Greetings and welcome to the Goosehead Insurance Third Quarter 2019 Earnings Conference Call. [Operator Instructions] It is now my pleasure to introduce your host Mr. Garrett Edson, Senior Vice President of ICR. Thank you, sir. You may begin.

Thank you and good morning. 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 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 Article Subject to various assumptions, risks, uncertainties and other factors that are difficult to predict, in 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 findings with the SEC, for more detailed discussion of the risks and uncertainties that could impact the future operating results and financial condition of goose 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 gap 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 structures 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 In addition this call is being webcast and an archived version will be available shortly after the call ends on the Investor Relations portion of the company's website at www.gooseheadinsurance.com.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 2019 earnings call. As we've done on previous calls I'll 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 technology development progress 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 detail about our third quarter and year-to-date results. Let me start by focusing on the most important bellwether in assessing the strength of our core organic growth strategy: premium growth. During the third quarter we delivered 44% organic premium growth over Q3 of 2018 to $202 million. Revenue grew 32% from the prior year quarter to $21.2 million. Year-to-date we grew premiums and revenue by 45% and 40% to $543 million and $63.7 million respectively. During the third quarter 2/3 of our premium growth was realized in our Franchise Channel where our royalties are 20% of revenue for the first term of a policy and 50% on renewals. While this weighting of new business toward the Franchise Channel causes a gap between premium growth and revenue growth in the first term of policies it creates a spring loading of top and bottom line future growth as new business converts to renewal. We maintained our 88% client retention rate in the most recent quarter which gives us a high degree of confidence in our ability to realize this mechanical revenue and earnings growth in the future. Overall our Franchise Channel continues to perform extremely well. The accelerated growth we've achieved in this channel this year is due primarily to investments we've made over the last several…

Thank you Mark and hello to everyone. Over the course of 2019 we've made significant investments in our technology platform including application and data source integrations migration to a cloud-based voice solution deployment of artificial intelligence capabilities into our service center development of a client-facing portal and cybersecurity enhancements areas of focus that allow us to sustain and build on our already considerable competitive advantage. Today I'll provide you all with an update of the status of these areas of investment and exciting new developments within our technology road map. Our integrated comparative rating technology has been rolled out in 44 states covering over 99% of our new business production for home and auto lines of business. We're now turning our attention to what we call last-mile integration where agents can manage the entire sales process from quote to issuance within our proprietary platform eliminating the need to go to a separate carrier system to complete the process. This project has a longer runway requiring deeper carrier integrations and additional data source integrations. However we are well on our way to accomplishing this and ultimately bringing the first choice model direct to consumer online via our customer portal which I'll provide an update on later. Additionally we're focused on bringing other ancillary lines of business outside of just primary homeowners and auto to our comparative rater starting first with flood insurance an extremely valuable line of business to anchor the client account and increase the likelihood of retention. Direct integrations with flood insurance carriers along with additional data source integrations to obtain flood zone determinations are under way and will soon give us the capability to present bindable flood insurance quotes to our agents more efficiently during the homeowners' quoting workflow. Over the course of the third quarter we've enhanced…

Thanks Mike and good afternoon to everyone on the call. For the third quarter of 2019 we grew revenue organically 32% to $21.2 million compared to $16.1 million in the prior year period. As noted in prior quarters the improvement was driven by strong growth in both our Franchise and Corporate Channels from new and renewal business. Total written premiums during the quarter which is an important leading indicator of our future revenue growth increased 44% year-over-year to $202 million. Our Franchise Channel total written premium once again grew 55% implying significant embedded future revenue growth as new business premiums convert to renewal premiums after one year and we increase our royalties from 20% to 50% on an ongoing renewal basis. At the end of the quarter we had over 448000 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 grew 37% year-over-year to $4.6 million driven by higher margin renewal revenue in both channels. Adjusted EBITDA margin likewise expanded to 22% from 21% in the prior year period as higher margin renewal revenue particularly in the Franchise Channel more than offset additional employee compensation and benefits related to investing in the hiring of corporate sales agents franchise sales agents and ongoing investments in technology. We continue to significantly invest in our talent and technology to support our high levels of agent and franchise growth. And as a reminder the costs of most of these investments immediately run through the P&L. We also continued to expand investing in our corporate agents' role to further support high levels of productivity within our Franchise Channel. We remain confident these investments will help fuel sustained revenue growth and long-term margin expansion as the new business…

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

I guess the first question is on the distribution growth. It was a little bit lower than we were expecting. And kind of I just had a numbers question in there too. So when I'm looking at the Texas operating franchise count it looks like that declined quarter-over-quarter. It looked like last quarter it was 202. And then this quarter it was 195. So I guess just what drove that decline within the home market? And then just how should we think about distribution growth going forward in each channel?

