Thank you for standing by, and welcome to the Goosehead Insurance Second Quarter 2025 Earnings Conference Call. [Operator Instructions] As a reminder, today's program is being recorded. And now I'd like to introduce your host for today's program, Dan Farrell, Vice President, Capital Markets.

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 expectations, estimates and projections of management as of today. Forward- looking statements in our discussion are subject to various assumptions, risks, uncertainties 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 on them. We refer all of you to our recent SEC filings for a more detailed discussion of risks and uncertainties that could impact future operating results and financial condition of Goosehead. We disclaim any intention or obligation 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 period-to-period by including potential differences caused by variations in capital structure, tax position, depreciation and 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 recent 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 In addition, this call is being webcast and an archived version will be available shortly after the call ends on the Investor Relations portion of the company's website at goosehead.com. Now I'd like to turn the call over to our President and CEO, Mark Miller.

Thanks, Dan. Good afternoon, and thank you for joining our Q2 earnings call. Before we begin, I want to take a moment to acknowledge the devastating floods that struck Texas earlier this month. As a company rooted in Texas, this is not only where we do business, but these are the communities where we serve. We are working hard to support our employees, clients and agency owners during this devastating time where tragically lives were lost. Catastrophic events such as these are unfortunately a constant reminder of why we exist. Our hearts go out to the families affected by this devastation, and our Goosehead team is here to support you. Here at Goosehead, we continue to pursue our goal to become the largest distributor of personal lines insurance in the U.S. in our founder's lifetime. We've steadily ramped our vast distribution network, which has grown to over 2,500 licensed agents and 200-plus carriers. Our growth plan centers around a few key strategic initiatives, supporting the accelerated expansion of our existing agencies, a strategy we've continued to optimize over the last several years, placing the right new franchise owners in the right geographies, expanding our corporate team to further support top decile agency growth, ramping new go-to-market motions through our enterprise sales and partnerships teams, developing new and maturing technologies to help us win the AI arms race and accelerate our path to industry leadership. I'm going to expand on each of these topics, and Mark Jones, Jr., our CFO, will provide more information about the quarter's results. First, our agency staffing program, which we call ASP, has been a highly strategic asset for Goosehead. Simply put, this program helps existing agency owners find talented agents to grow their franchises. 20 years of industry experience has allowed our recruiting function to…

Thanks, Mark, and good afternoon to everyone on the call. I'm extremely pleased with the work our management team has been doing and the substantial investments we have made in people, technology, AI and partnerships that is setting the foundation for our next phase of rapid growth at Goosehead. For the last several years, we have been delivering strong results through the most constricted product market of the last 50 years. As we look to the back half of 2025 and importantly, into 2026 and beyond, the landscape for underwriting demand and capacity is becoming increasingly clearer every day. The challenging product market has made us a much stronger company across all facets of our operations. We built a scalable infrastructure, invested in our management and human capital and developed the technology skill sets to be a company many multiples the size we are today. Mark Miller touched on the longest levers to continue to drive growth for our business. I'm going to touch on the economics of a couple of those items and provide an update for the quarter's results and outlook for the future. We've made strong progress on our efforts to expand our go-to-market strategy through our enterprise sales and partnerships team, the most rapidly growing division in the company. This team is highly nimble and strategic as it allows us to further insulate ourselves from cyclicality in the housing market and gain access to pools of clients that our traditional go-to-market strategy doesn't naturally reach, such as homebuilders and those not currently involved in a home closing transaction. This team is rapidly gaining momentum, producing 88% more new business in the second quarter than in the previous year period and growing 41% sequentially over the first quarter of 2025. We believe the growth curve of this…

And our first question for today comes from the line of Tommy McJoynt from KBW.

The first one here is you mentioned the upside to commissions as a percentage of written premiums as volumes move away from state- backed carriers and the surplus lines. Is there any way you could quantify that? Are you currently running something in the order of 25 basis points below average? Or is it a whole percentage point? Any way to roughly quantify that?

