Greetings, welcome to the Goosehead Insurance second quarter 2019 earnings conference call. At this time, all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. I'd now like to turn the conference over to your host, Garrett Edson. Thank you. You may begin.
Thank you, good afternoon. With us today are your hosts, Mark Jones, Chairman and Chief Executive Officer of Goosehead, Michael Colby, President and Chief Operating Officer, and Mark Miller, Chief Financial Officer. By now, everyone should have access to our earnings announcement, which was released prior to this call and which may also be found on our website at ir.gooseheadinsurance.com. Before we begin our formal remarks, I need to remind everyone that part of our discussion today may include forward-looking statements, which are based on the expectations, estimates, and projections of management as of today. The forward-looking statements in our discussion are subject to various assumptions, risks, uncertainties, and other factors that are difficult to predict and which could cause actual results to differ materially from those expressed or implied in the forward-looking statements.
These statements are not guarantees of future performance, 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. In addition, this call is being webcast, an archived version will be available shortly after the call ends on the investor relations portion of the company's website at www.gooseheadinsurance.com.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 now like to turn the call over to CEO Mark Jones. Please go ahead.
Thanks, Garrett, welcome to our second quarter 2019 earnings call. As we've done on previous calls, I will provide an overview of the quarter and year to date, as well as discuss our long-term strategy. I'll then hand the call over to our President and Chief Operating Officer, Michael Colby, who will update you on our latest technology enhancements and how our ongoing innovation continues to support our high levels of sustained rapid organic growth and profitability. Our CFO, Mark Miller, will then follow and provide more details about our second quarter and year-to-date results. During the second quarter, we continued to demonstrate the effectiveness of our strategy and our execution capabilities, with growth continuing to accelerate. We delivered revenue growth of 31% to $19.4 million and written premium growth of 46% to $194 million compared to the second quarter of 2018.
The largest contributor by far to the difference between revenue and premium growth was the mix of new business being more heavily weighted to the franchise channel. As a reminder, our share of first-term revenues earned in the franchise channel is 20%, while our share of renewal revenues grows to 50%. With the franchise channel contributing 73% of new premiums for this quarter, we have spring-loaded future revenue and earnings growth as that business converts to renewal revenue next year. We also continue to invest heavily in our talent and technology enhancements with terrific results. Mike Colby will discuss our progress with our key technology initiatives in a minute. Total franchise unit count grew 55% from the second quarter of 2018 to 765, as our franchise sales team had another strong quarter, and operating franchises grew 39% to 535.
We are very encouraged by the growth and productivity we are seeing in the franchise channel, where unit productivity is up in Texas and nationally compared to the prior year, which is a combination of four things. One, we are recruiting higher-quality agents over time. Two, our investments in pre-launch training and development are bearing fruit. Three, our training programs continue to improve. Four, post-launch agency support enhances the ability of new franchises to become productive quickly. Corporate sales headcount grew 44% from 2018 to 213. As a reminder, our corporate channel is a crucial element of our competitive advantage. This channel is where our technology, our sales processes, and our best practices are tested and refined and are then rolled out to our franchises nationwide. We could not accomplish what we do in the franchise channel in the absence of our corporate channel.
For the second quarter, Adjusted EBITDA grew 17% to $4.7 million, as profits generated by our renewal business more than offset our investments in technology and talent. Policies in force increased 45% from the prior year to 408,000, and we maintained our industry-leading client retention rate of 88% and world-class Net Promoter Score of 90 year to date. As we look to the back half of 2019, we feel like we are firing on all cylinders. Premium and top-line growth in the first half of 2019 has been excellent, and we've made significant strides in onboarding new talent across the company. We also continue to innovate on the technology side, and all of this is done to further position ourselves to rapidly and responsibly expand our market share and significantly grow our business and profitability over time.
I would also like to remind our investors that management continues to be fully aligned with you. These holdings represent the overwhelming majority of each of our individual net worths. We remain fully committed to the long-term success of the company. As I said before, our management team is devoid of mercenaries out to make a quick buck and then jump ship. We have worked together for a very long time to build this company to what it is today, and intend to continue to be fully invested in reaching our full potential, industry leadership, during my lifetime. Our premium growth continues to accelerate, and we've seen continued improvement in the productivity of our franchise channel. We grow more and more confident each day about achieving our goals for the year.
