Goosehead Insurance, Inc. (GSHD) Earnings Call Transcript & Summary

All right. Welcome back, everybody. So for our last session of the day, I have Goosehead Insurance. So thank you, everybody, for being here.

And maybe just to kick it off, could you all give a brief background of Goosehead, some of the things you're doing that are allowing the growth that's well in excess of what we've seen in some of the other brokers?

Sure. Thanks, Alex. Thanks for having us today. Let me start by just addressing really 2 of the problems in the industry that you said is solving for. First off, as you probably buying home and auto insurance is a terrible experience for most clients. There are consumers, quite frankly, when asked questions they don't know how to answer about their home and about vehicle represented as options that they don't understand that weren't explained to them. And then they are bombarded with sales pictures and phone calls and emails and text messages and the like. It's a very fragmented market. So we're going to have to repeat this process over and over in order to have any type of shopping experience. And if they go to a kind of comparative rating side, they're going to find out that their data is going to get sold over and over just leads to a worse client experience. So most of the time to avoid the pain, they're going to just go with one of the first couple of options they see online, which is going to mean they're going to be overpaying for their insurance or underinsured, or probably both. Goosehead makes this easier. We have a network of deeply knowledgeable sales agents with local area expertise that can shop them around 140 different insurance companies and leverage technology to do so in a very efficient way. We've also recently rolled out our digital agent, which with as little as three data points to name, address and date of birth, clients can go online and shop themselves. We've recently rolled out the additional feature where with one carrier right now, they can go all the way through the quote-to-issue process and kind of think of it like a checkout plan if they like what they see. By the end of the year, we'll have several different carriers online that make up a very meaningful portion of the business that we're in. So we're extremely excited about that. Once the client decides to buy with their insurance agents or directly themselves online, they're handed off to our service team, which is world class with a 92 net promoter score, 89% client retention. Our goal is to keep every single one of our clients for life. And so the other problem we help address is that selling home and auto insurance is a terrible experience for the agents, right? So most of the industry is made up of single carrier platforms or single platforms where they don't have the product to be competitive most of the time. So it really limits their ability to grow. They also have outdated technology to work with, and they have to build out their own service team, which is a really hard thing to officially scale. So agents that come into our system can immediately plug and play, have access to a very competitive product portfolio. They have very good technology to help make them very efficient at their jobs. And again, they have the best service team in the world that once they sell them all, so it's handed off to the service team through all the building questions and the like. So they can 100% focus on growing their business through new insurance sales. So what this has led to is a 5-year CAGR for premium of 45%, which has accelerated over the 10-year CAGR was 36%. And we have a long way to go, right? So by the end of the year, I think we'll have a little more than 50 basis points of a $360 billion industry. So we can keep doing what we're doing. We're opening this new digital agents to some of these quote-to-issue capabilities will help accelerate that back.

And look, I would just add, and I think that was pretty true at everything, but just I don't think there's anyone in the marketplace that brings to bear what we do to the personalized marketplace. That choice product platform with over 140 carriers, knowledgeable sales and service agents to help clients through the process and industry-leading proprietary technology that we've developed to address issues in the first-line space. So we've focused on personalized for nearly two decades. And there's a real benefit to that build experience current that you have and the years that stuff that you've learned from dealing with clients, agents and carriers focusing on addressing really all three of their needs.

Yes. So I wanted to expand on it a bit, especially as it relates to the operating franchises and the total franchise growth that you guys have seen. What are some of the things you're doing to drive in new partners there? I mean what is attracting people to the business that's allowing for this growth?

So as of the first quarter, we reported a 41% increase in total franchises and a 28% increase in operating franchises, the difference being just franchises that have signed a contract and get some training. So we get 2/3 of our franchisees from the captives, so [indiscernible] in all state. And these folks have very specific pain points in their business. Again, they have one product to sell. So if they can have a 10% to 20% close rate, they're doing really, really well. The next thing is they have really bad agent-facing technology. And the third being, again they have to grow their own service team. You can imagine being a distinct farm agent and you might have 2 or 3 service folks in this labor market [indiscernible] and you're now having to stop selling to recruit a new service agents and having to train them up and all that. It just really, really limits their ability to grow. So immediately, they come into our system, they can plug and play with some limited growth potential to the business.