Yes. Tommy, this is Mark Jones. Over the last couple of years, as more business has shifted towards the excess and surplus lines market and the state-run plans market, there's just been a gradual and consistent decline in the average commission rate. We think we're at the point now where that is inverting back in the other direction as you're getting more of the national product available in specific regions that were pretty heavily impacted by that. So without putting a specific number on it, if you go back and look at the last couple of years, the ratio between premium to the gross numbers on the P&L to take your new business royalties divide by 0.2, your new business -- your renewal royalties divide by 0.5 and take the gross numbers from commissions and renewals, you can get to where generally the commission rate was 2 years ago and to where it is now, expect the trend to be kind of similar in terms of the recovery. So we think it's a very positive thing for the business, not just for our own economics, but also for the insurance industry in general.

Yes. And the majority of that rate shift was just mix, right?

Yes.

And so no reason they can't get back to where it was 2 years ago, just to clarify [indiscernible]. And then just a follow-up question on another area. I want to make sure I heard you correctly. You mentioned the cost of servicing being down in the second half of the year relative to the first. Is that cost of service referring to kind of the total expense base? Or what are you explicitly referring to the cost of service?

Yes, really the total cost of our service department. So not the whole back office expense base, but the service department is the biggest portion of our P&L. And this is the first time in company history, we've been able to deliver what we expect to be really strong scale out of that department in the second half of the year through leveraging AI to better route cases and meet client needs. So it's exciting for us to see those things start to materialize. But what's even more exciting is the impact that has to the client experience. It's going to continue to get better over time. And we should be able to drive incremental margin improvement in the future. Now just looking at the rest of this year, right, you got to remember, we hired a bunch of new producers in June. So their cost is not fully baked into the run rate. We have a big class coming in July and coming in August. So you should expect margin pressure in Q3 relative to Q2 and then improvement in Q4. But that comment specifically on service is to document some of the improvements we've made leveraging technology.

And you're referring to margin, excluding the contingents, right, when you talk about margin?

Correct.

Yes. And our next question comes from the line of Michael Zaremski from BMO.

I guess, a follow-up on some of the comments on kind of the mix shift timing drag in terms of the revenues versus the premium dynamics right now. Is that coming from -- if we look at like premiums per policy in force, I think it's up 4% year-over-year, so it's been decelerating. Is that what you're referring to? And is that coming from the kind of dynamic you've talked about in the past of moving -- accelerating sales in lower cost states, like, for example, Arizona, more sales there versus like historical levels in Texas? Or what other dynamics should be -- I know there's other dynamics you talked about, if you could help out, that would be helpful.

Yes. So it's 2 things. One, it's putting more business into lower premium states, which we've done that very intentionally, things like the Columbus, Ohio market for our corporate sales team generates a ton of policy productivity, but obviously, the policies there are less from a premium perspective than they are in Houston. And we've been doing that very intentionally across the country to kind of reduce Texas exposure. And now at the same time, you're getting to the point where premiums are leveling off on a growth rate on a year-over-year basis for the same policy. So everywhere outside of Texas, on average, the book is increasing at a much lower rate. Texas is still increasing pretty aggressively. But then if you talk about the actual dollars of revenue per that premium, that's come down over the last couple of years of commission rate pressure just from business mix shift, and we expect that to -- the trend to reverse in basically the same fashion in the future. And then as you think about just converting that into revenue dollars, that's where we see the revenue guidance, we still feel really confident on.

And you guys discussed some -- a lot of the new initiatives. So some of them are existing, some of them new, like the Baird & Warner, I guess, joint venture, you could call it, the servicing agreements. How many of these items, if any of them are baked into your guidance? And if they are in the guide, how material are they?

Yes. None of that is baked into the guide at this point, given those are relatively new. Baird & Warner launched their franchise in July of this year, and the Fay agreement just got done. We're really excited about those. We've made really good progress in the partnership space, and we expect that to be a really meaningful portion of the business over time. And importantly, really the best place to interject the direct-to-consumer marketplace that we're building. But none of that is baked into this year's assumptions. Those things take a little bit of time to materialize. But once they get moving, it turns into a really big snowball pretty fast.