I'd like to thank every member of the Goosehead family who work tirelessly every day as we build this great American business success story together. Our people are our most powerful competitive advantage, and I'm grateful for the opportunity to serve as their leader. I'll now turn the call over to Mike to update you on the progress of some of our recent technology initiatives.
Thanks, Mark. Hello to everyone. We continue on our technology innovation path, making strong progress over the second quarter. I'm excited to provide an update on our current initiatives, along with brief updates to initiatives we've discussed previously. We announced on our prior call that a client-facing technology interface was under development. We're excited to announce today that we've completed the first version of our online client portal. Consistent with our omnichannel strategy to engaging our clients, we set out to build an intuitive and robust portal for our clients to manage their accounts in a self-service capacity and engage us in their ongoing insurance needs directly online. Our first version of the client portal is focused on the new client onboarding process, where clients will have a simple and intuitive way to create an account, manage their communication preferences, sign their documents, and upload supporting documents.
Additionally, they'll be able to view all of their policies across multiple insurance carriers in one place, engage our service agents real time via chat functionality. Monitor the progress of their open service request. This portal is mobile optimized. We are currently working to develop a mobile app on the iOS and Android operating systems. We've rolled this out to a subset of our clients. We expect to have this rolled out to all new clients in the coming weeks. While our first version is indeed focused on the new client onboarding and new policy issuance processes, it's worth noting that the majority of service work occurs within these processes. We're excited to make this valuable tool available to our clients. We expect strong adoption and a meaningfully improved client experience.
As we continue to invest in deeper system integrations with our carrier partners, we'll be able to provide more robust self-service capabilities within the portal. Investments we've made in carrier and database system integrations to date, along with these early investments in providing a tool for our clients to engage us directly online, are the building blocks that will eventually be used to provide a complete quote-to-issue experience online. We also believe the client-facing portal can be a resource for our agents to engage their referral partners, further differentiating our value proposition in the home closing process and helping to establish Goosehead as the number one provider of insurance services in the U.S. to the new home buyer.
This is exciting progress towards a vision of providing the complete choice model and agent experience direct to consumers and referral partners online, allowing us to serve our clients in ways unseen in the industry today. Second, we've made significant strides in launching our first artificial intelligence application focused on improving client retention in our service centers. Over the first half of the year, we've migrated the entire organization to a new user interface within Salesforce that is compatible with this AI application. This was no small feat, requiring significant development work, training, and change management efforts. We've also built the predictive analytic model that will be the backbone of our AI capabilities.
Now, we are developing the component within the user interface that will provide real-time insight to our service agents on next best actions during a live client interaction to maximize the probability of retaining that client with us. This is scheduled to be rolled out in the coming weeks. As we mentioned on the last call, managing client retention is the longest economic lever. However, there are many value-added use cases for this new technology, including applying it in our recruiting, sales, and quality control processes. As the AI system continues to learn, and as we accumulate more data in our integrated voice solution, the power of this tool and its predictive capabilities will compound. In addition to taking these two major initiatives across the goal line, we continue to roll out our comparative rating solution in new states, mainly states that are adjacent to our larger markets.
Currently, the integrated comparative rating solution is available in states where over 90% of our new business revenue is generated. I'd like to echo Mark's comments and thank the entire Goosehead family for their enthusiastic support of these new technology initiatives, their unyielding commitment to excellence, and their willingness to manage through consistent change in order to defend and grow our competitive advantage. We look forward to providing you with more updates on future calls. With that, I'll turn the call over to Mark Miller to provide some color on our second quarter.
Thanks, Mike, and good afternoon to everyone on the call. For the second quarter of 2019, we grew revenue organically 31% to $19.4 million, compared to $14.8 million in the prior year period. This improvement was driven by strong growth in both our corporate and franchise channels from new and renewal business. Not yet reflected in these numbers is significant embedded future potential revenue growth due to high levels of new business premium being written in the franchise channel. Total written premiums during the quarter, which is a crucial leading indicator of future revenue growth, increased 46% year-over-year to $194 million. Franchise channel total written premium grew 56%, implying significant future revenue growth as the new business premiums convert to renewal premiums, and we increase our royalties from 20%-50%.