And maybe more broadly on the environment right now. I mean, obviously, inflation is doing what it's doing. There's a lot of repricing going on. I think that probably translates to maybe a bit more shopping than it is normal. Like what are some of the challenges and opportunities associated with this kind of environment?

Inflation, obviously, as it kind of puts and takes for our new business, I think we're seeing the same cost increases that every company in the world has seen on certain fronts. We're pretty unique in that. Insurance is a very hard market right now where insurance companies are having to raise their rates. And because we are paid a percentage of the total written premium, that's essentially [indiscernible] for us and for our agents. Honestly, we tend not to focus too much on that. When you're growing premium at 40-plus percent, is kind of few points here and there don't tend to really matter. There are a lot of companies out there in the brokerage world that their entire growth strategy depends on rate and who are fortunate enough. If you think about the pillars of our growth being onboarding large amounts of franchise and corporate agents, ramping up their production to industry at levels and most importantly, retaining that business. So that's what we're focused on day-to-day. So we tend not to focus too much on rate, but a hard market and possible for the business.

And that and I think the true value of what we bring in the business is highlighted in an environment like this, the choice plan, product platform, the shopping experience, the ability to get customers appropriate insurance at the best possible cost. So I think we can deliver more in a challenging environment.

And so since this is an InsurTech conference, I did want to focus more in on the digital agent aspect of what you're doing. Could you tell us a bit more about that? Like why did you decide to build this platform? What is that opportunity? How big could that be for you?

Sure. No, we're something we're very excited about. And we rolled out really the beta version last August with only home and auto insurance. on recent added condos, renters insurance, life insurance, flood insurance and a couple of other lines. We've also added the kind of quote-to-issue capabilities for one insurance company currently. By the end of the year, we'll have several more, again, to make up a sizable portion of our new business. I think it's just that it's probably important to just take a step back and really talk about what's currently available for clients online, right? So there's really two different types of options clients are going to see when they go online. They're going to go to a direct company like the Geicos of the world or the Progressives and it has really good technology. But ultimately, you're only seeing one product option. So if you go into those sites, the chances of either overpaying for insurance or being undervalued or underinsured is pretty high. The other option that clients are going to see are some of these rating platforms are the client rating platforms. So they're just -- they're gathering your data and they're selling it to other data sellers and other insurance companies and if you want to play a good joke on a friend going there and putting their phone number in there and their stream get blown up for 2 weeks and then 12 months after that, so it's a pretty bad experience. And it's either -- they're not getting quotes or if they are, they're very unrealistic quotes, right? So I can think of one in particular that the client print says that they're going to quote you as a 65-year old male with perfect credit who drives an 85-old automobile and only drives 5,000 miles a year. And the same thing that's for auto insurance and it's the same scenarios for home insurance. What they're trying to do is drive down the listed price as much as possible. And then when you finish the process, you're going to end up paying multiples of that. It's just a very unsatisfied sales process that takes weeks. And so again, we're the only company bringing the choice product offering. We're giving accurate quotes because remember if this is driven by 3 million plus historical quotes that our agents have run, and it really drives this agent-driven machine learning that we provide very accurate quotes that fits your particular situation. And again, we're shopping you across our entire carrier platform. So we're going to give you the best choice possible. And finally, what we're excited about rolling, I don't think that many clients are comfortable buying home insurance online. I think there's more so that are comfortable buying auto insurance, but that could just be because the experience has been so terrible so far. And it's kind of too early to tell how many of our clients that go through this will buy online versus rejecting and talking to an agent. But really, our goal is to try and reach the client, however they want to reach, whether they want to go through the process themselves or whether they want to start the process, they talk to the agent. But whether they just want to pick up the phone and call the agent for the first time and have a 30-minute call and be educated and all those things, we'll be there for the clients. I think the early indications of this are pretty profound. I think the Net Promoter Score for the clients that go through this process is about 95, which is higher than our permit process. The ones that go to issue online at a very, very high cross-sell rate. So they're buying both home and auto, which is pretty remarkable. It's something that clients want both. They just have to present it to them. So again, we're really excited about it. I think it opens up the door for a lot of opportunities with our strategic partnerships and really integrated within the company that has your name, address and date of birth that wants to provide our insurance and auto insurance and other lines of business to their clients. So that's another area if you want to get into now and can just something that we feel is a nice additional growth factor for the business.