And lastly, you talked about it, I think, a couple of times in the remarks about kind of expecting your commission rate or take rate, there might be another term for it to kind of -- I think we saw a bit of an inflection this quarter, and you expect it to continue to improve as the -- is kind of the, I guess, probably the profitability of the carriers improves and they open up their kind of their appetites a bit more. Is that -- is the line of sight fairly clear right now? Or is there still a bit of uncertainty in certain locations depending on kind of how the wind blows during hurricane season? Maybe that's always the case. But just kind of curious how -- if things sound like there -- your outlook might sound like a little bit better on that commission rate than it was a quarter ago, if I'm understanding correctly.

Yes. I would definitely say we feel like the product environment is in a better position today than it was on our first quarter call. We are seeing progress from the big admitted carriers coming back into markets in specific locations, more businesses flowing away from the state-run plans, which is a super positive thing, not just for us but also for clients. So generally feeling much more optimistic about the product environment now as opposed to the first quarter and certainly relative to last year.

And I think what we said on the last call, I'll just reiterate that the auto market is pretty wide open right now. So we've got plenty of product in every geo, admitted carriers there. And when you look at the home market, it's very geo dependent. Some look a lot better than others. But overall, I would say, improving dramatically over the last 6 months or so, and carriers are starting to run incentives for growth, things we haven't seen in a long time, which then naturally the commission rates kind of follow those national carriers in the admitted market instead of doing state-run plans, which for the last 3 years, we've had to do a lot of state-run plans because that was the only carrier that was available in certain states.

And our next question comes from the line of Andrew Kligerman from TD Cowen.

So I'd like to unpack some of the figures toward the end of your press release. Maybe starting with the total franchise producers. And you mentioned it's up 5% year-over-year. But since year-end, it's down slightly to 2,085 producers. Is there something seasonal there? Or is there -- I would have thought more -- we'd be seeing more producers on a sequential basis.

Yes. Great question, Andrew. What I would say there is it's a bit seasonal. But more than anything, what we've seen is some mergers and consolidations of the smaller franchises into the larger ones, which is very common in a franchisor sort of environment when they get to a certain age, the smaller ones start to consolidate with the bigger ones. And we look at that as very favorable to our overall ecosystem. The bigger ones will take that cash and reinvest it in producers where some of the smaller ones would not. And that's exactly what we're seeing. So we've seen a lot of orders, if you will, for our ASP program to help staff up these larger agencies. And we've got a lot of agents that started in July, and we'll have a lot more starting in August. So I think it's just a timing thing.

Yes, you should see it up sequentially in the third quarter relative to the second quarter. And like we talked about our kind of top bucket of agencies, they've got 4x as many producers per franchise as the rest of the group. And you're getting more agencies now kind of getting into that big scaling mode makes us feel really confident about the direction of the franchise community.

And then maybe moving down a bit, it looked like corporate agent productivity, both under a year and over a year, was down year- over-year. Then I looked at the franchise productivity, those under a year productivity was down. And then, of course, I guess, based on what you've been saying, those franchises with more than a year of experience, that was up a lot, like 20%. And I assume maybe that's part of the merging activity. But maybe a little color on why those other 3 components were down and why franchises with more than a year were up 20-ish percent.

Yes, sure. Happy to talk about it. So less than 1-year corporate agents, the tenure of that group is down 24% year-over-year. So productivity being down 13% compared to tenure down 24 actually means they're on a tenure adjusted basis, significantly more productive. I think that's a good thing. Now the tenure of that team will come up next year. But this year, we do have another big class in July, another big class in August. So you're going to see more tenure dilution in the third quarter. We're going to keep building that corporate team because it's the best place to launch franchises out of. That's less than 1 year -- greater than 1 year. Previous year's numbers include not as many franchise launches. So we launched a lot of agencies out of last year's greater than 1-year bucket. And if you didn't launch those franchises, you can back them out of the math, that productivity is actually up 2%. So we feel really good about that. Similar story on the less than 1-year franchises. Last year's less than 1-year franchise included 24 corporate launches. This year has only included 6 in that bucket. And we talked about how those can be up to 10x as productive as the average franchise. It makes a meaningful difference, especially in the less than 1-year group because there's just less franchises in that bucket. And then in the greater than 1 year, they just keep scaling. There's more agencies that are hiring. We feel really, really great about the direction of that team.