Chris this is Michael. As it relates to the Texas operating franchisees we've made a very focused effort to diversify our production outside of the state of Texas. In fact over 90% of our new agent growth is coming from outside of the state. And the reason for that is because we're trying to provide a more diversified book of business with our key carrier partners. It's important to them to provide a book of business that has uncorrelated underwriting risk and we can do that by growing outside of Texas. So we actually have not had any focused proactive recruiting efforts taking place in the state of Texas this year. Now that being said I think we're getting to a point where the book is being sufficiently diversified. And we're planning to repurpose some of our recruiting resources back toward the state of Texas. But that's strictly an effort to provide our carriers with a more diversified book of business.

Got it. And then I guess just in terms of the agent count like how big can you get? How big can like Texas be for you? Just I mean is it like 300 400 agents?

So I mean Texas we've been operating in Texas since inception. It's our largest concentration of agents and we're in less than 1% of Texas households. If you, we've been deploying our go-to-market strategy in Texas longer than anywhere else. And we, our go-to-market strategy is executed more, in a more sophisticated way than any of our competitors. And we were only involved in less than 14% of new home loan transactions year-to-date. So we have an incredible runway for growth still in Texas. But again our growth efforts in agent recruiting specifically our efforts have been outside of the state to accommodate a more diversified book with our carriers. Texas we have an incredible runway for growth here in Texas still.

And then I guess just, I'm sorry. Go ahead.

Chris can I just add one thing? This is Mark Jones. One of the things I think that's important to take into account is if you look at the large captives you look at State Farm or Allstate and you look at the number of agents that they have in the state of Texas or in any state those numbers are bounded by the portion of the market for which our product is a good match. So they're very limited because they're a single-carrier platform and they have a more finite addressable market. We on the other hand have a very broad base of carriers and our ability to address somewhere between 80% and 90% of the market with our carrier portfolio. So we've got literally 4, 5 and more times growth opportunity than even the sort of the captives currently represent.

And then just outside of Texas I mean it sounds like you guys have had what 98% of the new agent growth has come from outside of Texas. So I guess what percent of premiums are non-Texas these days versus a year ago?

Well we've got, it's about, yes it's about 30% Chris. And you're right. 96% of the franchises that we launched in Q3 were outside of Texas. But total written premium in Texas still makes up about 70% of our book.

And what was that a year ago? Was that, I thought that was a lot higher right?

Yes. Yes. It was about 75% to 80%.

And then I guess how do the commission levels vary between taxes? Are they similar?

They are. Commission levels are similar. Premium average premiums for homeowners and auto vary across states.

And what's the average commission level you guys have these days?

So it's roughly 15% on new business and I think it's approximately 14% on renewal.

And I mean are you seeing any upward pressure in that as some of the auto some of the personal line carriers get more adequate in auto and then they're kind of switching to a growth mode? Are you seeing, like are you starting to see a benefit in terms of these carriers being willing to pay higher commissions for growth?

I wouldn't say we're necessarily feeling that. We're also not feeling kind of any type of kind of movement in rates. At our levels of growth where we see growth is we see growth by adding top talent bringing on top talent in our agent force and by growing productivity and that's really what we're focused on.

And then I know probably a little bit early but I mean are there any like guidelines we should start thinking about in terms of like 2020 guidance relative to 2019 in terms of premiums revenue growth?

Yes. We'll talk in Q4 about our guidance for 2020. We're continuing to invest and we continue to expect high levels of growth into the foreseeable future past 2020.

Okay. Got it. And then just one last one. Are you guys seeing, interest rates are lower. That's good for mortgage volume and mortgage lenders. Are you guys seeing like a benefit in the sales pipeline?

You're seeing your normal seasonality. Certainly the seasonality has been a little muted this year certainly compared to last year. And I would suspect that rates have something to do with it.

And so just to make sure I understand. So that means like typically this would be like a low time of year right for...

Well it's typically, right. It's typically you're going into your low season for the housing market. But I would say kind of the seasonal decline may be less driven by, potentially driven by rates.

Yes. And that's the reason that we always talk about looking at us year-over-year rather than sequentially quarter-over-quarter. And so just kind of continue to focus on that and compares to Q3 last year year-to-date last year as we move into Q4.

[Operator Instructions] Ladies and gentlemen at this time there are no further questions. So I'd like to pass the floor back over to Mr. Jones for any additional concluding comments.

Thank you. We'd just like to express our appreciation for your support and look forward to a strong fourth quarter. Thank you.

Ladies and gentlemen, this does conclude today's teleconference. We thank you for your participation and you may disconnect your lines at this time.