As Mark mentioned, this was the largest driver of the delta between total written premium growth and revenue growth. At the end of the quarter, we had over 408,000 policies in force, a 45% increase from one year ago. We continue to generate consistent, rapid year-over-year growth, positioning us well for long-term success. Total Adjusted EBITDA was driven by higher margin renewal revenue in both channels, producing 17% year-over-year growth to $4.7 million, while Adjusted EBITDA margin was 24% compared to 27% in the prior year period. Adjusted EBITDA margin was impacted by additional employee compensation and benefits related to investing in the hiring of corporate agents and franchise sales agents, material investments in technology, and additional public company costs.
We continue to remain focused on investing in our talent and technology to support our high levels of agent and franchise growth, the cost of most of these investments immediately run through the P&L. However, we remain confident these investments will help fuel sustained revenue growth and long-term margin expansion as the new business premiums we are winning reliably convert to more profitable renewal premiums. In the second quarter of 2019, our corporate segment grew revenues 25% over the prior year period to $10.7 million. This growth was driven by a 30% increase in new business revenue, primarily due to a rise in corporate agent headcount and a 22% increase in renewal revenue due to sustained high levels of client retention.
Our Net Promoter Score, which is the key metric of our service team and a key driver of our exceptional retention, stands at 90, up from 87 a year ago. As of June 30, 2019, we had 213 corporate sales agents, up 44% from one year ago, driven by the hiring of recent college graduates during our seasonally strongest recruiting months. As we've noted consistently, we manage the business on a long-term basis, focusing on ramping up our new agents' production over time, typically two to three years. These increasing levels of production ultimately convert into higher margin renewal revenue, resulting in high levels of sustainable profitability. Additionally, our corporate channel's contributions to our franchise channel's rapid national expansion cannot be overstated.
Not only do they help develop best practices and technology, they are crucial to our recruiting efforts and our ability to train new and existing franchises on our most recent developments. Adjusted EBITDA in the corporate channel grew 23% over the prior year period to $2.3 million. Adjusted EBITDA margin was 22%, consistent with the prior year period. The growth in Adjusted EBITDA was primarily due to the growth in renewal revenues, which more than offset the company's continued investments in growth of corporate sales agents. Our franchise channel generated revenues of $8.7 million in the second quarter, a 39% improvement from the prior year period, driven by the greater royalty fee generated on renewal business versus new business and higher royalty fees from the larger number of operating franchises.
We are very proud of the 39% revenue growth in the franchise channel, that our long-term enthusiasm lies in the future revenue growth embedded in our current new business premium as business converts to renewal and our share of revenue grows to 50% from our new business share of 20%. As of June 30, 2019, we had 765 total franchises, up 55% from the prior year, and 535 operating franchises, up 39%. As we continue to invest in the refinement of our recruiting, training, and onboarding processes, we have been seeing significantly higher levels of franchise production. Our franchise pipeline remains robust, and we are continuing to grow our franchise recruiting team to advance this channel's rapid growth.
Adjusted EBITDA for the franchise channel in the second quarter was $2.9 million, up 33% from the prior year period, while Adjusted EBITDA margin was 34% versus 35% in the prior year period. Adjusted EBITDA margin was impacted by the recognition of initial franchise fee revenues and the additional investment in our franchise sales department, and mostly offset by higher margin royalties related to policies and their renewal terms. Net income in the second quarter of 2019 was $2.8 million compared to a net loss of $23.9 million in the prior year period, which was entirely due to IPO-related non-cash equity compensation costs in 2018. Included in our second quarter 2019 results were approximately $368,000 in equity-based compensation costs. When adjusting for these expenses, Adjusted EPS in the second quarter of 2019 was $0.07 per share.
For the six months of 2019, our revenues grew 45% to $42.5 million, driven by higher commissions, agency fees, franchise royalty fees generated by the renewal business, and an increase in contingent commissions received. Total Adjusted EBITDA for the first six months of 2019 rose 56% to $14.2 million, while our Adjusted EBITDA margin was 33%, up from 31% in the prior year period. Total written premiums for the first half of 2019 have grown 46% from the prior year to $341 million. It has been a rock-solid first half of 2019 for Goosehead, and we remain very well positioned to grow rapidly and responsibly for the remainder of 2019 and beyond. As of June 30th, we had cash and cash equivalents of $8.4 million after paying the $15 million dividend declared in March, as well as $48 million of debt outstanding.