And then just the last one, premium retention. 99% in the year ago quarter, 95% this quarter, still good. I mean, does that -- I'm just not quite sure what that implies. Is rate coming down in some instances? Or just help me think through that.

Yes. Rate is leveling off. So the rate of increase in premiums year-over-year is leveling off. That rate is declining. Client retention is improving. Now it's still showing at 84%, but we see it basically going up basis points every single day. So we feel confident about that continuing to accelerate in the second half of the year. But we should be getting to a point relatively soon where premium retention and client retention go in the same direction, and there's just a small gap between the 2 of them for normal year-over-year pricing. I mean I've said it publicly many, many times, I'd much rather have a kind of 5% to 7% year-over-year pricing impact as opposed to a 20%. It's just a much healthier market for everybody in that situation.

And our next question comes from the line of Paul Newsome from Piper Sandler.

I was hoping you could give us a few more thoughts on that direct channel comments that you were making. Is this tied to what you had previously been working on? And I guess maybe any thoughts about what a significant investment could mean prospectively? Because I think in the past, there was some fairly heavy tech expenses that came through the system and it was something that you talked about a little bit in the past.

Yes, Paul. So to go back to the previous investments, I think you're talking about QTI investments there. And all of that stuff that we've done over the last few years on QTI help enable what we're talking about. So it opens up the connections between us and the carriers. So that code is all very valuable and still really relevant. When you think about our new enterprise opportunities that we have, there's a good opportunity to cross-sell into our existing book and sell into these enterprise clients using a direct-to-consumer sort of interface, which brings a very targeted client to the carrier, which is what they would want in a more automated fashion than what we do today. Now on the size of the tech investment, I think we're still scaling out all that, and we'll provide more color down the road, but we're working on the sizing of that project right now and staffing it.

Completely different question. Did the increased proportion of your business that was from [ state-runs ] or residual businesses policies impact the contingent commissions? Is that part of the story that you get less contingent on those kind of policies? I simply don't know the answer.

Are you asking if we get less contingent commissions associated with the renewal book?

Associated with the [Technical Difficulty] state-run plans.

Yes, yes. No, there's no contingencies associated with the state-run plans. The state-run plans are not trying to incentivize agents to put business there. It's simply there as a backstop for when there's not other product available for a client. Specifically related to kind of our forecast and guide for contingent commissions this year. Like I said in my prepared remarks, there really is a wide range of outcomes that could happen here. I mean we had a really light hail season in DFW, which is super positive for underwriter profitability. We don't know what's going to happen with hurricane season. So we'll see how that plays out. It could certainly be better than what we're expecting, although I'm not ready to promise that at this point. We'll have a lot more clarity. And certainly by the fourth quarter, likely by the third quarter, we'll have a lot more clarity on what contingencies look like for the year.

But if you just -- just so I make sure I'm not confused. If you write a higher proportion of nonresidual fund or you call them policies, that gives you more opportunities for contingent commissions. Is that fair?

Yes. Less policies on state-run plans should equal a higher percentage of policies earning contingent commissions, yes.

Our next question comes from the line of Katie Sakys from Autonomous Research.

I wanted to circle back to the 28% adjusted EBITDA margin, excluding the impact of the impairment expense this quarter. If I probably take a look at your adjusted EBITDA margins ex-contingents thus far this year, to put up expansion for the full year 2025, I think it implies fairly significant improvement over the back half of the year. Would you mind kind of walking us through where you think some of the drivers of that expansion might come from? And if possible, quantify how much margin expansion you guys are kind of getting a sight line on for the full year at this point?

Yes, Katie. So I think in a previous question, I talked about the third quarter, you should expect to see weaker margin relative to the second quarter and on a year-over-year basis because we have a significant amount of new hires coming in and also now expanding into the Nashville market in the fourth quarter and doing some of these very interesting tech investments. Margin ex-contingents, it wouldn't surprise me if it is down slightly for the full year, although we firmly believe we're making the right decisions to maximize long-term profit dollars. But as the client retention continues to improve, that could certainly aid that as our corporate agents come down the ramp-up curve and generate more productivity per agent, that generates incremental margin opportunity. But you shouldn't be surprised to see it tick down slightly in the third quarter, tick up slightly in the fourth quarter and potentially on the year, some slight compression because we're very intentionally making investments that are going to drive long-term value.

