Goosehead Insurance, Inc (GSHD) Q1 2022 Earnings Report, Transcript and Summary

Thank you for standing by. This is the conference operator. Welcome to the Goosehead Insurance, First Quarter 2022 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 Daniel Farrell, RBC Capital Markets. Please go ahead.

Thank you. And good afternoon. 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. Forward-looking statements in our discussion is subject to various assumptions, risks, uncertainties, and other factors that are difficult to predict and which could cause the 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 the 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. An archived version will be available shortly after the call ends on the Investor Relations portion of the company's website at www.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 our CEO, Mark Jones.

Thanks, Dan, and welcome to our first quarter of 2022 results call. I'll provide a summary of our key results in the first quarter, and we'll discuss some strategic initiatives we have underway to drive continued strong revenue and earnings growth over time. Vice President, Brian Pattillo will then discuss some of our technology enhancements related to the digital agent. And then Mark Colby, our CFO, will go into greater detail on the quarterly financials and our outlook for the rest of the year. We delivered very solid first quarter results demonstrating the incredible resiliency and consistency of our business and putting us in a great position for the remainder of 2022 and beyond. Our total written premiums, the key leading indicator of future revenue growth, increased 41% for the first quarter while policies enforced were up 39%. Total revenue and core revenue were up 32% and 37% respectively. An improvement over fourth quarter 2021 growth rates. And excluding contingent commissions and roughly $2 million of costs related to our Ascend Agent Conference, which did not take place in 2021, our EBITDA margins improved nearly six points in the quarter. As an organization, we remain laser-focused on delivering our core -- our three core drivers of growth. Onboarding of high-quality agents and franchisees, ramping up their production and critically, client retention. Our renewal book continues to perform exceptionally well with client retention of 89%, up from 88% a year ago, and helping us deliver very strong overall premium and revenue growth. While microenvironment remains challenging for new business generation, I'm encouraged by the improvement in productivity we saw in the first quarter relative to the fourth quarter. The rate of growth both franchise and corporate productivity improved by mid-single digits versus the fourth quarter. While we cannot predict macro trends in the near term, our year-ago comparison on new business growth does begin to ease meaningfully as we progress through the year. I'm also encouraged by several other underlying factors which remains squarely in our operating control. First, our cross-selling and other referral efforts leveraging the digital agent remain in the early stages, but we are already beginning to see it bear fruit as we leverage our sizable book of business to drive existing growth with minimal acquisition costs. We've seen sequential monthly acceleration thus far in 2022 on our cross-selling measures. Second, given our still tiny share of the market with roughly 3% of mortgage transactions and less than 0.5% of U.S. premium. We continue our efforts to pivot to gaining market share through new referral partner relationships, leveraging additional technology to assist agents in these efforts. During the quarter, we activated 45% more new referral partner relationships than the prior year and saw a reactivation rate of referral partners that hadn't sent us a lead in over 90 days. That was three times the prior year. Lastly, our growing number of tenured franchises are continuing to scale their books of business and our corporate agents continue to provide important support in this area. The benefits of this are just beginning to take hold, but will become increasingly material over time as they are increasing levels of production convert to renewals, at which time both our revenue and earnings increase substantially. Moving to agent count. Total franchises increased 41% and operating franchises grew 28% in the quarter. We've been focusing on addressing the elongation we've experienced in the launch process through increased engagement with signed but not yet launched agencies to drive faster launches. We've also shifted compensation for our recruiting team during the quarter towards successful launches of franchises to better align with this objective going forward. I'm encouraged with some of the recent KPIs we have seen and believe this will translate to improved operating franchise growth as we progress through the year. In April, for example, we observed a 44% increase in launched franchises versus a year ago month. and scheduled June and May launches also reflects strong continued momentum. During the height of the pandemic, we've temporarily limited terminations of some underperforming franchises, but had begun recently managing them out of our system using our traditional standards and thereby reducing drag on our resources. Accordingly, we experienced a higher number of operating franchise terminations and transfers during the quarter, which slightly reduced operating franchise growth. Importantly, the short-term decrease in operating growth has not materially impacted franchise premium growth, which was up 48% in the quarter. Terminated franchises make the minims contributions to premium and revenue growth. Corporate agent growth in the quarter was up 35% to 490. As a reminder, we onboard the majority of our corporate agents in the second and third quarters of the year around college recruiting. Corporate channel plays a critical role in supporting the development of the franchise channel through process and tech development, training, and mentoring. While we expect both the corporate and franchise channel to continue to grow, the corporate footprint is beginning to achieve a size where we expect to start achieving some scale benefits over time. We will remain active in recruiting new corporate agents, but we'll also identify strong corporate managers and producers that we feel could be exceptional owners and operators of franchises and that would be well-suited to build your own sales teams and provide a pathway for them to become franchisees. A number of our most productive franchises are owned by former corporate producers. We do not expect this to have a material impact on 2022, but could provide efficiency and growth benefits in the intermediate to long term. The launch of our digital agent is significantly enhancing our clients experience and improving our agent’s ability to drive revenue beyond our existing go to market strategy. There is literally nothing like it in the market. The next phase of our digital agent work is to provide a full online quote to buying experience for clients who prefer to shop in this way. We recently launched our first of several carriers with the ability to go "to issue ". And Brian Pattillo will provide more detail on this in his remarks. As I've said before, we believe the potential of this platform is significant as we build out and continue to invest in digital marketing and actively explore possible partnership opportunities that would embed our digital agent into partner’s client acquisition processes. While this new channel is in early stages of development, I have been very encouraged by some of the partnership discussions of which I have been apart. There is nothing remotely competitive to our value proposition in market. I want to thank our employees and franchise agents for their tireless efforts in delivering another strong quarter in an environment that remains challenging. I'm excited for our many long-term strategic initiatives, initiatives to take hold as we press along our highly enviable runway for sustainable high levels of both revenue and earnings growth. With that, I'll turn the call over to Brian.

