Thank you for standing by. This is the conference operator. Welcome to the Goosehead Insurance’s Second Quarter 2020 Earnings Call. As a reminder, all participants are in a listen-only mode and the conference is being recorded. [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 will 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 structure, 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 archives 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 second quarter 2020 earnings call. I’ll provide an overview of our results for the quarter as well as our strategy and outlook for the full year. I’ll then hand it over to Mike Colby, our President and Chief Operating Officer, to update you on some of our technology and human capital investments as well as an update on actions around COVID-19. Our CFO, Mark Colby, will then go into greater detail on our second quarter results and outlook. Before reviewing our results for the second quarter, I would like to share our business philosophy. Adherence to this philosophy has allowed us to deliver exceptional results even during a global pandemic. One, we view and manage the business through the lens of long term owners. Every member of our senior management team has the vast majority of their net worth tied up in Goosehead stock. We think like long-term owners because we are long-term owners and are deeply committed to reaching our collective full potential, which is achieving market leadership during my lifetime. All of our decisions are geared to create value over the long-term and drive toward our full potential. Number two, we are successful because we create value for others, which means we are maniacally externally focused. This external focus has been particularly powerful while the world grapples with COVID-19. While others were wringing their hands with worry and experiencing paralysis to a greater or lesser degree, we were in the market, making things happen, and our results are a testament to this. And three, our business was built with the client at the center of our universe, and we are heavily tech-enabled. The guiding objectives for our technology investments are creating a better experience for each of our clients, which includes consumers,…

Thanks, Mark, and hello to everyone on the call. Over the first half of 2020, we’ve continued to see our strategy surrounding technology investment create substantial competitive advantage for our business. This was demonstrated in several key areas. One, our seamless transition to a virtual operating environment in response to the COVID-19 pandemic; two, the continued progress on our technology development road map; and three, new talent acquisition within our development team. I’ll elaborate on these three areas. First, our response to the COVID-19 pandemic. As mentioned on our first quarter earnings call, we transitioned all operations to a virtual environment in mid-March. This includes all marketing and business development efforts, new business sales activity, client service and back-office functions and recruiting and onboarding efforts for new corporate employees and new franchise partners. As of this date, our team continues to operate in this virtual environment and we continue to see strong performance results across the entire business. Our team has delivered or outperformed our internal expectations for all key performance indicators set at the beginning of the year, including agent recruiting and onboarding in both channels, new business sales productivity and client retention. Additionally, we’ve been able to meet or exceed our expectations on qualitative metrics, such as NPS and cross-selling percentages. This is a testament to our remarkably talented and agile team and the years of investment in technology infrastructure, such as our cloud-based voice solution and our referral partner marketing tool, which provides complete business continuity. We’re very proud to be a stable employer to our team, partner to our agents and referral sources and service provider to our clients during this time of crisis. We look forward to bringing our team back together in our offices when it’s safe to do so and will continue to…

Thanks, Mike, and good afternoon to everyone on the call. For comparability purposes, my comments on our second quarter 2020 results will be discussed against the second quarter 2019, as if recognized under ASC 605. A reconciliation of ASC 606 accounting to ASC 605 accounting for 2020 has been provided as a supplemental schedule in our earnings release. For the second quarter of 2020, total written premiums, an important leading indicator of our future core and ancillary revenue growth, increased 41% to $274 million. This included Franchise premium growth of 47% to $191 million and Corporate segment premium growth of 29% to $83 million. This growth is being driven by continued high retention rates, strong new business generation and increasing agent productivity in the Franchise Channel. The continued shift in our mix of business towards the faster-growing Franchise Channel implies significant embedded future revenue growth as new business premiums convert to renewal premiums after year one, at which time, our royalty fees increased from 20% to 50% for ongoing renewals. At quarter end, we had over 590,000 policies in force, a 45% increase from one year ago. Our consistent and rapid year-over-year growth in both premiums and policies positions us well for long-term success. Revenues were $29.9 million for the quarter compared to $19.4 million in the prior year period, an increase of 54%. In Q2 2020, if reported under ASC 605, revenues grew 42% to $27.6 million and core revenues increased 41% to $24.8 million. During the second quarter, our Franchise Channel generated core revenues of $10.4 million, if reported under ASC 605, an increase of 51% from one year ago, with the results driven by continued strong growth in new business and renewal royalty fees from an increase in operating franchises combined with higher productivity plus sustained high…

Thank you. [Operator Instructions] Our first question is from Mark Dwelle with RBC Capital Markets. Mark Dwelle, your line is open.

Yes, good afternoon. I’m never first on these. I’m really surprised when I get to go first. Maybe, the first question that I had, really just kind of a general business condition question. Obviously, the second quarter was one that was constrained by recession and other considerations. Are you seeing anything in customer behavior in terms of changing policies or cancellation of policies that might have had a factor in the quarter?

Mark, this is Mike Colby. No, we haven’t seen any change in consumer behavior that’s notable. I think the rebate – premium rebates that a lot of the carriers, really all of the big national carriers, are doing are helping with that and helping keep those policies in force and providing some type of relief to customers who need it. So we haven’t seen the change in behavior. I think the early part of the quarter, we did see some housing activity decline, which really honestly rebounded for us in May and June as we look at our lead flow per agent. So we’ve – and I think it’s also worth reminding the group. Our market share is so small as – in terms of total premiums in the U.S., but also in kind of our involvement in new home sales. So in a situation where you do see a dramatic and sudden decline in housing activity, we have the data. We have the tools to where we can refocus our efforts on activating new relationships, backfilling that lead flow, and that’s definitely what we saw taking place in the early part of the quarter, which led to really good momentum into the back half of the quarter and into the new quarter.

