Greetings, and welcome to the Goosehead Insurance Second Quarter 2019 Earnings Conference Call. As a reminder, all participants are in listen-only mode and the conference is being recorded. [Operator Instructions] I'd now like to turn the conference over to your host, Garrett Edson. Thank you. You may begin.

Thank you. And good afternoon. With us today are your host 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 managements 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 archive 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 second quarter 2019 earnings call. As we've done on previous calls, I will provide an overview of the quarter and year-to-date, as well as discuss our long-term strategy. I'll then hand the call over to our President and Chief Operating Officer, Mike Colby, who will update you on our latest technology enhancements and how our ongoing innovation continues to support our high levels of sustained, rapid organic growth and profitability. Our CFO, Mark Colby will then follow and provide more details about our second quarter and year-to-date results. During the second quarter, we continue to demonstrate the effectiveness of our strategy and our execution capabilities with growth continuing to accelerate. We delivered revenue growth of 31% to $19.4 million, and written premium growth of 46% to $194 million compared to the second quarter of 2018. The largest contributor by far to the difference between revenue and premium growth was the mix of new business being more heavily weighted to the Franchise Channel. As a reminder, our share of first term revenues earned in the Franchise Channel is 20%, while our share of renewal revenues grows to 50%. With the Franchise Channel contributing 73% of new premiums for this quarter, we have spring-loaded future revenue and earnings growth, as that business converts to renewal revenue next year. We also continue to invest heavily in our talent and technology enhancements with terrific results. Mike will discuss our progress with our key technology initiatives in a minute. Total franchise unit count grew 55% from the second quarter of 2018 to 765, as our franchise sales team had another strong quarter. And operating franchises grew 39% to 535. We are very encouraged by the growth in productivity, we are seeing in the Franchise Channel, where unit productivity is…

Thanks, Mark, and hello to everyone. We continue on our technology innovation path, making strong progress over the second quarter. And I am excited to provide an update on our current initiatives, along with brief updates to initiatives we've discussed previously. We announced on our prior call that a client-facing technology interface was under development. And we're excited to announce today that we've completed the first version of our online client portal. Consistent with our omni-channel strategy to engaging our clients, we set out to build an intuitive and robust portal for our clients to manage their accounts in a self-service capacity and engage us in their ongoing insurance needs directly online. Our first version of the client portal is focused on a new client onboarding process where clients will have a simple and intuitive way to create an account, manage their communication preferences, sign their documents and upload supporting documents. Additionally, they'll be able to view all of their policies across multiple insurance carriers in one place, engage our service agents’ real time via chat functionality, and monitor the progress of their open service request. This portal is mobile optimized and we are currently working to develop a mobile app on the iOS and Android operating systems. We've rolled this out to a subset of our clients and expect to have this rolled out to all new clients in the coming weeks. While our first version is indeed focused on the new client onboarding and new policy issuance processes, it's worth noting that the majority of service work occurs within these processes. We're excited to make this valuable tool available to our clients and we expect strong adoption and a meaningfully improved client experience. As we continue to invest in deeper system integrations with our carrier partners, we'll be…

Thanks, Mike, and good afternoon to everyone on the call. For the second quarter of 2019, we grew revenue organically 31% to $19.4 million compared to $14.8 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. Not yet reflected in these numbers is significant embedded future potential revenue growth due to high levels of new business premium being written in the Franchise Channel. Total written premiums during the quarter, which is a crucial leading indicator of future revenue growth increased 46% year-over-year to $194 million. Franchise Channel total written premium grew 56%, implying significant future revenue growth, as the new business premiums convert to renewal premiums, and we increased our royalties from 20% to 50%. As Mark mentioned, this was the largest driver of the delta between total written premium growth and revenue growth. At the end of the quarter, we had over 408,000 policies in force, a 45% increase from one year ago. We continue to generate consistent rapid year-over-year growth, positioning us well for long-term success. Total adjusted EBITDA was driven by higher margin renewal revenue in both channels, producing 17% year-over-year growth to $4.7 million, while adjusted EBITDA margin was 24% compared to 27% in the prior year period. Adjusted EBITDA margin was impacted by additional employee compensation and benefits related to investing in the hiring of corporate agents and franchise sales agents, material investments in technology and additional public company costs. We continue to remain focused on investing in our talent in technology to support our high levels of agent and franchise growth. And the cost of most of these investments immediately run through the P&L. However, we remain confident these investments will help fuel sustained revenue growth in long-term…

Great. Thank you. At this time, we will be conducting a question-and-answer session. [Operator Instructions] Our first question here is from Jay Cohen from Bank of America. Please go ahead. I'm sorry, Jay, you may be on mute by accident. One more time. Jay, you maybe on mute. Your line is in queue here. Now, we'll go to next question here from Christopher Campbell from KBW. Please go ahead.