And I would say we're going to continue to be super cautious on our spending, but this is what we've been waiting for, for several years is to accelerate into the growth opportunity. And based on what we're seeing from the carriers, it's the time to press on it with more agents.

Yes, it feels like we've got a really interesting window of opportunity here where the product market is turning around. The technology is at a point now where we can really lean into it. And the partnerships that we're bringing on, which do take incremental investment to operationalize kind of each one of them. All of those things drive really nice long-term growth opportunities. And I want to make sure we're being disciplined enough to invest in those things as opposed to just arbitrarily dragging down cost.

Yes, certainly. I can appreciate a more long-term view here. I guess perhaps following up on the adjustment to the full year 2025 guidance. I think I've reconciled all the different moving pieces there and how they impact premium growth and revenue growth this year. But I assume that you guys also have more or less some sort of mental model built for 2026 at this point. Any changes to how you guys are thinking internally about the growth opportunity in 2026 and any quantification that you can provide us?

Yes. So we're not ready to give 2026 guidance at this point, but I can certainly speak in generalities about where the business is going. So going to continue to expand the corporate team, going to be placing agents in the appropriate geographies where they have the highest likelihood of success and holding people accountable to really high standards. I mean we've got multiples of industry best practice on the corporate team in terms of productivity. And same thing on the franchise side of the business. We're going to keep investing in our biggest and best agencies while pumping in new blood into the system from our MBA program, which we're feeling really good about from the veteran program and continuing to launch corporate agents into franchises. So if you break down some of the individual pieces, second half of the year, you should see really -- second half of 2025, I should say, you should see really strong acceleration in new business commissions generated from the corporate and enterprise teams. You should see new business royalty fees, relatively consistent levels of production because we've got a really good group of agencies today, and we're being really intentional about the ones that we consolidate into existing franchises. And then the pace of recovery of client retention will drive that renewal book. And obviously, that's the biggest lever to growth because it's the majority of our revenue.

And then if I could just sneak one more in. On your discussion of the recovery of past-due commissions this quarter, how much more of that do you guys see potentially still sitting ahead of you for the rest of the year? Are there other carrier partners where you still need to recover past-due commissions? And the example of the $1.5 million commission rate increase that you mentioned with a specific carrier partner, is that a one-off example? Or is that pretty representative of the degree to which commission rates are changing across your average book?

Yes. I mean that specifically is a one-off example, but we are seeing continuous improvement and specifically like engagement from our carrier partners on trying to incentivize growth in the best way as possible. I mean more and more of the conversations with carriers now are how do we get in front of your agents more frequently? What do we need to do to continue to drive growth? And obviously, one of the levers is it's compensation. We have other things in the mix with other carriers regarding commission rates, but we were satisfied to get that $4 million recovery, and that's showing up in renewal commissions and royalty fees, and that should generate another incremental $1.5 million throughout the second half of this year with improvement in the average commission rate.

And our next question comes from the line of Mark Hughes from Truist Securities.

The $4 million gain, are you able to share how much was in each category?

Yes. Renewal commissions was $3 million, renewal royalty fees was $1 million of that net. That's where they showed up. And so you can see what the revenue retention would have been absent that, which is a better guidepost for the third quarter than what you're seeing on the face right now.

Yes. And I assume were there any expenses related to that? Was there a commission payout? Or what was the flow-through from that $4 million?

Yes. Agents were -- shared some compensation associated with the recovery.

Yes. Any change in your experience, just your ability to convert leads? It seems like there's been a drop-off in kind of applications or more contracts are falling through. So are you seeing anything in terms of your ability to convert leads either because of the nature of the housing market or because of availability of product, which seems like it ought to be getting better and the housing market presumably will improve, but I'm just sort of curious what you're seeing in the short term here.