Because of our strong EBITDA growth, our debt to EBITDA ratio has shrunk to 2.1, which allowed us to access a lower interest rate tranche of LIBOR plus 200 basis points, a 50 basis point improvement. We expect to further de-lever during the remainder of 2019, and we will evaluate our leverage and cash position early in 2020. Finally, as Mark noted in his remarks, we grow more confident each day about achieving our goals for the year and are maintaining our full year 2019 outlook with respect to total written premiums and revenue. Total written premiums placed for 2019 between $700 million and $725 million, representing organic growth of 38% on the low end of the range to 42% on the high end of the range.
Total revenues for 2019 between $80 million and $85 million, representing organic growth of 33% on the low end of the range to 41% on the high end of the range. As noted before, our 2019 revenue guidance is based on ASC 605 accounting. We will report under ASC 606 on the Form 10-K for the year end of December 31st, 2019, but we will provide a reconciliation at that time so investors can understand our performance under ASC 605. With that, I thank you for your time, and we'll now open up the call for Q&A. Operator?
Great, thank you. At this time, we'll be conducting a question and answer session. If you would like to ask a question, please press *1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press *2 if you'd like to move your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment please while we pull for questions. Our first question here is from Jay Cohen from Bank of America. Please go ahead. I'm sorry, Jay, you may be on mute by accident. One more time, Jay. You may be on mute. Your line is in queue here. We'll go to the next question here from Christopher Campbell from KBW. Please go ahead.
Yes. Hi, good afternoon, gentlemen.
Hey, Chris.
Hi, Chris.
Hey, Mark, you had mentioned, I think in your opening script about you guys are doing a lot of work behind the scenes trying to get higher quality agents. I guess, have you seen a tangible impact on your productivity for the franchisees? If not, when would you expect to see that start to ramp up?
Hey, Chris, this is Mike. We are certainly seeing higher levels of productivity and higher quality revenue from these agents. Remember, it takes these new franchisees a full 2 to 3 years to fully burn in, but the early indications leave us to be very optimistic, very positive. It's a combination of recruiting better agents, also having them better prepared through our training process and better supported after they get out of our initial training. We remain very optimistic there.
Okay, got it. Are you seeing higher first-year productivity out of the newer agents than maybe you did in the 2018 cohort?
Well, it's been a consistent incremental improvement. This is nothing new to us as an organization. We've been focused on improving our recruiting capabilities, improving our training and onboarding capabilities since we've started franchising. We're certainly seeing continued progress on that end.
Okay, great. Then, I'm thinking about lower interest rates, like LIBOR's come down significantly year-to-date. What impact is that having on your homeowners refinancing leads for homeowners insurance? Are you seeing a pickup in business, with people expecting rates to decline a little bit further with the Fed rate decrease?
Without speaking to the broader housing market, I can tell you, certainly, in Texas, which is our largest market where we have the highest market share, we're seeing a very healthy housing market, and our agents are generating very high levels of lead flow. Is that from housing market tailwinds? Could be, but I think it has a lot to do with the technology we're rolling out and the strong user adoption. It's worth pointing out that regardless of any type of volatility in the housing market
If you look at our relatively low market share here in Texas, and certainly outside of Texas where we don't even register, we're not feeling the impact of those macro cycles, at least over any extended period of time.
Okay. Got it. Thanks for that color. Just switching to auto. You're thinking about the auto market. What we've seen in some of the BLS surveys and things like that is just a huge drop in rate. Is that driving more shopping behavior? What we've heard is kind of a mixed bag, is that rates have come down, that's driven less online shopping and things like that. I'm just trying to get an idea of, are you seeing a pickup in shopping behavior in for auto leads?
For us, Chris, as an independent, the beauty of being an independent broker is that the client relationship stays with us. As carriers decide to take rate or reduce rate, it changes maybe the mix of our carrier mix and our production, the client relationship stays consistent with Goosehead, that's why you're seeing those consistent levels of client retention.
Yeah, I'll add, Chris, if you think back to our go-to-market strategy of leading with the home and cross-selling the auto, we might feel those impacts a little less than your normal agency.
Okay. Got it. Just a few numbers questions. Can you give a breakout of the $194 million of premium? How much of that is Texas and non-Texas?
We don't disclose those numbers. In the Q that'll come out tomorrow, you'll see a breakout of franchise and corporate and new business and renewal. We don't break that out by state. I'll say kind of high level, if you look at our premium breakout by state, about 75% is in Texas. That's come down over time.
Yeah.
Okay. Got it. What would that have been like a-?
The overwhelming majority-
Sorry, go ahead.
the overwhelming majority of our new agent growth is coming from outside of Texas.