Yes. That's interesting. Maybe we could talk about just how the launch is going so far. I think you talked on your last earnings call about an initial group of carriers that you're going to go live on. And how is that process going? Where are you starting in terms of products? And yes where we'll like go from here?

Yes. So we rolled out our first -- it's an InsurTech company who -- again, it was the first to go quote-to-issue and I think since then, the Domino's have really started to fall. In fact, we're at our annual Ascend meeting, and we had 100 representatives from our carrier partners. You're announcing we called special attention to this insurance carrier said thank you, we're going to be the first company to go support to issue. And we're literally giving the e-mails live in that meeting from some of our largest insurance companies saying can I be next. And so I think it's really shown that carriers want to integrate with us that they trust us to provide our clients with a great experience but also to write good business, which is an important space that a lot of companies in the past, I can think of Google specifically have tried to do something like this, but ultimately failed because the carriers get comfortable with the product there, right. So we'll have a majority -- not majority, we'll have a large number of our carriers that were writing new business on the platform or to issue by the end of the year. We're excited about it, and we can truly determine how many of our clients will go forth with issue, but I think [indiscernible].

Yes. It's a grouping that it is traditional, national, regional or InsurTech, it's all -- give all that interest and excitement to join the platform.

Maybe next, we could talk about for the digital agent, what will the distribution look like through partnerships? I think I've seen you talk some about that as well. And it sounds pretty interesting just from the value proposition of having a choice of a number of carriers is an option to be able to go to bigger partners with that kind of value proposition sounds pretty interesting. Where do you see that going? And what stages does that -- where does that stand in terms of what stage it's in bringing some of that to fruition?

Sure. So I think it's important to just say, first and foremost, that we recognize that our core growth strategy remains in the franchise operation and with the corporate agents and continuing to grow that. However, I think this possibility creates a nice potential kind of growth factor for us. And really, again, any company, whether it's a mortgage company or a community bank or credit community financial service company, our own builder, whatever it is, anyone that has your name, address and data first and wants to provide home and auto and other lines of business to their clients, they can do so. So I think that it really opens up the door and the possibilities of [indiscernible]. And I think this is the perfect timing for us to start the strategy because it wasn't until really last August and even more so at the end of this year where we had some additional quote-to-issue capabilities that we can provide the technology that these partners would be interested in their ability for their agents to go through the process on their own or you talk to an agent. We also haven't been until recently at scale with thousands of insurance agents across the entire country to be able to handle these fleet volumes, right? We really -- I think a lot of folks underestimate the local area expertise that's needed to provide a good shopping experience for our clients, right? So someone that lives in Houston, Texas, is a lot different than someone who lives in Nebraska or some other place that might not have as much of the risk or today the California has very unique risks, Florida, really, anywhere in the country. So I think we're at a nice -- a really good point in our company where we feel comfortable passively pursuing some of these opportunities, knowing that we provide a good experience for those partners' clients, but we can also now have the bandwidth to royalty stage without putting stress in the system.

I think Mark really touched on a good point of the difficulty there is in providing this experience is high-quality, appropriate experience for clients. There's a lot that goes into building that. And I think there's examples of companies from other industries that have tried to tap in to various parts of the insurance value chain and they're having challenges doing that. So we think our digital agent offering is a nice point for a lot of companies to consider gaining that way, and at the same time gaining that expertise without necessarily having to build it because it takes time. We set ourselves our own management team that built this business. If you gave them several billion dollars today to start from scratch, it could take 5, 7 years a day to kind of build it again. There really is a value and a barrier and moat in the time that's been put into that.

Got it. Yes, I guess, high level, where are you with being able to take this and really integrate it in, like white label, it is part of partnership. I mean is there -- are you pretty close to being able to have all those capabilities ready to go? I mean is that something that you're kind of continuing to build out in addition to bringing the carriers on having the products available?

Yes. So again, we're working on all those things kind of at once actually going through our first implementation with a couple of smaller strategic partners. Again, nothing that you'll notice from a financial statement, in fact, but I think are good examples of just kind of cutting our team, building up a blueprint for implications when we can take that to partners and say, here's what we can do. So we're excited about that, and I think the larger ones are going to take a lot more time to negotiate to me. But again, I'm thinking forward a couple of years that it can provide a really nice additional growth back to the company.