Yes. Hi. Good afternoon, gentlemen.

Hi, Chris.

Hi, Chris.

Hi. So Mark, you had mentioned I think in your opening script about you guys are doing a lot of work behind the scenes, trying to get like higher quality agents. So I guess like where -- like have you seen like a tangible impact on your productivity for the franchisees? And then, if not, when would you expect to see that start to ramp up?

Hey, Chris, this is Mike. We are certainly seeing higher levels of productivity and higher quality revenue from these agents. Now, if you remember, it takes these new franchisees a full two to three years to fully burn in, but the early indications leave us to be very optimistic, very positive. So it's a combination of recruiting better agents, but also having them better prepared through our training process, and better supported after they get out of our initial training. So we remain very optimistic there.

Okay, got it. And so are you seeing more like positive? Are you seeing like a higher first year productivity out of the newer agents than maybe you did in like the 2018 cohort?

Well, I mean, it's been a consistent incremental improvement. I mean this is nothing new to us as an organization. We've been focused on improving our recruiting capabilities, improving our training and onboarding capabilities since we've started franchising. And we're certainly seeing continued progress on that end.

Okay, great. And then I'm thinking about lower interest rates like LIBOR has come down significantly year-to-date. What impact is that having on your homeowners like refinancing leads for homeowners insurance? And are you seeing like a pickup in business like with people expecting like rates to decline a little bit further with like the -- just like the Fed rate decrease?

Without speaking to the broader housing market, I can tell you certainly in Texas, which is our largest market, where we have the highest level -- highest market share, we're seeing a very healthy housing market, and our agents are generating very high levels of lead flow. Is that from housing market tailwinds, could be. But I think it has a lot to do with the technology we are rolling out in the strong user adoption. So I mean it's worth pointing out that regardless of what -- any type of volatility in the housing market, if you look at our relatively low market share here in Texas and certainly outside of Texas, where we don't even register, we're not feeling kind of the impact of those macro cycles, at least over any extended period of time.

Okay, got it. Thanks for that color. And then just switching to auto. Thinking about like the auto market, what we've seen in somebody like the -- kind of like the BLS surveys and things like that, is just like a huge drop in rate. So I mean is that driving more shopping behavior because what we've heard is kind of a mixed bag is that rates have come down, but then that's driven less like online shopping and things like that. So I'm just trying to get an idea of are you seeing, like a pickup in shopping behavior in for auto leads?

For us, Chris, as an independent we -- the beauty of being an independent broker is that the client relationship stays with us. And as carriers decide to take rate or reduce rate, it changes, maybe, the mix of our carrier mix in our production, but the client relationship stays consistent with Goosehead. And that's why you're seeing those consistent levels of client retention.

Yes. And I'll add, Chris. If you think back to our go-to-market strategy of leading with the home and cross-selling the auto, we might feel those impacts a little less than your normal agency.

Okay, got it. And maybe just a few numbers questions. Is there a breakout -- can you give a breakout of $194 million of premium like how much of that is Texas and non-Texas?

We don't disclose those numbers. In the queue, that will come out tomorrow, you'll see kind of a breakout of Franchise and Corporate, and new business in renewal, but we don't break that out by state. But I'll say kind of high level, if you look at our premium breakout by state, about 75% is in Texas and that's come down over time.

Yes.

Okay, got it. And what would that have been like -- I'm sorry. Go ahead.

Sorry. The overwhelming majority of our new agent growth is coming from outside of Texas.

Okay, got it. And what would that have been like a year ago? I'm just trying to get an idea of, like how quickly you guys are diversifying into these other states.

Yes, sure. So I think if you look back a year ago, it's probably 80% -- 82%.

Okay, got it. So 82% of your business would have been Texas a year ago, and now it's like 75%?