Thanks, Mark. And hello to everyone on the call. I'm excited to announce that in Q1, we enhanced our consumer-facing quoting platform to allow a complete online checkout experience for our first carrier partner. Consumers can now get the benefits of the choice model with the convenience of an all-digital experience. To understand the significance of this technology, it's critical to recognize how the extreme fragmentation of the U.S. personalized market has created a cumbersome shopping process. There are currently over 400 insurance carriers, 150 of whom have greater than $100 million in premium. The complex regulatory environment and differences in carrier underwriting appetite, have created wide pricing disparity, where no one carrier is the right fit for more than a small fraction of the market. Even more rare is finding one option who is best for both home and auto insurance. Most consumers shop with single-carrier platforms, such as captive agents or direct-to-consumer options, but they often only check with three or fewer carriers before picking one. This means they have shopped with less than 1% of the market, virtually guaranteeing they end up overpaying for insurance or having to make coverage trade-offs. The best current solution is to contact an independent agent who can shop for them. The problem is that in most independent agencies, consumers are required to have a lengthy call to relay their information and then wait for a call back in the next few days with a quote. The modern consumer wants an easier and faster solution to quickly identify the insurance company who will provide the coverage they need at the best available price without having their data sold. That's exactly what our digital agent platform does. We've now launched our first carrier who allows consumers to go all the way through the process to buy home, auto, and umbrella insurance online. During the checkout process, consumers can make coverage adjustments at discounts to the start date and enter their payment information in less than two minutes after receiving the initial quotes. This bowl quota issue option is provided in instances where the carrier ranked as the best price for the client. Each client is assigned to an agent who will review the policy and be available to discuss any recommended adjustments. Every Goosehead agent has their own unique link and QR code to route clients directly to them through this platform. This enhanced capability allows our agents to provide clients a full Omnichannel experience. Whether consumers prefer to speak with an agent the entire time, get a quote and then finish with an agent, or buy online, we can accommodate each. We're working with other carriers to offer the full quota issue experience and we'll add several more over the course of this year. As Mark mentioned, this technology is built to connect and be embedded into any other platform. Any business who wants to offer insurance to their clients can now leverage our technology to do so. This can be done by creating a co-branded linked to our platform from their site, or by leveraging an API that enables partners to return quotes without ever leaving their platform. In many cases, these partners already have the data needed to get quotes such as name, date of birth, and address, making the process even easier for consumers. Mortgage servicers could leverage this technology to allow customers to get quotes and switch out their home insurance policy renewal with a few clicks. Mortgage originators, builders, and real estate companies could allow homebuyers to get their home insurance set up for closing without ever leaving their platform. Online fintech platforms and banks could now offer insurance to their clients without the complexity of having to build their own agency. We are starting to discuss this opportunity with several potential partners. The ability to provide a full online checkout experience powered by an agent informed choice model is critical to the success of these opportunities. We're incredibly excited about the roadmap ahead for our digital agent and we'll keep you updated on the progress in future calls. I will now turn it over to Mark Colby to review our Q1 financial results.