All right. So when we think through over what time period, this could sort of evolve and they get to impact the financials in a bigger way, I mean what are the expectations you all have for how quickly that could occur and when we could be sitting here looking at a much bigger growth contribution coming from this part of the business?

Yes, it's kind of to be determined there, I would say, certainly not this year. I think being half way already if we landed some big partners, you probably could take [indiscernible] potentially next year, I think we'll have some additional thoughts on that as the year progresses and as the quarter progressed or if there's any kind of important thing certainly will share with you guys.

Understood. Maybe shifting gears a little bit. How is inflation impacting the business? And from expenses and having to deal with more policies being marketed and just the manpower that goes behind all of that, how is that affecting your business more broadly?

Yes, definitely. The market creates some shopping behaviors. I think we are uniquely positioned to -- for our own clients to reshop their business effectively and efficiently using technology, either through our service team or our sales team to reshop those policies quickly or the clients can again go on our website and can shop themselves if they so choose. I think it does provide an opportunity to capture some additional market share as if you're a single carrier platform, you're still having the same struggles of profitability, you're still having to increase your insurance premiums. But you have no other choice for your clients other than shape and coverage and quickly create some less shopping behavior for people and our clients to find yourself one way or another. Yes, and then on all the costs, I think it's -- we won't be unique in any of our costs that we see inflation, rent expense and [indiscernible] expense all the good stuff that everyone else is doing, I think it is impacting us. But fortunately, we are very scalable business. We're continuing to grow at a very fast clip and grow profitably. I think that's one thing that sometimes gets lost on investors given our high growth and given where this kind of drove the InsurTech name, I think it's assumed that we are a growth at all cost companies, which you are most certainly not. We still operate the business and make investments like we're a private company. And that includes a necessary ROI that we got to see before making the investment. So I think that's one area we continue to improve on. We talked about some margin expansion that we expect this year for at very, very high growth rates.

I would say that as one of our greatest differentiators. We have very strong revenue growth and incredible runway in the marketplace but we generate high levels of profit and expect to continue to grow our earnings at a very high levels to go forward as well.

And can you talk a bit about your current geographic presence? And certainly, the digital agent will probably maybe contribute to expansion as well. But even just from a franchise perspective, like how will you look to expand from a geographical standpoint?

Sure. So we are currently in 47, I believe, of the lower 48 states. Physical presence is there, either corporate offices and work franchises or both. And so it's really going to -- our continued focus will be to further penetrate those markets, especially our key markets, honestly, like 47% to 48%, we got into those -- a lot of those just because we're being opportunistic. We had a really impressive agent come to us and say, hey, I want to be your flagship Montana franchise. Montana is a very easy state to turn on. We have the national carrier product platform, so we could do so easily. I would say our main areas of focus growth are going to be in the Midwest, Illinois and Michigan, hirer good states for us, but the Eastern Seaboard, the Carolinas, Georgia and then again, in our kind of key states of Texas, California, I think those are all really good state with lots of runway for growth.

Yes. We have 18 corporate offices in various places in the U.S. And as I said here last year, we added, I think, 5%. So a significant amount of growth there. I don't think you'd expect that level of growth going forward in any given year. In fact, we talked about it in the last quarter call that our corporate side is getting to a level of scale that it's been an important support function for the franchise side, but it's getting to a size where we think we're going to be able to start leveraging some scale of that gradually over time. So I'm not saying that there wouldn't be a further expansions. But it's the amount of expansion we had last year was quite a bit, and that's going to scale nicely as we progress through the rest of the year.

One of the other questions I wanted to ask you on the growth front was just the, I guess, the increase in contribution from referral partners that you guys had mentioned recently. What's driving that? Is there something different that you are doing? Is it some dynamic in the market? Like what's driving the greater referral?