Yes.

Okay.

So we're rapidly expanding outside of Texas.

Okay.

If you look at our 2018 franchise launches, I think between 80%, 90% of them were outside of Texas, and that trend has certainly continued into 2019.

Okay, great. And then just one last one. So I think you had mentioned like investing to improve retention. Are there other areas inside the business where like you're looking to I guess invest more where you think you could get a high ROE that we on the outside, just beyond distribution and things like that, that you think it would improve the business?

I think that holds true across every aspect of our business, Chris. I mean just culturally as an organization; we are committed to continuum improvement and innovation. And that's what helps us maximize the distance between us and the next competitor. It's something that we're highly focused on across the entire business.

Chris, it's Mark Jones. We have teams scattered throughout the Company whose -- it is not their only job, but these are experts, the people are actually doing the jobs that are solely focused on innovation. And how do we use our technology to get more productivity, how do we do things better, smarter, faster, higher quality, lower cost. So part of this is a little bit of a kind of the Bain legacy of being strong believers in the experience curve. We very aggressively manage to an experience curve. And so these things are happening constantly as we go every day.

Chris, just to add one more thing to Mark's point. We talk about some of the really big technology initiatives that we're doing and we talk about those consistently on every call. But you know in 2018, we had over 500 technology -- different technology enhancements that we rolled out over the course of the year. And in a lot of ways, it's the accumulation of those small incremental changes that over time are the biggest drivers of our evolution. So it's something that we're always focused on.

Okay, great. Well, thanks for the color. Best of luck in the third quarter.

Thanks, Chris.

The next question here is from Jay Cohen from Bank of America. Please go ahead.

Can you hear me now?

Hi, Jay. We can hear you.

Sorry. So there was a button mute, I thought it was an acronym, but it was mute. I figured it out.

The fact that you're not sure tells you that you're getting old, Jay.

I think so. Hey, I did listen to all of Chris' questions and some of them were mine, anyway, so worked out well. It does seem like you're certainly investing to improve retention. Your retention is already quite high. Can you get it a much higher or these investments just designed to kind of keep it where it is?

Well, even a single point of retention gain when you're at 88% is really, really valuable on the margin. So we are -- we want to protect what we've got, but we are always reaching for more and always will continue to do so. And that involves a lot of things. That's one of the reasons why we invest so heavily in our service center, and making sure that our service center is the best in the world at what they do. And we're confident that they are. That's one of the reasons that we push so hard on packaging to make sure that there is no hen -- there is no fox in the henhouse with our clients, where you may have a policy with them and another agent has another line of business. And so that other agent is constantly peppering the client for your line of business. We -- so we focus on that, that helps with retention. Our AI initiatives are helping with retention. It is the longest-lever, so any incremental gain we can get is good and worthwhile.

Got it. That's helpful. And then relative to franchise recruitment, you suggested that the quality of the franchisees is improving. And I guess I would have expected over time it'll be tougher and tougher to find the right people for your firm, but it seems to be getting better. Is that simply a matter of a larger number of recruiters?

That's part of it, Jay. And if the size, the population of the target audience was a lot smaller, we might see dilution over time. But that's just so large. I think right now we have close to 70,000 leads in our pipeline. And so it's just a huge target rich environment. We have better -- so our franchise sales people are better trained. Run the cost, we can disclose this. We had -- we saw...

Sure.

We increased headcount by...

30%.

30% with franchise sales and increased signings...

51%.

Right, 51%.

Yes. And that's year-over-year.

Year-over-year. So we're just -- we're getting better at everything we do. We're constantly focused on how do we do this better.

I think to Jay, as we see more success stories across every state that we're in, that really helps with your recruiting efforts, when you have agents who are working the model and seen a lot of success across the entire country. So it definitely helps with that.

Got it. Helpful answers, guys. Thank you.

Thanks, Jay.

Thanks, Jay.

[Operator Instructions] As there are no further questions, I'd like to turn the floor back over to Mr. Jones for any closing comments.

Just would like to thank everyone for dialing into the call. We appreciate your interest and appreciate your support. And you've got our commitment to do our best to deliver a great third quarter and more importantly, a great several years into the future.

This concludes today's conference call. You may disconnect your lines at this time. Thank you again for your participating.