Thank you, Brian. And hello to everyone on the call, for the first quarter of 2022, total written premiums, the leading indicator of our future core and Ancillary revenue growth increased 41% to $451 million. This included franchise premium growth of 48% to $341 million and corporate premium growth of 24% to $110 million. This growth is being driven by strong franchise new business generation, new corporate and franchise agent growth, and increased retention. Our book is also becoming increasingly diversified with Texas accounting for 51% of the total written premium compared to 57% in the year-ago quarter. This continuing trend should help us contingent commission volatility year-to-year, and further diversify our overall book of business as we race towards our goal of industry leadership. Revenues were $41.3 million for the quarter, an increase of 32% from the year-ago period. While core revenues were up 37% to $36.5 million, both revenue metrics growing faster than fourth quarter 2021 results. Ancillary revenue, which includes contingent commissions, was $2.2 million in the quarter compared to $2.8 million a year ago. The decrease driven by true-up adjustments booked in 2021 and read 2020 contingencies. On a normalized go-forward basis, we believe it is reasonable to assume around 80 to 85 basis points of contingents as a percentage of annual premium. However, any given year can vary significantly from this level. Franchise generated core revenue of $18.3 million during the quarter, an increase of 54% from the year-ago period. At the end of the first quarter, we had 2,298 total franchises, up 41% from the prior year, and 1,268 operating franchises, up 28% from a year ago. Franchise core revenue growth is driven by strong new business production from franchisees, increased retention to 89% from our already industry leading levels and growing franchise count. We remain encouraged by the increased contributions and revenue from our tenured franchisees as they continue to ramp their production and hire new sales agents within their franchise. As Mark indicated, we have increased our engagement with signed but not launched franchises and made adjustments to our compensation to align with the goal of improving operating franchise launch time. We are seeing encouraging signs in the franchise KPIs that indicate improving trends as we progress through the year. Our April launched franchises were up 44% versus the year-ago and we're seeing nice momentum in scheduled launches for May and June. Additionally, it is critical that we focus our investments towards our most successful franchises. Part of ensuring that focus requires evaluation of our lowest performing franchises. As a result, the pace of our terminated and transferred operating agencies has returned to pre -pandemic levels of around 15% annualized attrition. We view this level of churn as healthy for a high performing sales organization, and, importantly, our churn continues to account for less than 1% of our new business generation. Corporate sales headcount at the end of the first quarter was 490, an increase of 35% from the year-ago quarter. Corporate core revenues were $18.2 million in the first quarter, an increase of 23% compared to the year-ago period. Corporate investments have been critical in scaling and improving productivity of franchise sales. While we will continue to grow both corporate and franchise headcount meaningfully, we do believe we can gradually realize some scale benefits over time given the size of the corporate producer force and the significant office expansion from 2021. We are also reaching a scale at corporate where we feel more comfortable for actively identifying corporate agents that would be highly successful at starting and scaling a franchise opportunity. Total operating expenses for the first quarter of 2022, excluding equity-based compensation, were $40 million, up 38% from a year ago. Compensation and benefits expense, excluding equity-based compensation, was $25.7 million for the quarter, up 33% from the year-ago period. The