Thank you for standing by. This is the conference operator. Welcome to the Goosehead Insurance First Quarter 2019 Earnings Call. As a reminder, all participants are in listen-only mode and the conference is being recorded. [Operator Instructions]. I would now like to turn the conference over to Garrett Edson, Senior Vice President, ICR. Please go ahead.

Thank you, and good afternoon. With us today are your hosts 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 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 In addition, this call is being webcast and an archived version will be available shortly after the call ends on the Investor Relations portion of the company's website at www.gooseheadinsurance.com.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 First Quarter 2019 Earnings Call. As we've done on previous calls, I will provide an overview of the quarter as well as discuss our unique and proven long-term strategy. I'll then hand the call over to Mike Colby, our President and Chief Operating Officer, who will update you on our ongoing technology investments and why we believe they further facilitate our competitive advantage and support high levels of sustained rapid organic growth and profitability. Mark Colby, our Chief Financial Officer, will then follow and provide more detail about our first quarter results and our outlook. Before I review the highlights of the quarter, I would like to share a few thoughts given that we just celebrated the first anniversary of our listing as a public company. Because our disruptive and highly differentiated business model produces profitable organic growth at levels this industry has not seen, some have voiced skepticism over our ability to sustain these kind of results. We have continued this quarter to demonstrate that we can do just that, just as we have done so over the past 15 years. There is no doubt the Goosehead platform works. Those that participated in our IPO a year ago and have remained shareholders have seen their investment nearly triple. Betting on ourselves has always been a winning proposition for the management team and we are highly aligned with our public shareholders as we continue to be the largest owners of Goosehead stock. Now let's turn to the results of another successful quarter. The first quarter of 2019 saw us continue to build on the success of our banner 2018 and the many years prior to that with our rapid and responsible organic growth model clearly intact. On top of accelerated revenue growth in the…

Thanks, Mark, and hello to everyone. During the first quarter we continued to make significant progress on the technology roadmap we've laid out on previous calls. Today I'll provide an update on the major technology initiatives we've discussed previously, and also discuss some exciting new initiatives underway. As we noted on our prior calls, the integration of our comparative rating application into our Salesforce platform and implementation into our sales operations is a key initiative, and in the first quarter we successfully implemented in 8 states, mostly in the Mid-Atlantic and Northeast regions. And we're now covering states where over 80% of our new business revenue is generated. In April we launched 5 additional states - Ohio, Indiana, Missouri, Colorado and Washington - making steady progress on our plans to have this technology implemented nationwide by the end of 2019. In addition to the national rollout efforts of the integrated comparative rating application, we've worked to optimize the application and have made improvements that allow for insurance quotes to be generated 3x faster than experienced in our original version. Closely related to our comparative rating application is the integration with property, driver and vehicle data providers. We were excited to announce at our Annual Meeting in April the national release of our vehicle and driver data integration. Now, with only several data points, such as name, date of birth and home address, our agents can generate an accurate home and auto insurance quote for clients in a matter of minutes. Its enhancements to our technology platform like these, focused on driving productivity in the client acquisition and onboarding process, that create a highly differentiated value proposition for both our agents and our clients. Over the remainder of the second quarter we're focused on further advancements with our RingCentral voice solution…

Thanks, Mike, and good afternoon to everyone on the call. For the first quarter of 2019 we produced a 59% increase in revenues to $23.1 million compared to $14.6 in the prior-year period. This improvement was driven by strong growth in both our corporate and franchise channels from new and renewal business and increased contingent commissions. As a reminder, we receive most of our contingent commission payments in the first quarter of each year. Total written premiums during the quarter, which is a good proxy for the growth of our business, grew 45% year-over-year to $146.9 million. At the end of the quarter we had over 365,000 policies in force, a 45% increase from 1 year ago. We continue to generate consistent year-over-year rapid growth, positioning us well for long-term success. Total adjusted EBITDA grew 86% year-over-year to $9.5 million, while adjusted EBITDA margin was 41% compared to 35% in the prior year period. Adjusted EBITDA and adjusted EBITDA margin growth was driven by higher margin renewal revenue in both channels and increased contingent commissions received, partially offset by additional employee compensation and benefits related to accelerated hiring of franchise sales agents, increased number of operating franchises and material investments in technology, as well as public company costs. As a reminder, the cost of most investments we're making in talent and technology run through the current P&L. However, these investments provide opportunities for improved sales and service productivity over time, which should fuel sustained growth and long-term margin expansion. Breaking down our results by channel, in the first quarter of 2019, our Corporate segment grew revenues 52% over the prior year period to $12 million. This growth was driven by a 34% increase in new business revenue, primarily due to a rise in corporate agent headcount of 52% from 1…

[Operator Instructions]. Our first question comes from Christopher Campbell with KBW.

