Goosehead Insurance, Inc (GSHD) Q4 2019 Earnings Report, Transcript and Summary

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 on the fundamental economics of our business as evidenced by operating cash flow, which is not affected by the accounting change, more than doubling to $21.2 million for the full-year 2019. However, it does change the way we report our results to our owners. While the governing bodies who established accounting rules have a set of objectives with ASC 606, we do not believe those rules at clarity in understanding our particular business. Accordingly, we will do our best to explain the metrics that management uses to assess our performance with the hope of providing more insight to the investment community. The balance of our business continues to shift toward our Franchise Channel. This is important to understand because of the way premium converts to revenue. In the Franchise Channel, we earned 20% royalties on the first term of a policy and 50% on renewal terms. So as a larger relative share of new businesses generated in the Franchise Channel, there will be a growing gap between premium growth and revenue growth. Given our 88% client retention rate, we see approximately 120% mechanical revenue growth as a policy converts from new to renewal. So strong premium growth today drive strong revenue growth tomorrow. Our Franchise Channel now represents 67% of our overall premium compared to 62% in 2018. While our business has natural operating leverage and potential for margin expansion over time, our strategic focus remains delivering strong revenue and earnings growth over the long-term. When faced with the trade-off between short-term profits and much larger long-term profits, we always managed for the long-term with an eye to maximizing total profitability over time. Our management team continues to own the majority of the company so we are well aligned with other owners and we will continue to focus on delivering shareholder value over the long-term. We continue to average up the gene pool with higher quality franchise recruits over time. Total franchises at year-end were 948, an increase of 47% from the year-ago period. Operating franchises increased 34% for the year to 614. Signed franchises, which have yet to go into operation, were 334 at the end of the quarter. Our recruitment of higher quality franchise agents has resulted in an elongation of average time between signing the franchise agreement and going live because these individuals frequently have more complex business circumstances to unwind before they can open their Goosehead franchise. This is another positive indicator of future growth momentum as the signed franchises gradually transition to operating status and begin ramping up business production. Our Corporate Channel ended the year with sales headcount of 248, an increase of 49% from the year-ago period. I want to continue to highlight that the Corporate Channel represents a unique and vital component of our overall growth strategy and competitive advantage. We utilized the Corporate Channel to test and refine new technology and sales processes. This allows us to refine and identify best practices that are then rolled out across the Franchise Channel. While these are separate channels, we manage them as one integrated growth strategy for the company. Our tremendous success in the Franchise Channel is in large part, dependent on our continued investment in and support of the Corporate Channel. Likewise, success within our Franchise Channel creates unique and highly attractive career and professional development opportunities for our corporate agents in the field. The success of this model is evident in the continued improvement in our overall agent productivity numbers within the Franchise Channel. Let me provide one brief example of how we leverage our Corporate Channel to enhance performance of our Franchise Channel. Last year, we pilot tested something we called our Virtual Sales Coach Program. This involves select corporate agents, managing and mentoring a handful of franchise agents each for a three-month period. Three months after completion of the pilot, average productivity of participating franchisees was over 55% higher than the historical ramp up of their peers. This is just one of many initiatives we run that help our franchisees achieve extraordinary levels of productivity. Without our Corporate Channel, these tools would not be available to us. In April, we will be opening new corporate offices in Charlotte, North Carolina, furthering our geographic reach to the Corporate Channel to drive new business and provide ongoing support to regional franchises across our Eastern State footprint. Our current geographic coverage encompasses approximately 90% of the U.S. population. In addition to our people in geographic expansion we've added to our already industry-leading technology platform in 2019 and have exciting plans for enhancements going forward. Mike will go into greater detail around some of these investments in his remarks. I'd like to take a moment to discuss our balance sheet strategy. Over the long-term, we plan to maintain an efficient capital structure that includes an appropriate amount of debt. In March, we raised $85 million of new debt, a portion of which will be used to paydown our existing notes payable of $46.5 million. While this increases our near-term leverage ratios to a level in line with our historical borrowings, our balance sheet delevers very quickly given our pace of growth. As I have said previously, we carefully assess the cash needed to fund our growth strategy every year and set aside what is necessary plus a conservative cushion. Given the current uncertainty in the marketplace related to the coronavirus, we are going to preserve our balance sheet flexibility and for the time being maintain our higher cash position. I would like to highlight that today we have seen no negative impact on our business due to uncertainties related to the coronavirus. Lead flow and productivity remain very strong. The underlying market demand for homeowners and auto insurance is extremely stable. Essentially if you live somewhere or drive something, you need to buy the product we sell either from us or a competitor. That being the case, our management team has taken what we believe to be prudent actions to avoid potential disruptions to our business in the event they become necessary. This includes forward buying of IT equipment, where the supply chain maybe exposed to disruption and preparing for key employee groups to work remotely if it becomes necessary. We anticipate that any potential negative impacts on Goosehead will be temporary in nature-only, and we continue to have a great deal of optimism and enthusiasm for our long-term prospects. We are very fortunate to have the investor base that we do. It includes some of the highest quality long-term investors in the world. We appreciate the support of our owners and are proud to call you our partners in creating one of the great American business success stories. Lastly, I want to thank our management team, employees and franchisees for their tremendous efforts in 2019. Management's ownership interest in the company represent the vast majority of our individual networks. We remain highly motivated and energized to continue to deliver strong growth responsibly as we progress along the path to becoming the leading personal lines distributor in the United States. With that, I'll turn the call over to Mike.

