with KBW. Please go ahead.

Great. Thanks. I guess, I will start by echoing Mark Dwelle’s comment about the coolness of the portal. I just had a couple of, I guess, [indiscernible].

Thank you.

No problem. I don’t know cool as well as he does. Is this – when we talk about the launch of this? Is that going to be nationwide?

Yeah, it is. Yes.

Okay. And when you said panel agnostic, I think that means between the franchise and the corporate channel.

Correct.

Okay. Were there additional expenses in terms of like second quarter, because I think one of the things we’ve noted is the margin pressure, were there additional expenses associated with the launch that sale going forward?

Yeah, I mean, we have certain integrations that we’re building out the launch that will stick around, but I don’t expect them, it might stick around for another few quarters. But, again, we’re talking about completely redoing our website margin. And some of that cost is capitalizable, not all of it. But, content duration those sorts of things that will continue to add cost to it. But again, I think, they’re going to scale very nicely compared to 2021.

And this is just a technical question. But if assuming that somebody is using this in the middle of the night, is the only option available then to schedule a call for later?

That’s correct, Meyer. This is Mike, again. Our agents will be connected seamlessly with the client expectations will be set, the client will be put on a journey roadmap with us, but we expect and we’ll manage high levels of responsiveness, and a very consistent client experience that our existing customers have grown to expect and appreciate. So, yes, we’re not going to have agents manning this 24/7 here today. But I believe our prospective customers will get a lot of value out of the transparency, being able to start the process and be able to kind of pick up the process very seamlessly with an agent.

Okay. And then really my final question is, if I’m not a Goosehead customer, and I don’t know that the portal exists, how does that get introduced to me?

So initially, Meyer will be using this to augment our existing channels, lead channels. So I think this adds incredible value to our referral partner marketing efforts, where our referral partners can use this tool to integrate us into their mortgage origination process much earlier, in the process to get accurate pricing indications as they’re working with their customers. I think it removes a lot of obstacles, and allows our existing customers to action, client referrals, which they say with 92 net promoter score that they’re overwhelmingly willing to do. We think there’s a lot of opportunity there. And also, on top of that, we have a lot of data to mine, as it relates to existing customers with additional product cross selling opportunities, whether it’s recovered clients that we’ve lost over the years, we believe we can drive a lot of traffic to the site, using that – using our existing data sources or existing sales process and lead channels. Organic…

Right. Got it. Go ahead.

Yeah, in addition to that, we also with Ann Challis, our new Chief Marketing Officer, as part of this new website launch are part of the new product launch or re-launching our entire website. And our website is really driven around the content strategy to develop your meaningful content, that with optimized ratio, where clients can learn about insurance, but they’re going online. And we believe that over time, that’s going to drive traffic to the site. Paid traffic is very expensive in this industry. And so we’re taking more of an organic approach. But we’re leveraging, we built the entire website around driving organic traffic that we believe over time could be to meaningful traffic on our site.

Yeah, so there will be some costs associated with content development things like that. But one thing we’re not going to be doing is, offset buying data and television commercials or Google AdWords or anything like that, but that just we can’t compete in that space where we’re fighting billion dollar ad budgets. So we got to compete on a different playing field.

Okay, perfect. Thank you.

The next question comes from Pablo Singzon with JPMorgan. Please go ahead.

Hi. So my first question is, in the work you’ve done in evaluating the online readers and investment. The other sense of the magnitude of incremental that you will get, versus, I guess your current degeneration channels such as referrals or real estate or mortgage brokers? I’m just wondering if you have an early sense of sort of the incremental marketing opportunities as tool will present here.

So we’ll have a better idea of that, Pablo, kind of when we start giving our 2022 guidance. We don’t know how much additional lead volume will be driven in 2021. But again, we’re excited about kind of the possibilities of this. And we’ll have some more to say on that kind of towards the end of this year, early next year.