Congrats on the quarter. I guess just a few questions, mostly around the contingents and things like that. How much of the revenues were contingents this quarter? I think Mark said something in his script about contingents being 3x what they were a year ago.

That's about right. So combined they were $7.5 million for this quarter compared to $2.8 million in the prior year quarter.

Got it. And then I guess just, I mean kind of what drove most of that? And I guess are all your contingents now in the first quarter and not in the other 3 quarters? Is that how we should think about timing of those?

Most of our contingencies are received in the first quarter. Historically there's been one carrier that we received in either the end of the third quarter or beginning of the fourth quarter. And that's still on the table.

Okay. Got it. Now thinking about second quarter, there shouldn't be any contingents. Correct? So we should see kind of margins and . . .

Nothing material.

Okay. Got it. And then that $7.5 million, how does that break out between Franchise and then the Corporate Channel?

So there will be some more detail in the Q about that. But pull it up real quick. Sorry, Chris. $3.2 million for Corporate and $4.2 million for the Franchise Channel.

What's been interesting, Chris - this is Mike - is that when you look back over 2018, 2017, 2 of the worst catastrophic loss years that we've seen on record, I think it's a testament to our quality control efforts that we've been able to navigate through that and see increasing contingent commission revenue kind of every year since then.

Yes. Got it. And then the mortgage pipeline, I guess that was an issue. And, I mean, have you guys kind of rectified that? I mean, are you sort of back to where you were before?

Yes. So if you look at our market share, specifically in Texas, which is a pretty good proxy, where most of our business is, we went from around 11% market share in the fourth quarter to 14% for the first quarter of 2019. So, yes, our ability to kind of pivot and start grabbing share has really started to pay off.

Got it. And then are you seeing similar trends in kind of your newest states like California, Florida, Illinois?

Yes. Again, it's a much smaller sample size but we've seen success nationally. The mortgage share outside of Texas, Chris, doesn't even register.

All right. Got it. And then just one last one on the franchise fees. I know that that helped to drive revenues in Franchise in 4Q. Didn't look like it was mentioned this time. I guess just what trends are you seeing on the initial franchise fees between first quarter of this year versus last year?

Yes. So as we mentioned in Mark's remarks and my remarks, there's - we've seen kind of a delay in people coming through training. And that's on purpose. We've changed a lot of the onboarding tactics to make sure people are fully ready to commit to this business model in full before they start with us. And so what we've seen is kind of a little bit of delay towards the end of last year. And that's continued into this year.

I think the important takeaway there, Chris, is that the . . .

Now I know you guys are seeing, like, your retention was probably a little bit better than you expected in Franchise. So I guess just what is the impetus behind delaying the Franchise Channel if retention is lower than where you had planned?

Yes, Chris. I mean, it's about - what we're focused on is we're focused on successful launches for our agents. So there's a lot that goes into them having a successful exit from where they're at currently to successfully onboarding and launching with us. So our primary concern is not about expediting that process to expedite the recognition of our franchise fee revenue. It's about a quality experience for that agent. But if you look at our pipeline of our franchise agents, it's very strong. We're recruiting better and better agents every year. We're launching them more successfully every year, which I think justifies our approach there. Again, we're focused on the long-term value that those agents can create over a career with us and having a successful launch provides just a lot more kind of lifetime value from that agent rather than focused on that initial franchise fee.

That makes sense. And then just one last one, if I may. What retention trends are you seeing in the Corporate and then Franchise Channel?

Very consistent trends with what we've seen historically.

[Operator Instructions]. Our next question is from Jay Cohen with Bank of America Merrill Lynch.

Chris asked a lot of my questions. Just one follow-up on the contingent question. Is it fair to say there was nothing unusual in the contingents in the first quarter? In other words, as we look into 2020, that should kind of grow with your earnings. There's nothing unusual this quarter. Is that fair?

That's fair to say. We did have one new contingency this year, but there's - we have every reason to believe that that will continue into the future.

Proportionate with our total written premium growth and the value that we're creating for these carriers. So I agree with that.