Yes, it's a great question. So I think that comment was related to a question that we get quite frequently on the housing market headwinds that we've been seeing recently. Again, we're not immune to these factors, but we're very well explained. If you look at our total revenue bar, only about 20% is tied to the housing market in any given year, so we have such a big renewal base. And so what we were talking about was the slowdown in the housing market and what that means for our business. And we've said it several times in the past, but I think we finally shared some very good data on our efforts. And anytime there's a pullback in the housing market, really our mission is to gain more share, get more with partners sending us business. And the stats we gave were during the first quarter, you saw a 44% increase in referral partner activations. So these are mortgage lenders, realtor style companies whoever who send us the lead for the various first time. And we saw a 3x increase in the reactivations. We had some this business in the past, but hadn't for in 90 days, but it started sending us leads again. So I thought it was good data to help put some color on to things that we said over again. You've seen these housing market pull back several times in our company. We've been able to grow fast through those every single time, including 2008 to 2010 and continue to use those efforts to try and grab market share in the housing market. The other thing I'll mention there is, I think something that's commonly misunderstood about you said is that we're kind of closely linked to the refinance activity. Only a very small kind of low single-digit percentage of our new business is from refinance leads. So again, I don't think there's a big headwind that's a lot of people. I think I still think there's a large number of housing market transactions that are happening in the U.S. and will allow us to continue to grow.

Makes sense. Okay. Next one was just on the capital markets volatility. When we look at the growth factor rotation and cost of capital has changed a bit. I mean what does that change, if anything, about the strategy that you guys are implementing, the way you capitalize the business?

Yes. I don't think it really changes anything. I think -- obviously, we like the stock to be where it was at the end of last year or higher. But we're focused on mortgage and control growing revenue, growing earnings, grabbing market share and delivering a good client experience, a great client experience to make that happen. So that's what we're focused on. And just from last year's CFO, it really doesn't change anything on the CapEx side. We've historically had a very simple capital structure involving some debt and dividends. We'll continue to evaluate that strategy and see if it makes no sense, but that's already anticipated a change.

I'd say that the ability to fully self-fund our growth. I think it's a huge advantage for [indiscernible], particularly one that gets a little more stress.

That's an important point back to the point of us is profitable and generating a lot of cash. We just -- we don't need to go to the capital markets. So fortunately, as we see a pullback like we do now or whether the storm and just kind of refer to back up.

Yes. Maybe pivoting back to the agent and franchise growth. Can you talk about how current labor market is impacting your ability to grow that at all. I mean has that been a material headwind? Or are there enough reasons for State Farm or Allstate brokers to want to switch over that that's not as much of an issue? Like how do we think about that as a driver for you all?

Yes, it's certainly not as easy as it was in 2020 when seemingly every other company was laying off workers and following them we were hiring and giving raises the bonuses and we really accelerated in that period. But you have to nail on the head. I mean there's over 100,000 agents that state farmers in All State. And they have those pain points regardless of the labor market, right? The pain points aren't necessarily that they're not getting paid about or whatever it is. It's that they can only sell one product. They're other employees, they're State Farm. So they have to build on book of business and grow their individual businesses. So it doesn't change in the labor markets. And again, we're not immune to any of those factors, but I think we can continue to grow given that large kind of pool of agents to fish from and given their pain points have not changed.

And maybe just to finish it off here with a pretty broad question about the future. What are the biggest objectives, the biggest things that are top of mind for you as the management team and thinking about the next few years? What are you most focused on?

Yes. Honestly, it's the same answer that I would have given a year ago. It's continuing to focus on growing our agent count with both corporate and franchise. It's ramping up their production over the first 3 to 4 years until actually from then on as well, our franchises, we continue to invest in them and helping ramp up themselves, but also taking the next step and helping that with their hiring and how to hire, how to fire, how to do the different things to grow their teams effectively. It's really a big focus of ours. And then most importantly, client retention will always be our most important focus because it's so critical to the economics of our business. Our new business, we are breakeven at best, all the economics are in the renewals. So we have to continue to review our premium and our revenue at high rates that will be a focus of ours. I think the one additional focus I would add is the strategic partnerships, but I think you just folding nicely to all those other things. We'll have the agent force. I duly just more of a shift in your go-to-market strategy compared to still going to be agents processing those leads. We're still going to have to retain those business -- that business at very high levels. So I think it just kind of hold in nicely into our current business strategy.

Great. Well, I think we're at the top of the time we had. I really appreciate you guys doing this. It's great to hear about the digital agent platform in particular. So thanks, and thank you, everybody, in the audience. We'll speak again soon.

Thanks, Alex.

Thank you very much.