increase in compensation and benefits is being driven by our ongoing investment in headcount across the organization, particularly the hiring of corporate agents in support of franchise channel growth, service agents to manage our largest revenue stream, renewals, recruiting and on-boarding functions to continue our growth trajectory, and systems developers to ensure our technology is on the cutting edge for our clients and internal users. General and administrative expenses for the quarter were $13.5 million, an increase of 46% from a year ago. Growth in G&A expenses was due to an expanding real estate footprint, higher travel and entertainment expense, and marketing expenses around our digital agent initiative. Additionally, our annual conference, Ascend, which was not held in 2021, was approximately $2 million of expense, excluding Ascend our G&A growth rate would have been approximately 24%. Total adjusted EBITDA in the quarter was $1.3 million compared to $2.1 million in the year-ago period. EBITDA margin was 3% versus 7% a year ago. Excluding contingent commissions, our margins expanded one point even including approximately five points of margin impact from our Ascend conference versus a year-ago period. We expect the many investments we made in 2021 to continue to scale nicely through the remainder of this year as new offices add producers and new opportunities from the digital agent, particularly in the areas of cross selling and client referrals begin to ramp up and help offset initial and ongoing development cost. As we have said previously, we believe it is strategically more important to focus on investing for growth now, which we believe will drive long-term - long-term margin improvement. Our high growth rates, most expenses are largely variable, however, this year we continue to anticipate significant growth in EBITDA and strong EBITDA margin expansion. As a reminder, the first quarter is seasonally our weakest earnings Quarter of the year, given the historical seasonality of our insurance sales and lack of ability to recognize any material contingencies this early in the year. Net EPS for the quarter was a loss of $0.11 versus a loss of $0.02 in the year-ago period. Adjusted EPS was $0.04 versus $0.03 in the year-ago period. The reason for the wider gap between net and adjusted EPS is due to higher equity stock compensation, which was $0.16 of EPS versus $0.05 in the year-ago period. The change in this non-cash item relates to the black shoal’s valuation of options, which takes into account stock price on the grant date and historical volatility, among other inputs. More importantly, our option grants this year account for roughly 2% of shares outstanding, similar to historical grant levels. As of March 31, 2022, the company had cash in cash equivalents of $21.7 million, we had an unused line of credit of $24.8 million at year-end. The total outstanding term note payable balance was $98.1 million as of March 31, 2022. For the full-year 2022, we are reiterating the company's outlook for premium and revenue. Total written premiums placed for 2022 are expected to be between $2.086 billion and $2.215 billion, representing organic growth of 34% on the low end of the range to 42% on the high end of the range. Total revenues for 2022 are expected to be between $197 million and $212 million representing organic growth of 30% on the low end of the range to 40% on the high end of the range, driven by high levels of core revenue growth and historically average contingent commissions. We also continue to expect significant EBITDA growth and EBITDA margin expansion for the full-year 2022. In what remains a challenging macro environment, we have continued to deliver strong and consistent growth and have started to see signs of margin expansion in the business. Additionally, recent KPIs, as well as an ease in comparisons in the back half of the year, position us very well as we move through 2022 and beyond. I want to thank everyone for their time and with that, let's open up the lines for questions. Operator.