Yes. I mean product availability is beginning to improve. And so that's right now, not necessarily a significant headwind relative to the first quarter, certainly compared to the historical numbers that we're used to. The housing market and specifically kind of cancellations of mortgage applications does result in an increase in what we call false starts, basically policies that we write that don't end up actually becoming effective. That's certainly a short-term thing, which means that there's potential upside in the future to mortgage cancellations coming down.

Yes. And then one final question. The -- you had a very big increase in the corporate agent count last year. How should we think about the magnitude of what you're looking at this year again?

Yes. Last year, a bigger portion of the class started in July and August. This year, we front-loaded a little bit more of that in June, and we still do have a good-sized class that comes in, in July and August, but not quite as much relative to last year. You'll still see the numbers grow sequentially in the third quarter. And then typically in the fourth quarter, you just get kind of normal attrition and not much onboarding. So without giving you specific guidance on where the headcount is going to go, it should be up from here by the end of the year.

And our next question comes from the line of Pablo Singzon from JPMorgan.

It sounds like homeowners and personal auto have become more competitive versus several years ago, perhaps personal auto more than homeowners. As the impact of tariffs begins to roll through, do you see the environment changing and how that might affect your business?

Yes. I would say one place you'll see it is what we just talked about a minute ago, you'll see a shift to the admitted markets from kind of the state-run carriers because in a lot of places, we just didn't have the product availability. You'll also see our conversion rates are something that we look at, like how many times do you quote versus how many times do you actually close on the policy. With more product availability, you close at a much more frequent way. So each lead is worth a lot more if you can close it at a faster rate. So I believe that's what we'll see -- you'll see carriers -- we're already seeing it incentivize some growth and a commission mix upward to more profitable carriers.

Pablo, sorry, were you asking about tariffs specifically? I want to make sure we cover your question.

Yes. About tariffs, yes.

I'm sorry, I missed it. I didn't quite understand. I didn't see -- heard tariff's part.

I'm not sure that tariffs is really going to make an impact on our business. I mean there's certainly the possibility that it increases the repair cost for autos and kind of roofs and lumber, things like that. But we're obviously downstream of that. We're not the ones underwriting the product. We'll distribute it. I don't think it's going to change necessarily like severity or frequency. So maybe there's an increase in premiums associated with that, but I don't think it causes any restriction on the product market.

We certainly haven't heard anything about it from our carriers at this point.

And then second question, can you talk about demand on the new business side? So it's clearly capacity is opening up, which is good, retention is picking up too as well. But are you seeing more applications coming in and maybe because it's more shopping or perhaps underlying markets getting better like housing?

Yes. I mean we're still such a low percentage of market share in terms of home closing transactions across the country that we're still able to just go get more referral partners to maintain our lead flow. I would say definitely lead flow per referral partner is down, but our team knows exactly what to do to go develop more lead sources and continue to execute on their new business quotas. So expect that to be a tailwind in the future when housing recovers, but housing is certainly down year-over-year.

But we've been able to keep lead flow pretty consistent.

Okay. And then just last one for me. Where do you expect client retention and premium retention settling longer term, right? Because I think now we're in a period of normalization, but where do you see those 2 numbers longer term?

I mean client retention, I think our historical high was 89%. I think it's pretty reasonable to say that we get back to that over time. We will -- I would imagine we'll end up being better than that at some point, although I can't give you a specific time line on that. I mean we learn more every day about how to better serve clients' needs. And as we continue to roll out technology that makes it easier to be a client and easier to handle your own insurance portfolio and interact with us however you want to, I would expect that increases client retention over time. And then premium retention should just be a function of client retention plus pricing. So if you're in a normalized kind of 5% to 7% pricing year and you've got 89% premium retention, you should expect kind of 94-ish -- if you have 89% client retention, 94-ish premium retention.

This does conclude the question-and-answer session of today's program. I'd like to hand the program back to Mark Miller for any further remarks.

All right. I just want to thank everybody for taking the time to join the call today. I appreciate your continued support and interest. And once again, we look forward to speaking to you on the third quarter earnings call.

Thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.