Thank you for standing by. This is the conference operator. Welcome to the Goosehead Insurance Fourth Quarter 2019 Earnings Call. As a reminder, all participants are in listen-only mode and the conference is being recorded. After the presentation, there will be 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; 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 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. I would also like to point out that during this call, we may discuss certain financial measures that are not prepared in accordance with GAAP. 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 like to turn the call over to CEO, Mark Jones.

Thanks, Dan, and welcome to our fourth quarter and full-year 2019 earnings call. I'll provide an overview of our results for the year as well as our strategy and outlook. I'll then hand it over to Mike Colby, our President and Chief Operating Officer, to discuss some of our recent people and technology investments that are advancing our already significant competitive advantage. Our CFO, Mark Colby will then go into greater detail on our fourth quarter and full-year results as well as a detailed discussion on the impacts of adopting ASC 606. 2019 was a phenomenal year for Goosehead, which further demonstrated the strength of our platform and our significant competitive advantage in the marketplace. In 2019, we continue to drive high levels of organic growth while maintaining strong profitability. We view premium growth as the most important measure of the overall effectiveness of our overall growth strategy. For the full-year 2019, premiums placed were $739 million. This represented an increase of 45% from 2018, which exceeded the high-end of the guidance range we provided a year-ago of 38% to 42% growth. While our growth rates are impressive, they are not a new phenomenon for us. We've been delivering very high levels of organic growth for many years. In fact, for the five years ending in 2019, our premium growth compound annual growth rate was 45%. In the fourth quarter, our revenue grew 39% and EBITDA grew 81% using ASC 605, our historical accounting methodology. For the full-year 2019, using ASC 605, we delivered revenue growth of 40%, which was at the high-end of our initial guidance of 33% to 41% and EBITDA growth of 55%. We are required to implement ASC 606 for our 2019 full-year reporting. It is important to remember that implementing ASC 606 has no impact…

Thanks, Mark, and hello to everyone. Over the course of 2019, we made strong progress on our technology innovation roadmap. Progress was seen with new tools and many new enhancements of existing tools being introduced to agents and clients. In addition, we made major strides with a number of important carrier integration projects that will provide important building blocks for future innovation. I'll now provide you all with a recap of our 2019 technology projects that we've discussed on prior calls as well as some insight into our 2020 technology agenda. Our custom-built comparative rating application has been successfully implemented across both our agent channels covering 99% of our new business production for homeowners and auto lines of business. We've completed data integrations over 2019 that provide real-time property, vehicle, driver information and now with less than 10 data entry points we can generate homeowners and auto insurance quotes from a multitude of companies in a matter of seconds. We are now investing to enhance the rating application in two key areas. One, the last-mile integration that will allow our agents to manage the entire sales process from quote to issuance within the app and two, developing rating capabilities for other personal property and casualty lines of business. The last-mile integration work is underway and while we are reliant on the capabilities and timing of our carrier partners, we had the full commitment of our key partners to accomplish this. In the first quarter of 2020, we introduced flood insurance rating capabilities and the application giving our agents the ability to offer either federal or private flood insurance coverage seamlessly in their homeowners' insurance quoting process. Having this capability is important for a couple of reasons. First, flood insurance is an important, sometimes required coverage for many homeowners and the…

Thanks, Mike, and good afternoon to everyone on the call. With this quarter's earnings release and in our 2019 10-K filing, we are implementing the new revenue recognition accounting standard, ASC 606. Before I review the main impacts of this accounting convention, I'd like to highlight some changes we have made to our presentation of revenue that more closely aligns with how management thinks about the business. We view revenue in three distinct tiers. The first tier is core revenue. This includes commissions and fees that we earned from selling insurance and by driving high levels of retention through unmatched client service. Core revenues are driven primarily by factors largely within the control of management and are the most indicative revenue measure of our success executing our core organic growth strategy. The second tier is what we refer to as cost recovery revenue. This includes initial franchise fees, which cover our costs to recruit, train, onboard, and support our franchises for the first tier as well as a small amount of associated interest income for those franchises, financing the initial franchise fee. The third tier relates to ancillary revenue. It includes primarily contingent commissions. Contingent commissions are less predictable and are largely driven by a number of factors outside the control of management, such as weather events and carrier underwriting accuracy. Over time, contingencies are expected to grow as our overall premium base expands. While not precisely predictable in any given year, they are more predictable over a multi-year timeframe. Over the last four years, contingent commissions received during the year have averaged 94 basis points of annual premium. Regarding the impact of ASC 606, I would like to reiterate that this revenue recognition accounting change has zero impact on the cash flows or overall economics of our business. As…

We will now begin the question-and-answer session. [Operator Instructions] The first question comes from Meyer Shields with KBW. Please go ahead.