Thank you. We will now begin the question-and-answer session. [Operator Instructions] We will pause for a moment as callers join the queue. Our first question comes from Paul Newsome of Piper Sandler. Please go ahead.

Thank you, and good morning -- oh, good afternoon, sorry. Could you talk a little bit more about expenses in the run rate prospectively? That seems to be the main consideration, I think, in terms of getting the EBITDA up for the remainder of the year and maybe just -- maybe I'm wrong with that. Maybe you could talk about that, is there a run rate that's less than what we're -- than that we've seen in the quarter, or -- anyway, I'll let you just answer the question.

Thanks, Paul. It's good to hear from you. We do expect significant EBITDA margin expansion this year and we've started to see that in the first quarter. If you exclude contingencies, we saw EBITDA margin expansion of 1%, but further than that, if you exclude the annual meeting that we had, that it would have been 6% EBITDA margin expansion, but we didn't have that last year because of COVID. So we're starting to see some trends there and thinking bigger picture and longer-term for the year. I think consensus has us currently around 19% to 20% EBITDA margins, which we feel is a reasonable assumption without giving guidance for the year.

[Indiscernible]

[Indiscernible] pretty substantially. But again, if you exclude contingencies, we do expect some significant margin expansion.

But if we don't have contingency expansion, would we not have margin -- EBITDA margin expansion?

Yes. So remember last year was historically a very bad contingent commission year at 65 basis points. We're hopeful that we can get back to at least the average of 80 to 85 basis points. But I think even with contingencies as a percentage of premium still staying flat, we still think margin should expand given some of the scale we're seeing on our comp and G&A this year.

Great. Thank you. I'll let some other folks ask questions. Appreciate the help.

[Indiscernible]

Our next question comes from Mark Dwelle of RBC Capital Markets. Please go ahead.

My question was more -- my first question was more or less the same as Paul's, just in terms of, as you think about looking ahead over the course of the year, are there any other notable items like your agency meeting and things like that, like one-time things that will either be added into the mix or expenses you incurred in the year-ago run rate that we should consider in subtracting out of the mix as we think about EBITDA progression over the balance of the year?

No, I don't think so. I think it's just continued scale, last year thinking back, we significantly expanded our office footprint. We should continue to grow into that cost throughout the year. Headcount costs continue to scale for the business and so I don't think there's any other big drivers at this time. One of the reasons we don't guide to earnings is because we want to leave some flexibility there. So I'll leave some flexibility for any kind of an interesting investments that we see coming along but we will be sure to bring those to everyone's attention as we learn of them.

The annual meeting and during the first quarter is a big expense item, and that's done now and there won't be another equivalent this year.

That's helpful on that. And then as you think about the digital agency rollout, are you able to -- I guess the thing I've always wondered on that is really how you're able to tell that you're getting incremental new customers as compared to customers that your might would have just gotten in the ordinary course. Really, I guess what I'm talking about is channel conflict or cannibalization. Do you have a way that you can track that and itemize the degree to which you're getting distinct new business volume off of that channel?

Absolutely. Remember, we're not really investing digital marketing right now just to drive people to Goosehead.com; it's a lot more targeted than that. So initially the campaigns are cross-sell and client-referral campaigns where someone clicks that email and goes through the process. It creates a lead in sales force that we tie directly back to that. And we're already seeing really good traction through the first quarter of the year and through April as well. So it's not a material part of our new business yet, but we feel like as that continues to scale throughout the year, it could contribute nicely. And with these strategic partnerships --

Do you have any sense -- go ahead, Mark, I'm sorry?

Sorry. And also with the strategic partnerships that we've talked about, again, that's most likely 2023 before those are really material, but we'll have ways to directly tie any traffic from those partnerships through equity to those efforts.

Mark, this is. Mark Jones. The corporate partnerships we're actually really excited about that as a new channel that could create a really attractive growth vector, which we created. We invented this digital agent. There is nothing like it in the marketplace. No one can even come close and you've seen the demo of it, and we have we have put one of our most senior sales leaders in charge of building out a corporate partnership channel where we would embed that digital agent in other companies, client acquisition processes. And there's a lot of companies that would really like to tangentially get in the insurance business without getting in the insurance business. And this provides a way to do that, create more monetization opportunity for their clients. But as we've had discussions with some pretty large organizations, it shouldn't really admit this in a public forum, but we're learning how truly differentiated our product offering is and sort of a number of these. Folks had thought, well, maybe I can, maybe I can get in the insurance business myself and Goosehead will make it easy. I can create a franchise on sort of deal with my new client acquisition opportunities that way. But the key thing that they don't have. Is the local market expertise and product and we have that across the country? And literally nobody else does that, that has a large scale agent force that can handle leads that would come in at a big scale. We've got 2,500 or so agent scattered across the country with deep expertise and deep products in every market. And I'm just -- when I look at this business, I look at it like I did when we got into the franchise businesses, this is an opportunity to really create another growth factor. As you know, these negotiations and the implementation of these things take a little bit of time. We have a few small partners that we're working with now, that we're in implementation and we're going to learn what works, how to optimize the value proposition. But we are really excited about that opportunity, that potential there.

