Good day, ladies and gentlemen, and thank you for your patience. You’ve joined the Goosehead Insurance Third Quarter 2018 Earnings Conference Call. At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will be given at that time. [Operator Instructions] As a reminder, this conference may be recorded. I would now like to turn the call over to your host Senior Vice President of ICR, Garrett Edson. Sir, you may begin.

Thank you and good afternoon. With us today are your hosts, Mark Jones, Chairman and Chief Executive Officer of Goosehead; and 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 and 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. In addition, this call is being webcast, and an archived version will be available shortly after the call ends on the Investor Relations portion of the Company's website at www.gooseheadinsurance.com. With that, I'd now like to turn the call over to CEO, Mark Jones. Please go ahead.

Thanks, Garrett, and welcome to our third quarter 2018 earnings call. Thank you to everyone for participating on our call and for your continued interest in Goosehead. Today, I will provide an overview on the quarter and some additional perspective on our long-term strategy. I'll then hand the call over to our President and Chief Operating Officer, Mike Colby, who will discuss some of our technological investments that we expect will enhance our competitive advantage in existing channels, open additional distribution channels for us in the future and facilitate our ongoing growth in revenue and profitability. Our CFO, Mark Colby, will then follow and provide more detail about our third quarter results. In the third quarter, we continued to realize strong organic growth across our corporate and franchise channels and we delivered another quarter of strong profitability. We continue to focus in a laser light manner on executing our strategy and we believe this will continue to allow us to create sustained long-term value for our shareholders. For the quarter revenue and adjusted EBITDA grew to $16.1 million and $3.1 million respectively. This represents year-over-year growth of 49% for revenue and adjusted EBITDA growth of 42%. Total written premium rose 50% and policies in force grew 50% from the prior year as we continue to execute and win. On top of our strong growth, we maintain our industry leading retention rates and actually increased our world-class Net Promoter Score to 88, which I'm particularly proud of given the high bar we have already set. This quarter gave us the opportunity to demonstrate the robustness of our new business development strategy, which centers on supporting professionals involved in the home and mortgage closing process. We normally see a seasonal slowdown in the housing market after the summer months are over and…

Thanks, Mark, and hello to everyone. As mark has noted on numerous occasions, innovation is part of the DNA of Goosehead. We've created an exciting and forward thinking culture where we're constantly evolving and improving our ability to deliver the best experience for our customers and our team. A major focus of ours is in the consistent investment in advancing our technology. We've talked before about the technology platform enabling all of our strategic accomplishments and providing us with an ongoing competitive advantage. It would take an enormous amount of time, human capital and funding to replicate our platform, providing us with a very real barrier to entry. Today and on future calls, we want to take you further behind the scenes to talk more about the new capabilities we've developed and how each better positions us to win over the long-term. While our growth in 2018 has been strong, we would also say that this year has been transformational for Goosehead with respect to the enhancement of our technology platform. Our objectives are to increase the efficiency and effectiveness of our sales and service to agents, creating productivity and client experience improvements that will lead to increase revenue and profitability over time. It's important to point out that our past and present development efforts have been focused on agent facing technology. However, we are laying the foundation for exciting new omnichannel capabilities that will face our clients and referral partners in the future. We've developed the roadmap that we believe can leverage our technology backbone, industry expertise and accumulated experience to make Goosehead the first major insurance broker to bring a complete and integrated online choice model buying experience to the U.S. market. We believe this will create significant incremental growth opportunities for us over time. This year our…

Thanks, Mike, and good afternoon to everyone on the call. Let's go right into our third quarter results. For the third quarter of 2018, we produced a 49% increase in revenues to $16.1 million compared to $10.8 million in the prior year period. This improvement was driven by strong growth in both our corporate and franchise channels from new and renewal business as well as $660,000 and contingent commission payments received in the quarter that were initially expected to receive in the fourth quarter. As a result of the timing shift, we do not expect to receive any contingent commission payments in the fourth quarter. Total written premiums during the quarter, which is a good proxy for the growth of our business, also grew 50% year-over-year to $140.3 million. At the end of the quarter, we had over 310,000 policies in force, a 50% increase from one year ago and 10% sequential growth from the end of the second quarter of 2018. We continue to produce consistent high year-over-year growth in our key performance indicators, which positions us well for long-term success. As Mark mentioned earlier, a larger than expected slowdown in the housing market was a headwind we battled during Q3. Fortunately, our sales process and proprietary technology allow our sales agents to pivot relatively quickly to expanding market share during times of slower lead volume. However, because of the time it takes to develop relationships and truly see the benefits of additional marketing efforts, we believe new business production will also be impacted somewhat in Q4. That being said, all signs suggest our fundamental go to market strategy remains very robust and competitively defensible. So we remain confident the impact to Goosehead of these headwinds are purely a temporary phenomenon. Based on the market share growth we are…

Thank you, sir. [Operator Instructions] Our first question comes from the line of Chris Campbell of KBW. Your line is open.