But the opportunity is huge. I mean, 2020 we were involved in 14% of new mortgage originations in the state of Texas, but in less than 2% of Texas homes is a lot more homeowners who are living in their current homes, than they are buying new homes or refinancing their current mortgage. So I think, obviously, this expands the market tremendously and as we get data on traffic and consumer behavior, we’ll be able to more accurately model that.

Got it. And then my second question is just on margin. So, I guess, putting aside serve the one-timer step up investments this year, right, so real estate that the expenses for the online rater? And maybe thinking about 1 or 2 years up and you serve back to business as usual, and I guess for us, it means like recruiting growing, 30%, 40%, or something like that. So, but I guess it’s in the context of the question in the path, when you’ve been growing at similar rates, your EBITDA margins were north of 20 easily maybe 25 in some years. Would that be a reasonable range to expect your margins [sort of revert to] [ph] once these sorts of onetime expenses are behind us?

We’re not going to guide towards earnings. But you’re right, I mean, we historically have been able to sustain those levels of growth at 20%-plus margins. And in the absence of some step up and costs, I think, we would be right there. So, again, I don’t want to guide to that. I’m sure some interesting investment opportunities will come along, but we want to be able to stay agile, and make those investments when we can.

Pablo, it’s Mark Jones. Just to kind of go back to what I was saying, we are optimizing. We’re spending responsibly. We do have a long history of being a private company, and we’re spending my money, and that culture continues. But we’re very focused on capturing [Technical Difficulty] sure that we’re expanding our competitive moat, and building a really, really defensible strategic position. So, the margins are there. This is a business where EBITDA margins are in the 40%s on a steady-state basis. If we slow growth down, as I said to 10% or 12%, that’s what margins – that’s where the margins end up being. But that’s – the way to maximize total profit, total value creation is to focus on growth, responsible growth, it’s not wasting money, but not getting too hung up about every point of margin. That’s not our priority.

Understood, thank you for your answers.

Thanks, Pablo.

[Operator Instructions] Our next question comes from Josh Shanker with Bank of America. Please go ahead.

Yeah, thank you. Congratulations on the new launch, everybody.

Thanks, Josh.

Two questions, given how cool it is, do any of your agent or prospective future franchisees look at this and say, I could see a path to being disintermediated? What sort of guarantees do you have that you’re not trying to be agnostic about also adding a Goosehead direct channel?

Josh, this is Mike. We’ve been emphatic in our communication to our agents and in our demonstration of the way we run the business, that this is an agent kind of driven strategy. We believe in the role of the agent. We’ve been investing aggressively. We built the business model around the agent and equipping them with the right product and the right tools to serve the clients. We view this as a different way to engage, for agents to engage our customers. And again, we can’t develop this technology without the information and the behavior and observing the behavior of our expert agents. And we can’t continue to deliver for our clients the experience that they deserve and that they expect from us without our agents. So – and we have a track record of being very transparent and very solid partners to our agents. I mean, I’ll remind you that, 93%, 94% of home insurance is still purchased through an agent. The most attractive segment of the market wants to engage with an agent, wants to make smart decisions. This is about empowering our agents and allowing them to engage with customers in a digital manner. It’s not at all about disintermediation. I think our agents are extremely excited about having this tool and extremely excited about the power of the tool, and the opportunity that it creates for them to market their services, build their businesses, and engage their clients and provide a better experience. So I think that’s a theoretical I think area, Josh, you’re hitting on. But our agents don’t believe that, that’s not part of our strategy, that’s not the way we operate. And I think we’re putting our money where our mouth is, as it relates to really supporting and holding up our agents.

Okay, thank you for that. And are there any KPIs that you’re going to be providing for how we should gauge the success of the digital platform?

Yeah, we’ll continue to evaluate those and kind of determine what’s appropriate to share with the Street and everyone else, but, yeah, we’ll certainly have additional KPIs internally that we’ll be monitoring.

Thank you very much.

Thanks, Josh.

Thanks, Josh.

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

Yes, I’d like to thank everyone for joining us. And just as a reminder, the video of the Digital Agent Platform is on our Investor Relations website. You can go back and look at it at any time at IR.GooseheadInsurance.com. And thank you and good night.

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