Okay, thanks for that. That's a great update. I'll stop there.

Thanks, Mark.

Thanks, Mark.

Our next question comes from Meyer Shields of KBW. Please go ahead.

Thanks. Two quick questions. First, I think Mark you mentioned that you are something of a catch-up on other performing agents, or franchises, I should say, termination in the quarter. Is there any way of quantifying that? The impact on it --

Really just with the increase in our termination rate the last year or two really, since COVID that's trended down to 10%

We've tried to be nice.

Yes. Just being patient and understanding the challenges they are facing. Since the COVID cloud has lifted for all intents and purposes, I feel like we can start getting back to our high standards and working these folks up or out and during the first quarter, we saw that result in our attrition rig going from 10% to more normal 15% annualized rate.

Okay.

Again, Meyer, These, these franchises are really not contributing anything in terms of new business. These are people typically that are devoting full-time efforts to their business. And we're cleaning about so that they don't absorb resources of the company anymore.

Yeah. To Mark 's point, they make up less than 1% of the new business that's being produced.

Okay. That's helpful.

But they drag a lot more than 1% of the resources. And so again, I feel like it's the right call.

No doubt, that's helpful. I'm just trying to quantify the improving productivity that market talked about in the franchise channel. If we take that component out or if that's a reasonable way to look at things.

Really, what we're seeing is improving compared to the fourth quarter trends that we saw. Productivity compared it throughout the year. So we disclosed that once a year in our 10-K, and we'll continue to give updates throughout the year, but we're really encouraged by the franchise productivity, especially among our tenure cohorts that are continuing year-after-year, even though the ones 2015 and prior contributing year-after-year to growing their contributions to new business. And same-store sales growth as well.

Okay. Perfect. Thank you.

Our next question comes from Ryan Tunis of Autonomous Research. Please go ahead

Hey, thanks. First question, I guess relative to your guidance, seeing the total written premium, your full-year guidance this quarter came in at the high end of what you were thinking, more than 40%. When we think about the headwinds versus tailwinds, I think even investors discussed, the headwind clearly is mortgage environment and real estate environment, but there's also the tailwind from the firm pricing market in personal lines. When we look at the total written premium growth at the higher end, is it safe to conclude that the hard market and personal lines is having more of a positive impact than the negative stuff going on in the real estate side?

I think we're seeing -- you're correct, we're seeing harder market, but we've also increased our client retention from 88% to 89%. So net-net, maybe it's an incremental positive. It's something that is too early in the year at this time to update our guidance for the year and we'll have some additional thoughts on that in the second and third quarters, but yeah, we're seeing positive trends there on the premium side.

Also in terms of dealing with the headwinds though. I mean, we're activating a lot more referral partner relationships and was it up 45%?

Yeah 45% of during the first quarter of new referral partners who had never sent us a lead before and then we reactivated, meaning these referral partners hadn't sent us a lead in over 90 days. We reactivated three times more than we did in Q1 of last year. So again, when -- really the housing market impacts our total revenue bar, maybe it's only about 20% of our revenue that's exposed to the housing market. So when we see kind of declines, like we've seen, we pivot, we go to gain more share and we're starting to see the fruits of those efforts pay off. We also, as we've discussed in the past, we feel we can mitigate some of those housing market headwinds with the cross-selling campaign, the digital agent stuff that we're working on. Again, with the new channel partnerships that Mark mentioned earlier, all these things will help offset that over time.