Okay, got it. What would that have been like a year ago? I'm just trying to get an idea of how quickly you guys are diversifying into these other states.
Yeah, sure. I think if you look back a year ago, it's probably 80, 82%.
Okay, got it. 82% of your business would've been Texas a year ago, and now it's like 75?
Yeah.
Okay.
We're rapidly expanding outside of Texas. If you look back at our-
Got it.
Our 2018 franchise launches, I think between 80% and 90% of them were outside of Texas, and that trend has certainly continued into 2019.
Great. Just one last one. I think you had mentioned investing to improve retention. Are there other areas inside the business where you're looking to, I guess, invest more where you think you could get a high ROE that we on the outside, just beyond distribution and things like that you think would improve the business?
I think that holds true across every aspect of our business, Chris. Culturally as an organization, we are committed to continual improvement and innovation. That's what helps us maximize the distance between us and the next competitor. It's something that we're highly focused on across the entire business.
Chris, it's Mark Jones. We have teams scattered throughout the company whose, this is not their only job, but these are experts, the people that are actually doing the jobs that are solely focused on innovation and how do we use our technology to get more productivity, how do we do things better, smarter, faster, higher quality, lower cost. Part of this is a little bit of a kind of the Bain legacy of being strong believers in the experience curve. We very aggressively managed an experience curve. These things are happening constantly as we go every day.
Chris, just to add one more thing to Mark's point. We talk about some of the really big technology initiatives that we're doing, and we talk about those consistently on every call. In 2018, we had over 500 different technology enhancements that we rolled out over the course of the year. In a lot of ways, it's the accumulation of those small incremental changes that over time, are the biggest drivers of our evolution. It's something that we're always focused on.
Okay, great. Well, thanks for the color. Best of luck in the third quarter.
Thanks, Chris.
Our next question here is from Jay Cohen from Bank of America. Please go ahead.
Can you hear me now?
Hi, Jay. We can hear you.
All right. There's this button, M-U-T-E. I thought it was an acronym, but it was mute. I figured it out.
Well, the fact that you're not sure tells you that you're getting old, Jay.
I think so. Hey, I did listen to all of Chris's questions, and some of them were mine anyway, so it worked out well. It does seem like you're certainly investing to improve retention. Your retention's already quite high. Can you get it much higher, or are these investments just designed to kind of keep it where it is?
Well, even a single point of retention gain when you're at 88% is really, really valuable on the margin. We want to protect what we've got, but we're always reaching for more. Always will continue to do so. That involves a lot of things. That's one of the reasons why we
Invest so heavily in our service center and making sure that our service center is the best in the world at what they do, and we're confident that they are. That's one of the reasons that we push so hard on packaging to make sure that there's no fox in the henhouse with our clients, where you may have a policy with them and another agent has another line of business. That other agent is constantly peppering the client for your line of business. We focus on that. That helps with retention. Our AI initiatives are helping with retention. It is the longest lever, so any incremental gain that we can get is good and worthwhile.
Got it. That's helpful. Relative to franchise recruitment, you suggested that the quality of the franchisees is improving. I guess I would have expected over time it'd be tougher and tougher to find the right people for your firm, but it seems to be getting better. Is that simply a matter of a larger number of recruiters?
That's part of it, Jay. If the size, the population of the target audience was a lot smaller, we might see dilution over time, but it's just so large. I think right now we have close to 70,000 leads in our pipeline, it's just a huge target-rich environment. Our franchise salespeople are better trained. We're on the call, so we can disclose this. We saw we increased headcount by-
30%
30% with franchise sales and increased signings-
51%
by 51%.
Yeah, that's year-over-year.
Year-over-year. We're getting better at everything we do. We're constantly focused on how do we do this better.
I think, too, Jay, as we see more success stories across every state that we're in, that really helps with your recruiting efforts when you have agents who are working the model and seeing a lot of success across the entire country. It definitely helps with that.
Got it. Helpful answers, guys. Thank you.
Thanks, Jay.
Thanks, Jay.
Once again, as a reminder, if you would like to ask a question, it is star one. If there are no further questions, I'd like to turn the floor back over to Mr. Jones for any closing comments.
Just would like to thank everyone for dialing into the call. We appreciate your interest and appreciate your support, and you've got our commitment to do our best to deliver a great third quarter and more importantly, a great several years into the future.
This concludes today's teleconference. You may disconnect your lines at this time. Thank you again for your participation.