Yeah, hi. Good evening, gentlemen.

Hey, Chris.

Hey, Chris.

Yeah, I guess, kind of first question just talking about the trading plan, which I think will definitely help the liquidity and dampen the volatility in the stock. So I guess how should we think about modeling the dilution over time within the plan and then what variables could impact that in like a particular quarter?

Yeah, really, Chris. There shouldn't be any dilution impact from it using the adjusted EPS number. We always account to make – to account for Class Bs that will be converted to Class A and the income tax impact of all that. So really the way to look at it is just kind of net income divided by the total of Class A plus Class B expenses plus a couple of adjustments which we've laid on the earnings release.

Okay, got it. So there's no new like options or shares or restricted shares or anything like that?

No, just the options from the IPO that those are the only options that will have any kind of dilutive effects in the future.

Okay. And then like how – I guess how many of those would be outstanding on a share equivalent basis?

There is 1.6 million shares related to the IPO. They're outstanding.

Okay and that's above the current share count. Correct?

Correct.

Okay, got it. And then just kind of looking at the balance sheet, just particularly cash and cash equivalents, I know you just refinanced the debt, but you've had $18 million in the past few quarters. I can’t imagine you need that much to run the business day to day. So just how are you thinking about deploying that that into the business? Is that more technology? Could that be accelerating your growth plans, spending into new corporate offices, I guess just how are you thinking about putting that money to work?

Yeah, Chris, it's Mark Jones. As we – as I have mentioned previously, we're not in a business where you can grow faster just by throwing more money at it. We are growing as quickly as we can responsibly absorb new people and new franchises. So we will be deploying some of that cash in technology investments. And the – I think one of the really important things for people to take away from this is the insight that kind of Mike communicated when he was talking about our tech investments that we have – we are now in a position that we can start to point some of those things at consumers and at referral partners, which opens up – which will open up over time as significant incremental growth opportunities over and above anything that we've sort of built into our forecast at this point. So we'll be using some of it for that, but primarily what we're going to do is fundamentally when we get to the end of Q1 or when we close out the year, we will determine what our cash needs are. And as anyone that heard me, I guess, we were going through the road show that asked me about this. I said, we're going to retain the cash in the business that we need to fund sort of growth. But the cash that we don't need is going to be returned to the people that own that cash, which is our shareholders. So it's premature to announce any sort of specific dividend, but I would anticipate that there will be some dividend in the first quarter.

Got it. And so are you thinking of that just as like an annual special dividend type of capital management process you would go through just after you finalize your budgeting process annually?

That's exactly how – that's exactly how we're thinking of it, Chris.

Okay, got it. That makes – that makes a lot of sense. So thanks for that color. And I guess just kind of on the homeowners headwinds, it sounds like – I mean you still – got still awesome growth rates, but it sounds like there could be a little bit of weakness relative to the strong results in homeowners lead gen. So I guess just what metrics are you seeing the biggest pressure on right now on homeowners? And then how sensitive is the new business production to the interest rate movements that we're seeing?

Hey, Chris. This is Mike Colby. I can't speak exactly to the interest rate movement and how that's impacting the home sales. That's not my area of expertise. But I can tell you that we've seen a more dramatic decline in housing sales towards the end of the third quarter than we've seen in previous years. So what that means is our team has to pivot and find new relationships to bring online and we've started to see very good results with that as Mark mentioned in his prepared remarks that we saw about 100 basis points of share grab towards the end of the third quarter, suggesting that our team is being successful turning on those new relationships.

So we anticipate being able to sort of backfill slowness in the market as it's presented itself thus far by the end of the fourth quarter. So we'll see some headwinds for the fourth quarter, but we are really good at gaining share and we'll continue to do that.

Okay, got it. And then just one more if I could circle back kind of like the capital management issues. I guess just how do you think about your day to day cash needs relative to the premium you're generating, the employees et cetera like your different cost drivers? What would be like a way that we can think about kind of potentially modeling that?

Well, again, Chris, I'm very simple minded. I think it's important that we have an efficient capital structure. So that's going to include debt and equity. And that as a rule of thumb from a capital management standpoint, my rule of thumb is if your debt service costs or covenants ever have an impact on operating decisions that you're making, you've got too much debt. If they are completely irrelevant to any operating decisions you make, which our debt level is, then you're okay. So, we generate cash every month, our operations are very cash flow positive. And so as we go throughout the year, we accumulate cash. And as I said, when we close out the year, we'll see where we're at and what we anticipate our needs are going to be in 2019 and we'll return cash that we don't need to the shareholders. I will also say that over time, we will look at making sure that we have an appropriate amount of debt on our balance sheet, so that we have an efficient capital structure. We feel like our current capital structure is nice and efficient.