Got it. And then I think in your prepared remarks, you talked a little bit about acceleration of franchise launches from implementation to operation in the coming months, could you just give us a little bit more detail on that dynamic, please? Thanks.

So we identified, like the rest of you, that the backlog that we saw growing last couple quarters and took some steps during the first quarter to help mitigate that. We redesigned some franchise sales business processes or sales processes. We redesigned their compensation to align more with the launches than the signing of a contract. And we knew that those weren't going to pay off this quarter necessarily, but we're starting to see those pay off in the second quarter with April launches up 44% year-over-year. May and June scheduled launches are continuing the momentum there. Again, it might not show up in the operating franchise count number immediately; we need a few more quarters of that. And we're also working to manage out some of the underperforming franchises as we've discussed. But really the operating franchise number there is just one piece of the puzzle. We need well-performing, healthy franchises in our organization, not just a large number of franchises. So that continues to be a focus of ours on investing in the best franchises and evaluating the lowest performing franchises.

Our next question comes from Josh Shanker of Bank of America. Please go ahead.

Yes. Thank you for taking my question. Can we talk a little more about the elongation versus close franchises versus the possibility that with the economy reopening and people maybe not working from home as much wage inflation that there's people who signed contracts with you that just don't plan to open a Goosehead franchise? I mean, if we're trying to put things in different buckets, are there -- What how much of the lack of conversion people you long gating, how much is franchise actually closing and how much is maybe you haven't been notified that they're not actually going to open a franchise?

Yes. So we don't terminate a franchise contract until we're 100% sure that they're not going to launch. And to my point earlier, that's been a priority -- a shift in focus for the franchise sales team to continue to reach out to the backlog of folks that we've signed historically and haven't yet launched in our system. And we're actively engaging with them to either launch in our system or we're going to completely restart the recruiting process over with them, which will require a new contract. And historically there's always been some percentage of signed contracts that haven't launched. We might see that increase a little bit with our COVID signings during 2020 and 2021, but I think importantly, we don't feel like that's going to slow down our ability to launch franchises throughout the year. We're continuing to not only chase that backlog, but also recruit brand new agencies and franchises in the system and we feel like the 2022 signings will continue to make up a large portion of the operating franchise growth this year.

And priors -- I understand the franchise salesforce was prior compensated on the number of contracts that they got signed rather than the number of open franchises, and now you're changing the compensation model?

It was a mix, but we've shifted that mix to much more heavily weighted towards the launch than the signing. And again, redesigned the sales process as they go through to make sure that if you signed a contract with us, you are planning to launch within a reasonable time frame in our minds.

Makes sense. And as you're closing these franchises, you get to accelerate the amortization of the initial franchise fees to the present. And as you close them, I guess you're going to see a surge in earnings, and I think we can see it in those numbers, they're up dramatically. To what extent are you over earning on the initial franchise fee line item and how long would that persist for?

Well, in my mind, were significantly under earning on the initial franchise fees given the change to AC606, those franchise fees are collected when they come to training, they're fully earned when they come to training and non-refundable under the new revenue recognition, we just have to extend that over a 10-year period. So again, in my mind, those should be recognized upfront that that gap feels a little differently. So I don't think there's any surge or anything in our franchise revenue from those terminations and material, it's getting back to the normalized level as well, and it's not like we saw terminations and nutrition go up to 50% or anything. It just got back to normalized levels.

And for a, this is my last one I promise for franchisees who is just not working out with you, who thought that they might write a few policies and get a book of business and enjoy stream renewal income. And you say, look, you're not working anymore, we're going to shut you down. And then he was gone looking to get some stream for White Source, so to speak. Is there any legal action from the closure franchises that people feel like their franchise was closed and it didn't understand or they didn't know or they feel that they have rights that you can't for some of the clothes or maybe that doesn't haven't at all?

Josh, typically, when we terminate, if there's any appreciable policies in force, there's a very active secondary market for that book of business. Internally that GU said with other franchise owners. So they're easily able sell that and monetize it.

And most of the time it's not like us just forcing them out or we're helping them come to realization that they are not successful in our model for various reasons. And the best course of action for them as to, as to either sell their book of business or walk away.