Great. Thanks so much. So two quick questions, really. One on the account – I guess, both on the accounting side. First, are the contingent commissions is going to be – is your expectation the contingent commissions are going to be restricted to just the third and fourth quarter of every year. Is that the way we should be modeling it?

Well, it really depends on the nature of the contingency. If it's purely growth based, we can – we have better data throughout the year that we can recognize that revenue. If there's any kind of loss ratio component, as you can imagine over the first and second quarters, we don't have enough data for how the loss ratios are going to perform for the full-year. So we can't confidently make any assumptions for revenue. In the third quarter and especially the fourth quarter round out, we'll have a lot more insight.

Okay. But it's not zeroed out in the first half of the year?

Not necessarily, but I honestly wouldn't expect much in the first half of the year.

Okay. That's helpful. Second, I'm just wondering, is there – you've talked about the investments that you're making to sustain long-term growth and all makes a lot of sense. Is there any seasonality in terms of when that will emerge in 2020?

Well, a lot of our investments are kind of throughout the year in people and technology. We've been making those investments for several years, and so I wouldn't necessarily expect a step function increase in those investments, but we'll kind of gradually make them throughout the year as we see those opportunities.

And Meyer, almost all of our investments flow through the P&L. So they show up real-time. Almost nothing, but it's a balance sheet.

That's perfect. Thanks so much.

Thank you.

Thank you.

[Operator Instructions] The next question comes from Mark Dwelle with RBC Capital Markets. Please go ahead.

Yes. Good afternoon. Just a couple of questions. I guess, within the revised reporting between renewal and new business commissions, I guess this doesn't really give any breakdown between what portion is Corporate Channel versus Franchise Channel? Is that something that you'd be able to provide on an ongoing basis just so that we can kind of track the relative flows between the two?

Yes, absolutely. I believe it's actually in some of the supplemental schedules to the earnings release. There should be a breakdown by channel.

Okay. And then the second question that I had related to the franchise fees. Well, I guess, I gathered from your description of those – those should be relatively flat quarter-on-quarter, but with presumably some inclined to them as you continue to add new franchises. Is that the right way to think about it?

That's correct. There's going to be a lot less variability in those because under 605, it depended on how many franchises we launched that quarter. With this, we're still recognizing revenue on franchises that – our very first franchises that we signed. And so you will see kind of a lot – more of a steady increase over time.

So the other question I had was, with respect to…

Mark, this is one area that GAAP diverges significantly from economic reality because those franchise fees are fully earned when someone – and they're non-refundable when someone comes to training and under any circumstances if they leave, they're still on the hook for those. So the deferral and amortization of franchise fees is one of the reasons that I pointed out early on in my call, in my text, is that we're trying to do everything we can to provide a little more insight as to how management looks at the business as opposed to GAAP because GAAP only models, the franchise fee accounting.

Okay. Yes. I mean, I guess, I would think that all else equal relative to how I might have thought about this before the implementation. That's one area where – with all the areas of the business fundamentally growing, that's one area that will not really see growth – a material amount of growth because the vast majority of what we're recognizing through, there is essentially things that have already happened.

Exactly. So I think the focus for you and for the investment community will be more on our KPIs, like premium growth and then operating franchises, total franchises, those types of things become even more important.

And then just to make sure, I'm pretty sure this is right, but there are not any 606 versus 605 effects with respect to the operating expenses. It's all just – it's entirely a revenue, to the extent that ratios are changed, it's because of the revenue component, not because of anything on the expense items.