Okay, got it. Well, thanks for all the answers and best of luck for rest of the year.

Thanks, Chris.

Thanks, Chris.

Thank you. [Operator Instructions] Our next question comes from the line of Adam Klauber of William Blair. Your line is open.

Good afternoon guys.

Hey, Adam.

A couple different questions. The franchise count has almost doubled in the – maybe in the last year and a half it has doubled. Is there any reason that will slow down? And instead of that, the large numbers going from 200 to 400 to double again, you have to go to 800. So will that pace just large numbers begin to slow somewhat?

Adam, this is Mike. Thanks for the question. We're seeing our value proposition to agents resonates strongly across the country in the markets that we're focused on. When you provide your agents with a choice model, so that they can serve their clients better when you give them smart technology to go to market and when you take all the non-sales activity – non-sales related activity away from them, they are able to grow larger books of business faster and more profitably. That is really resonating. So, our growth year-over-year is consistent with our past years and we expect that trajectory to continue going forward. We don't see any reason why that would slow down year-over-year. At the end of Q3, we had 424 operating agencies that was up 59% from the same time last year.

Yeah, and Adam, this is Mark Colby. One of the things that's really encouraging to us is the success we've had outside of Texas. During the year, we've launched over 80% of our franchises have been outside of this date and during Q3 about 90% of the franchises we launched were outside of the state, not only are we launching a bunch of outside of Texas, they're also more productive than ever outside the state. So, again, we're extremely encouraged with that.

Great. And can you give us, I guess, some idea of how is that productivity, I guess, you know – the franchises is non-Texas. How is that running now compared to a year and year and a half goes? How is that improving?

We're not disclosing that information right now. That will be a part of the 10-K as part of that kind of – we'd like to get a whole year of data before we disclosed that just because of some of the seasonality with the insurance market.

Okay. So we can – so 10-K, we’ll be able to get better, better granular in that…

Yeah, similar disclosures to what we had in the S-1.

Okay, okay. Yeah, that will be helpful. But you think the productivity out of state franchise is actually getting better. Is that over time, not just quarter over quarter, is that a fair assessment?

Yes, year-to-date we've seen some improvement there.

Okay.

We're fortunate in that we're – that the more successful we get the more really high quality candidates we attract. And so, the gene pool is getting constantly averaged up.

Okay, okay. And does it help that as you move to other states? I mean is the home value higher on average than Texas? Does it help also?

Adam, the home value is not typically the driver of insurance costs. It's the risk. So although, home values are very sort of reasonable in Texas, we have among the very highest property insurance rates in the country because you've got both hurricane exposure along the southern coast and you've got a tornado and hail exposure in the northern part of the state. And so, there is – home values are typically not the leading indicator of premium.

Yeah, but that makes sense. Makes sense, okay. Then as far as talking about the impact of the housing market, when new business commissions and agents – agency fees, does that mean next quarter they may be flattish or do you think that should be down moderately compared to this quarter?

Our best estimate so far is that we'll have a – probably a couple hundred thousand dollars impact on our new business revenue for Q4.

Okay, okay. That's helpful. And then as I think you mentioned that giving a bit of slower market that you've – you began to pivot. I guess what are the strategies are the corporate agents and the franchises using? Is it different than going to the real estate channel?

No, it's the same strategy, Adam. It's just you have to – when your current relationships slow down, and again we have a very small market share. So there is still a lot of market that we can pivot to and grab. So if I'm working with a loan officer or a realtor, whose business drops, I can increase my efforts of establishing new relationships and activating those relationships that take a little bit of time, but that's what we were focused on towards the end of Q3 and what we'll continue to focus on in Q4 is activating those new relationships to backfill for any type of decrease in volume. And we're confident that through Q4, we're going to be able to do that…

On the technology you had to pinpoint…

And yeah, that's a good point, thanks. The technology that we've rolled out that I mentioned allows us to be much more effective than we have been in the past because our agents know down to the individual kind of loan officer, where the mortgage activity is happening and they can focus their efforts with precision and understanding exactly kind of where they can focus their marketing activity to generate lead volume.

Okay, that’s very helpful. Thanks a lot guys.

Thanks, Adam.

Thanks, Adam.

Thank you. [Operator Instructions] As there are no further questions at this time, I'd like to turn the call back over to Mark Jones for any closing remarks. Sir?

Thank you and thank you to everyone that has taken an interest and listen to our call. And I know many of you are shareholders and we look forward to being in business with you for the long-term. Thank you and good night.

Ladies and gentlemen, this concludes today's conference. Thank you for your participation and have a wonderful day.