That’s helpful. You actually anticipated one of my other questions related to just the housing market in general. Turning over to the – you discussed at some length, some of the technology initiatives. Just as you accelerate the IT program there, is that anything – is there any contemplated charge or uptick in expense or that – you’ll absorb that just within the ordinary growth of the business over the near term?

Yes, there is an uptick in expense, but as opposed to our total revenue and how fast it’s growing, it won’t be like a big step function increase in our technology spend...

It’s proportional, isn’t it?

Proportional to the revenue and we’re making these investments, either through technology consultants and programmers that we’re hiring or internal developers that we’ve started to make a big push towards hiring. So in most cases, both of them, we run through our P&L immediately. So again, I don’t expect any kind of huge step function increase. It’s kind of normal course of business for us to continue these investments and continue to up our spend each year.

The environment that’s created a – sorry, Mark, yes, the environment has created some opportunities for us to pick up some really high-quality talent. So we’re fortunate to be in a position to play offense and take advantage of those opportunities as they arose.

Definitely makes sense. And then I guess in a somewhat similar context, were there any particular expense savings in the quarter associated with perhaps reduced travel and entertainment or other things related to just the change in the work environment over the course of the quarter?

We definitely saw some kind of more reallocation of where we spend where we didn’t have any travel during the quarter, right, no mileage expenses from our employees going out and visiting shops. No flights from our Franchise sales team going to meeting with potential agents. All that was done virtually during the quarter. However, rather than just taking that and accepting it, we repurposed that to certain incentives for our service team to increase cross-selling and referral generation and those sorts of things. So we wanted to reinvest that where we thought it would be useful, and we definitely saw some good results.

Yes. Primarily around incentives to keep people engaged, Mark, that working virtually, it’s very important that we’re doing things to keep people engaged throughout the weeks, the months of the quarter, and that’s where we really repurposed that spend.

Makes sense. I appreciate the answers. I’ll re-join the queue. Thanks.

[Operator Instructions] The next question is from Meyer Shields with KBW. Meyer Shields, your line is open. One moment, please.Meyer Shields, your line is open now.

Hi. Can you hear me?

Yes. Hey, Meyer. How are you doing?

Good well. How are you?

Very well.

Two quick numbers question and then a couple of bigger picture issues. The equity base compensation stepped up in the quarter. Is that a function of any of the other line items in terms of growth or recruitment?

No, no. How we think about those stock options, we awarded some stock options at the IPO to our Managing Director team. And the idea there is that it’s not going to be something that we award every year. It’s kind of every two years when you reevaluate. As those start to vest, we want to extend the time out of the vesting schedules for the new options to keep people motivated to keep them here, keep them driving. We think it’s a great tool. I mean, it’s the whole reason we went public is to award those type of opportunities to our folks. And so that’s what it was. It’s just kind of a re-up of the stock options for our Managing Director team.

Okay. So we should go back to the same levels for the next two quarters?

No, no. It will be at this level for – in perpetuity until we award some more.

Okay. So this is the [indiscernible] quarterly, right?

We expense quarterly. We take the Black-Scholes valuation, expense quarterly over the vesting period, right.

Got it. Okay. That was helpful. Also Contingent Commission. I know that could be tough to predict. But should we look at that as a function of current quarter profitability or proceeding here?

Yes. So we’ve talked in the past from a quarterly perspective of how we think about Contingent Commissions. And if you would have asked me three months ago, I wouldn’t have expected to book a lot of Contingent Commissions this quarter. However, the data we’ve been getting from the carriers on the Contingent Commissions that are loss ratio driven has been so positive that we felt very comfortable booking something in Q2 and still being very conservative on those Contingent Commissions. And so yes, 606, we’re really obligated to. But I would say, in any normal year, I wouldn’t expect a ton of Contingent Commissions in Q2, but I think a lot of it is due to COVID. People aren’t driving, our auto loss ratios are looking very good. And so decided to book some Contingent Commissions in Q2. And now we expect some positive results as we continue throughout the year. But we’ll keep you guys updated if anything changes.

Okay. Fantastic. And then I want to dig a little bit into recruiting of agents that come from other industries. In terms of – I’m trying to think of the right way to ask this question. What are you learning from them? How is their performance different from the legacy agent side?

Yes. Meyer, this is Mike. You’re presented with a different set of challenges when you’re recruiting from outside the industry. But candidly, I think teaching the insurance components the fundamentals, that’s the easy part. So what I see is the opportunity in a lot of these kind of outside of the industry recruits is that these folks come in and they don’t have bad habits that they need to unwind. And they’re really more apt to really embrace the system in its totality and be a lot more coachable. Whereas, if you’re working out the bad habits, if you’re really having to change the way you’ve done business for a decade, it’s a slower – I think a slower process to really getting burned into our system and fully adopting the tools that we make available. So we look at that as a very encouraging opportunity for us. And it really does broaden our talent pool as well outside of just the traditional agents.

Okay. On a month-to-month basis, is there any – I don’t know – I don’t have a great read on like individual regions and economic growth or shutdowns. But are you seeing any difference on a month-to-month basis in terms of people that are available?

I’m sorry, as far as recruiting candidates in the different regions?

Yes.

No. I mean, our growth would be – really would be a function of where are the recruiters focused. And we’re not seeing any one region, any recruiter in one region be disadvantaged compared to a recruiter in another region. I mean, we’re seeing a healthy recruiting pool across the country.

Okay, fantastic. Very helpful and great results.

Thank you.

This concludes today’s question-and-answer session. I’d now like to turn the conference back over to Mark Jones for any closing remarks.

We’d just like to thank everybody for participating with us. And I hope you have rest good day. Good rest of the day. Thanks.

This concludes today’s conference call. Thank you for participating, and have a pleasant day.