Yes, there's some minor changes to the expense items. But you'll see in the reconciliation kind of the second to last table in the earnings release, shows kind of all the P&L impacts of the transition and there's some changes in the employee compensation as well as the bad debt expense.

Okay. I missed that. But yes, I see it now. That's – I mean, it’s minor in the scheme of things. Okay. And then the last question that I had was more and more of an operational question. Somewhere early on, you mentioned opening new corporate offices in Charlotte. Is that primarily to be franchise assistance? Or are you actually going to be seeking and soliciting new business from that location?

Mark, this is Mike Colby. It's consistent with the way we've operated all of our corporate offices. So it will be staffed with sales agents who are responsible for marketing and building their book of business, but they have also very real responsibilities to support the franchise owners in that region.

Okay. All right. So I mean, it's both then, it's a sales office and a support office.

Correct.

Got it.

And that goes through all of our Corporate Channels as well, not just that specific office.

Great. Okay. I think that's all my questions. Thank you.

Thanks Mark.

The next question is from Adam Klauber with William Blair. Please go ahead.

Hi. Good afternoon.

Hi, Adam.

When you guys said your 2020 guidance, did you think about will the virus slow – did you add any cushion if the virus slows down economic activity?

Yes. We have some cushion in that guidance for certain scenarios. I think as far as the coronavirus, we just don't know enough about it yet and how it's going to impact our business. We're confident that it will have minimal impact. But again, we'll kind of keep the Street updated as we go along and after Q1 and Q2 just to kind of see how we're holding up to that guidance.

So far Adam we're not seeing any impact whatsoever from the coronavirus. Lead volume is very strong, productivity is strong, same-store sales growth is strong. We're just not – we are not seeing it other than the route in the stock market.

Great. And then as far as…

We're taking the right measures to make sure that we can – we have business continuity. So that we can keep our service center open for our clients. Our employees are mobile equipped and can operate effectively, just as effectively as they do here in the office from their homes. So we feel like this is a short-term challenge that we’ll face in the market, but we'll be able to weather the storm very nicely.

Great. And then how was churn and franchise with outside Texas in 2019 versus 2018 more on a relative percentage basis?

We really – we disclosed that number consolidated, both Texas and non-Texas. We've disclosed in the past, the number is 15% of the franchises that churn, it's actually come down a little bit to 12% over the last couple of quarters that we can – we feel comfortable with the trend now. But it's important to remember that 12% that churn only account for 1% to 2% of our new business being generated that are just not being successful in our system.

Okay. And then…

They're generally not being [indiscernible] devoting full-time effort.

Correct.

That's the issue. They're not working full-time.

Right. And then how big is the franchise recruiting division today versus say 12 months ago?

Our total agent recruiting is…

62.

Yes. Just over 60 people, which would represent about a 50% increase year-over-year.

Okay. And then finally, I know in 2019, you're ramping up a fair amount in – on the East Coast. Could you give us an idea of picking in the big states, New York, New Jersey, one or two others. How many franchises do you have today on the East Coast compared to what you had a year-ago?

Without giving specific…

Yes. Without giving specific state-by-state, we are continuing to grow there aggressively. And not only that, but those franchises are becoming more and more successful every year. We've had tremendous success not only in that region, but throughout the country. Colorado has been another great state for us. Michigan, Illinois continues to be good as do California and Florida, so we're really seeing tremendous success outside of Texas and within Texas.

Okay. And then, sorry, one final question on the margin. It sounds like you're investing for growth, which is great. Do you expect the margin to be more flat or maybe up, but just not as much as it would have been if you weren't investing?

Yes. Again, we don't give guidance to specific margin, but I would expect – built into our business, there's some operating leverage. So I would expect for the kind of existing franchises always for there to be continued operating leverage as they mature. But we're continuing to invest in growth. We want to be flexible. We don't want to commit to a margin number and then pass a good investment because we promised certain margins. So…

That being the case, we manage costs like we're still a private company and with management owning the majority of the company, we're very, very careful on cost.

Great. Thanks. Thanks for the answers guys.

Thanks, Adam.

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

This is Mark Jones. I'd like to thank everyone for participating and we appreciate your support.

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