Well, I appreciate all your answers. Thank you very much.

[Indiscernible].

Our next question comes from Mark Hughes of Truist. Please go ahead.

Thank you. Good afternoon.

[Indiscernible]

Could you provide a number for the on-boarded franchisees in the quarter or should we get that out of the queue?

Yeah, that will come out in the queue.

And you don't care to give us a sneak peek perhaps?

No, not till tomorrow.

Very good. And then in the discussion with the potential partners, I think you said you're already in some discussions with maybe smaller players that will create another growth vector for you. What does the economic model look like in that case, presumably the -- those partners are wanted to participate in those commissions. How do you envision that model developing over time?

It's still specific. We know what economic model works for us and we're committed to building out of business that has more attractive -- at least as attractive or more attractive margin profile than the existing business. But those deals, they're all -- they're different and we are in implementation with some smaller partners. We're talking to some really big ones. And the economics will be what we had negotiating with different partners, different things matter. So we've got to be congruent with what they need.

Yes, and different partners are going to have different quality of leads that we'll have to take into consideration as well.

Understood. You had mentioned how you're identifying corporate agents that you think would be successful as franchisees. When you make that transition, I don't know if it's going to be material enough for the details have been worked out. But when they make that transition, how does that impact the P&L?

So their existing book of business stays in-house. And we do allow them to keep their kind of sources and the referral partners, but they start over from scratch with API. So on that existing book of business, we do see a fall in our bottom line going forward. The franchise economics are richer. There's some consideration for the overhead that it takes to manage a person or and everything else that don't exist if they want to franchise.

And then any sense of how material we're kind of numbers is that maybe a few points on particularly here and there?

Not material at this point. And again, as we go on in future years really, it might become a more and more material portion of the franchises that we launched but specifically for 2022 is not.

It won't be material for 2022. But if we look at the scale of our corporate agency, we really do feel like we're in a position where we can be a lot more open to enabling people to have that career path of becoming a franchise owner. And over time, it actually could be quite material. And the -- what we've seen is corporate producers that have opened franchises are among our very most successful. And they -- when they open, they're opening at a dead sprint. There's no ramp up; they're opening at a dead sprint, so they're great partners.

It also creates a very lucrative career path for them that we can use in recruiting to continue to manage up the gene pool of our corporate agents and continue to get better and better people in the door and get them to stay with us longer.

Great. Thank you. I appreciate that.

Thanks, Mark.

Our next question comes from Pablo Singzon of JP Morgan. Please go ahead.

Hi, thanks for sneaking me in. So first question is within your homeowner's book, what percentage of new sales will do refinancing versus purchase mortgage originations? And what was that mix last year and how do you see it this year?

Yeah. Low single-digits and that's been consistent for a long time. So really we're not seeing any kind of housing market impact specifically related to refinance activity in our new business.

Got it. And then second question is, have you seen wage inflation having any impact on your recruitment efforts and any impact that you're seeing our expense base today?

No we've had -- we've a pretty good -- I would say very good in lucrative compensation model for our company across all departments. So I don't think we're really stealing that. It's not a company historically, where they can't go out and get a better job day one then make more money, that's not our value proposition to them. Our value proposition is three, four, five years in with the renewal book of business, that's where you really start to earn the real economics that are competitive across several different industries. We really haven't seen that to date. I think something to consistently keep an eye on and we'll continue to monitor that. But today really, you know, I think it hasn't shown itself.

Yes. I will say the flip side of that. How does our employee value proposition look with our service center? I'm going down Friday to visit our service center in San Antonio, on our employee value proposition down there is unbelievable. We've got almost no turnover, great -- It's a great, base of potential employees. There is a high number of them with Spanish speaking skills we're really excited to grow that San Antonio operation and make it a large service sub and labor market conditions down there are wonderful for us.

Got it. Thanks for your answers.

Thanks, Pablo.

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

Thanks everyone for joining us on the call today and have a good evening.

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