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 traditional way of obtaining it can be very cumbersome. Recent studies suggest that a homeowner is many times more likely to have a flood loss than a fire loss over the course of a 30-year mortgage. Sadly, many consumers go without this affordable and important coverage because of poor advice or no advice at all on the part of our competitors. Secondly, the flood insurance policy has proven to be a very strong anchor policy in client accounts. Removing obstacles that prevent agents from selling more flood insurance will have a meaningful retention impact over time. In addition to flood insurance, we are working to include dwelling property lines of business in the comparative rating application. These policies cover properties owned by landlords and represent approximately 12% of our agent's business. Having the ability to work with increased efficiency across a broader amount of property coverages is important to continued improvement in the client experience both for our insurance clients and our referral partners. In the fourth quarter of 2019, we implemented our online client portal for new clients. This has provided a much simpler and more secure onboarding experience as well as some basic self service capabilities for these clients. We've now had over 50,000 clients engage us for service via the online portal and a 93 NPS from those service interactions suggest a much improved client experience. Over 2020, we will provide access to the online portal to all existing clients and focus on making the user experience more intuitive. Additionally, our backend servicing integration work is well underway with our key carrier partners, which will allow for a more robust self-servicing capabilities in the portal. We are bringing together our advanced comparative rating application, deep integrations with our carrier partners and data providers and our online servicing portal to create a much improved and complete personal lines experience for both agents and clients. This project has a longer runway, but we are excited about the continued progress towards becoming the first company to provide a complete online quote-to-bind offering of a choice model to our clients. In addition to all of this, we've implemented advanced analytics and AI in our service center, focused on improving retention, introduced new omni-channel client engagement capabilities into our service center, enhanced our mortgage activity database to provide a more complete view of the home buying transactions and included over 1,500 other enhancements or new features to our technology platform over the course of the year. At the time of this call, we've increased our internal technology development team by 80% compared to a year-ago. Our team remains enthusiastically committed to our long-term objective of industry leadership and we understand that innovation and technology plays a key role in accomplishing this. I'd like to echo Mark’s sentiment and thank our entire team of employees, agents, insurance carrier partners and technology partners for their commitment to excellence and constant innovation. We are rapidly expanding the capability gap between us and our competitors and our culture of continual improvement provides us with an incredible competitive mode. With that, I'll turn the call over to Mark Colby to provide color on our financial performance.

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 evidenced by our $21.2 million of operating cash flow for 2019, more than double the level from a year-ago. Looking at our different revenue buckets. Core revenues isn't materially impacted, decreasing only $52,000 under the new standard. The area that we'll see the most significant impact is the initial franchise fees within cost recovery revenue. Historically, we recognized the initial franchise fees when a new franchise agent attends training and the fees are fully earned and non-refundable according to the franchise contract. ASC 606 requires that we differ and recognize this revenue over the 10-year life of the contract, which decreases our 2019 initial franchise fee revenue by $2.9 million under the new standard. Despite this accounting treatment, the initial franchise fees remain fully non-refundable even if a franchise leaves Goosehead. The other area impacted by the accounting change is contingent commissions within ancillary revenue. Historically, we have recognized contingents when we get cash or a statement from the carrier, indicating how much cash we will receive. This typically happens in the first quarter related to prior year activity. With ASC 606, these revenues will be recognized over the period they are earned. So it shifts the recognition of a large portion of the contingencies that were previously recognized in the first quarter and accelerates them to the prior year, mostly the third and fourth quarters as growth and loss ratio data becomes more known. This will result in a bit more of a smoothing and acceleration of the contingent commissions over time. In 2019, our business placed with carriers was impacted by a large number of weather events, which produced above average losses during the year. This came after a year in 2018 a below average loss ratios. The impact was a decrease in 2019 contingent commission revenue of $3.7 million under the new standard. In the supplemental disclosures at the end of the press release, we have included quarterly financials for 2019 under both ASC 605 and the new ASC 606 accounting methods to assist you in modeling under ASC 606 on a go-forward basis. Finally, before diving into the results, I want to take the opportunity to thank our finance and accounting team for the hard work and long hours required to implement this massive undertaking. Now getting into our results in more detail. For the fourth quarter of 2019, we grew revenue 59% from the prior year period to $23.4 million. If reported under ASC 605 revenue would have grown 39% organically to $20.4 million. The primary difference in the growth rates during the quarter relates to contingent commissions that were accelerated from Q1 2020 to Q4 2019, slightly offset by decreases in initial franchise fees. For the full-year, revenue grew 29% from the prior year period to $77.5 