Jay, it's Mark Jones. One of the things, as you know, the way that loss ratios are calculated, they're based on earned premium as opposed to written premium. So when you're in high growth mode like we are, just the math works against you a little bit from a loss ratio standpoint. What we're really realizing and you're seeing run through our financial statements is the value of our investment in quality. Because it is that precise risk placement. It is the underwriting compliance that improves loss ratios. And that has overwhelmed just the arithmetic where we're measured on loss ratios based on earned premium as opposed to written premium.

Got it. On the quality issue, it's a very interesting point. I'm wondering is there some measure that you could say, for example, a certain percentage of your business goes through with a mistake versus a typical independent agency? Is there any way you could compare your quality quantitatively versus a typical agent?

Yes. Our carriers don't make that available to us. And it's beyond just errors in the underwriting process. It's also about identifying the type of risk that the carrier wants and being able to provide - place that risk with precision. So there's a lot of risk that a carrier may not want on their books, but their system doesn't prevent it - even if it's underwritten accurately, doesn't prevent it from being written. And I'd say that's probably the biggest value-added component of quality control, is being able to understand kind of with our partners what are their business objectives, what are they seeing kind of real time in their loss trends and being able to react very quickly to that. If a carrier files a rate and they see maybe quickly that they're positioned for higher losses than expected and they communicate those details with us, we can make a systematic change in our agency management system and that would be the last time we placed that type of risk on their book of business. So I'd say there's obviously a component of accuracy and holding to the underwriting guidelines, the eligibility guidelines. But really it's about understanding what they're seeing be profitable for them and being able to quickly react to that and place that type of business with them.

Just to follow up on that, because you have that capability - and I guess I could argue most independent agents really just couldn't do it just because of their size - are you able to get I'll use the word "better," more attractive terms for your contingent deals with the carrier than a typical mom-and-pop independent agent?

I think absolutely. One is I think the mom-and-pops just typically aren't at a scale where they would really have a material benefit from those type of arrangements. But it's about two things. It's about growth. It's about underwriting profitability. And you have to be able to deliver both to really maximize your opportunity there. And that's where we shine. The mom-and-pops just aren't growing.

Right. Right. Exactly. Last question. On the Franchise side, so you just passed 1 year as a public company and I'm wondering if you could just reflect on any surprises, either good or bad, that you've had in the franchise model.

I don't think being a public company has impacted us, impacted our franchise business. It's - the people that are involved in running the public nature of the company are very focused. It's a very specific group. And everyone else is business - they're focused on executing their business as opposed to focus on the share price. I mean, I explicitly tell people, "Don't look at the price of the stock because it doesn't - looking at that isn't going to help. What's going to help is you doing your job." And we reiterate to people that we're here for the long term. The management team is here for the long term. There's no mercenaries among us. And we're going to continue to sort of focus on reaching toward our full potential, which is industry leadership. Being a public company hasn't impacted that other than sort of raising people's aspirations I think a little bit about the kind of organization we are. But there's been no distraction associated with it.

I agree with that completely.

Maybe I [indiscernible] . . .

And I would say anecdotally, Jay, that maybe there's a heightened sense of awareness from our franchise candidates as we're kind of marketing in these new territories. And I would say just feedback from kind of people in that process, the additional kind of level of transparency, being a publicly traded company and having kind of our filings that they can read through, has been positive.

Yes. I probably misphrased the question. I don't mean really the effect of being a public company. I'm just saying we've known you for about a year. You've been scrutinized by new people for about a year. So I just want to get a sense as you look back over the last year, forget the fact that - public, not public. What has surprised you, either good or bad, in the Franchise Channel?

I don't think there's anything in the Franchise Channel. The only thing that has surprised me, and I chock this up to rookie mistake as a newly public company CEO, was on our third quarter call in the interests of trying to be transparent I noted that we were facing some housing market headwinds. And then I tried to go on and explain what we were doing to address that. No one listened at that point. They just heard "housing market" and we saw some sell-off in our stock. When we announced the fourth quarter we were able to sort of back that up, back my statements up from the end of the third quarter and tell people that, yes, our system works. We've fully recovered all of the volume that was impacted by housing market headwinds. And so I think I learned a little bit how to talk to the investing public a little bit more. But other than that there hasn't been a lot of surprises.

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

I'd just like to thank everyone for joining us on this call. We appreciate your support. And I'll just reiterate our management team's commitment to delivering a great business [Technical Difficulty] something special. Thank you.

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