million. If reported under ASC 605 full-year revenue would have increased 40% to $84.1 million. The difference between the two full years related to a $2.9 million decrease to initial franchise fees and a $3.7 million decrease to contingent commissions as recognized under ASC 606. Revenue growth for the full-year was driven by strong growth in both the Corporate and Franchise Channels for both new and renewal business. Core revenues, which exclude initial franchise fees and contingent commissions, increased 36% for both the fourth quarter and full-year if reported under ASC 605. Total written premiums, an important leading indicator of our future core and ancillary revenue growth increased 45% to $196 million for the fourth quarter. For the full-year, total written premiums were $739 million, also an increase of 45%. Continued strong growth in franchise premiums imply significant embedded future revenue growth as new business premiums convert to renewal premiums after one-year and we increased our royalties from 20% to 50% on an ongoing renewal basis. As Mark mentioned, our mix of business continues to shift toward the Franchise Channel, which in 2019 accounted for 67% of premiums versus 62% in 2018. Because of the difference in royalties we earned on new versus renewal business in the Franchise Channel, we should expect to see an increasing short-term gap between premium growth and revenue growth. That being said, strong premium growth today in the Franchise Channel should yield strong higher margin revenue growth in the future. At the end of the quarter, we had over 482,000 policies in force, a 44% increase from one year-ago. We continue to generate consistent and rapid year-over-year growth, positioning us well for long-term success. Our Franchise Channel generated revenues of $11 million in the fourth quarter. If reported under ASC 605, franchise revenue grew 54% to $9.5 million. The results were driven by continued strong growth in new and renewal royalty fees. For the full-year, Franchise Channel revenues were $34.7 million. If reported under ASC 605, Franchise Channel revenue would have grown 52% to $39.3 million. At year-end, we had 948 total franchises, up 47% from the prior year and 614 operating franchises, up 34% from a year-ago. Our franchise pipeline remains robust and we are continuing to grow our franchise recruiting team, which currently stands at 62 to further advance growth. Non-Texas franchises which grew 71% versus a year-ago now account for 76% of total franchises versus 65% of total franchises a year-ago. We continue to significantly invest in our talent and technology to support our high levels of franchise growth. And as a reminder, the costs of most of these investments immediately run through our P&L. Corporate Channel revenues were $12.2 million in the fourth quarter. If reported under ASC 605, Corporate Channel revenues would have increased 28% to $10.9 million. For the full-year, Corporate Channel revenues were $42.8 million. If reported under ASC 605, Corporate Channel revenues would have increased 31% to $44.8 million. Corporate sales headcount at year-end was 248, an increase of 49% over the prior year. Agents with less than one-year of experience increased 57% to 141. While the corporate agents with less than one-year of experience add immediate cost impact to the P&L, the expansion in this area should bode well for future revenue as their production ramps up over the next two to three years. We also continue to expand investments in our corporate agents to both grow this channel and to further sustain high levels of productivity within our Franchise Channel. We remain confident these investments will help to fuel sustained high revenue growth and strong earnings growth over the long-term. 2020 investments include targeted office expansion such as the opening of our Charlotte, North Carolina office and expansions in our existing offices in Fort Worth, Texas; Houston, Texas; Irving, Texas; and Henderson, Nevada, as well as expansion of our headquarters in Westlake, Texas. While we report the Franchise and Corporate Channels as separate segments, we manage the business as an integrated whole to drive overall company revenue growth and to maximize profit dollars over the long-term. Adjusted EBITDA for the full-year was $17.5 million. If reported under ASC 605, adjusted EBITDA would have grown 55% to $22.9 million. Adjusted EBITDA margin for 2019 under ASC 606 was 23%. Adjusted EBITDA margin in 2019 if reported under ASC 605 was 27% compared to 25% in 2018. Looking ahead to 2020, we expect total written premiums placed to be between $975 million and $1.035 billion, representing organic growth of 32% to 40%. Total revenues under ASC 606 are expected to be in the range of $100 million to $105 million, representing organic growth of 29% to 36%. While we do not provide bottom line guidance, we expect ongoing investments in people, in technology as well as certain one-time accounting and public company expenses will have a moderating effect on margin improvement in 2020. To-date, our business has been unaffected by uncertainty surrounding the impact of the coronavirus. While the underlying demand for homeowners in auto insurance is stable, management is taking actions it considers prudent to minimize impacts on our operations, should conditions change. As of December 31, 2019, the company had cash and cash equivalents of $14.3 million and unused line of credit of $2.7 million and outstanding debt of $46.5 million. As Mark indicated in his remarks, we will look to maintain an efficient capital structure as our earnings grow. On March 6, 2020, we added $38.5 million of additional debt, bringing the total debt balance to $85 million along with $20 million of unused line of credit. We delivered outstanding top and bottom line results in 2019 while making meaningful investments in people and technology to drive future growth towards our objective of becoming the largest personal lines distributor in the U.S. Our business remains well positioned to deliver consistent and sizable growth in both revenue and earnings for many years to come. With that, I'd like to thank everyone for listening and we will now open up the lines for Q&A. Operator?

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.