Welcome to the Goosehead Insurance first quarter 2019 earnings call. As a reminder, all participants are in listen-only mode, and the conference is being recorded. After the presentation, there will be an opportunity to ask questions. To join the question queue, you may press star one on your telephone keypad. Should you need assistance during the conference call, you may signal an operator by pressing star zero. I would now like to turn the conference over to Garrett Edson, Senior Vice President, ICR. Please go ahead.
Thank you, and 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 Colby, 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, and therefore, undue reliance should not be placed upon them. We refer all of you to our recent filings with the SEC for a more detailed discussion of the risks and uncertainties that could impact the future operating results and financial condition of Goosehead Insurance. We disclaim any intentions or obligations to update or revise any forward-looking statements, except to the extent required by applicable law. In addition, this call is being webcast, and an archived version will be available shortly after the call ends on the investor relations portion of the company's website at www.gooseheadinsurance.com. With that, I'd now like to turn the call over to CEO Mark Jones. Please go ahead.
Thanks, Garrett, and welcome to our first quarter 2019 earnings call. As we've done on previous calls, I will provide an overview of the quarter, as well as discuss our unique and proven long-term strategy. I'll then hand the call over to Mike Colby, our President and Chief Operating Officer, who will update you on our ongoing technology investments and why we believe they further facilitate our competitive advantage and support high levels of sustained rapid organic growth and profitability. Mark Colby, our Chief Financial Officer, will then follow and provide more detail about our first quarter results and our outlook. Before I review the highlights of the quarter, I would like to share a few thoughts given that we just celebrated the first anniversary of our listing as a public company.
Because our disruptive and highly differentiated business model produces profitable organic growth at levels this industry has not seen, some have voiced skepticism over our ability to sustain these kind of results. We have continued this quarter to demonstrate that we can do just that, just as we have done so over the past 15 years. There is no doubt the Goosehead platform works. Those that participated in our IPO a year ago and have remained shareholders have seen their investment nearly triple. Betting on ourselves has always been a winning proposition for the management team, and we are highly aligned with our public shareholders as we continue to be the largest owners of Goosehead stock. Now let's turn to the results of another successful quarter.
The first quarter of 2019 saw us continue to build on the success of our banner 2018 and the many years prior to that with our rapid and responsible organic growth model clearly intact. On top of accelerated revenue growth in the quarter, we generated record Adjusted EBITDA dollars and margins, thanks to consistent investment in our technology and our people. Our business model has proven to be highly durable and scalable and to produce sustained growth and profitability even while we continue to invest heavily to create shareholder value over the long term. For the first quarter, our revenue and Adjusted EBITDA grew to $23.1 million and $9.5 million respectively. This represents year-over-year organic revenue growth for the quarter of 59%, driven by new and renewal business in both our corporate and franchise channels, as well as large increases in contingent commissions received.
It also represents Adjusted EBITDA growth of 86%, as strong and high-margin contingent commissions and renewal business more than offset our investments in technology and talent. Total written premiums and policies in force both grew by 45% from the prior year. We maintained our industry-leading client retention rate of 88% and once again increased our world-class Net Promoter Score to 90, which is higher than any other company of which we are aware, including Apple, Ritz-Carlton, Nordstrom, Disney, Amazon, and so forth. Our results benefited this quarter from strong contingent commissions. These represent annual bonuses we receive based on the growth and profitability of the business we add to many of our carrier partners. I would like to highlight the important role our quality control department plays in helping us earn strong contingencies.
Our 22 professional quality analysts review every policy before it is issued to check for accuracy and underwriting compliance. Their important work enables us to be precise in matching the placement of risk with the appetite of each carrier and improves underwriting accuracy, thereby enhancing the profitability of the business we write with our carrier partners. That enhanced profitability, in turn, positively impacts contingent commissions available to us. Our Q1 results are, in part, a testament to the value of our investment in quality. On the talent side, we ramped up corporate agent hiring in the first quarter, onboarding net 17 new corporate agents, and remain well positioned to grow that number further in the seasonally strongest summer months.
In addition, we added 44 net new operating franchises in the quarter as our dedicated franchise sales team continues to source excellent leads from our pipeline to help maintain the pace of growth in that channel well into the future. As I've consistently noted, onboarding top talent and investing in our people are key drivers of our success, setting us on the path toward continued long-term sales growth and expanding operating margins over time. We recently held our Goosehead annual team meeting for employees and franchise owners. This meeting is an event that brings our team together from all across the U.S. As happens every year, I was struck by how many of our franchise owners and employees, some with us for a long time, some very recent additions, made a point to share with me that the opportunity Goosehead has provided to them has fundamentally changed their lives.
I am proud that we can have that impact, our goal is to keep transforming the lives of our team members for the better. We are clear about the fact that for us to create sustained shareholder value over time, we need to be highly accretive to every member of our business ecosystem, our employees, franchisees, carrier partners, referral partners, and suppliers. Our management team is deeply committed to doing just that. As we look to the balance of the year, we are confident in our ability to sustain strong growth and profitability. Given that it is still early in the year, we have not revisited guidance and are maintaining our full year guidance for written premiums and revenue. We will evaluate this outlook at the conclusion of the second quarter and thereafter and provide further updates as appropriate.
I'll now turn the call over to Mike Colby to update you on the progress of some of our recent technology initiatives.
Thanks, Mark, hello to everyone. During the first quarter, we continued to make significant progress on the technology roadmap we've laid out on previous calls. Today, I'll provide an update on the major technology initiatives we've discussed previously and also discuss some exciting new initiatives underway. As we noted on our prior calls, the integration of our comparative rating application into our Salesforce platform and implementation into our sales operations is a key initiative, and in the first quarter, we successfully implemented in eight states, mostly in the Mid-Atlantic and Northeast regions. We're now covering states where over 80% of our new business revenue is generated. In April, we launched five additional states, Ohio, Indiana, Missouri, Colorado, and Washington, making steady progress on our plans to have this technology implemented nationwide by the end of 2019.
In addition to the national rollout efforts of the integrated comparative rating application, we've worked to optimize the application and have made improvements that allow for insurance quotes to be generated three times faster than experienced in our original version. Closely related to our comparative rating application is the integration with property, driver, and vehicle data providers. We were excited to announce at our annual meeting in April the national release of our vehicle and driver data integration. Now, with only several data points, such as name, date of birth, and home address, our agents can generate an accurate home and auto insurance quote for clients in a matter of minutes. It's enhancements to our technology platform like these, focused on driving productivity in the client acquisition and onboarding process, that create a highly differentiated value proposition for both our agents and our clients.
Over the remainder of the second quarter, we're focused on further advancements with our RingCentral voice solution in our service centers and franchise offices, bringing exciting new features such as live chat, SMS text capabilities, and speech analytics into our operations that will allow us to further enhance the client experience. Additionally, we're scheduled to launch our first artificial intelligence application focused on improving client retention in our service centers. This will provide actionable insight real time to our service agents, allowing them to identify and address issues with our clients that will increase the likelihood of them renewing with us. While client retention is the single longest economic lever in our business, we believe this to be the first of many use cases for AI to assist with driving higher levels of performance across our entire business.
Lastly, we plan to launch our first client facing technology interface by the end of the second quarter. This will be a portal for existing clients to manage their accounts in a self-service capacity and engage us in their ongoing insurance needs directly online. This is an exciting first step towards our ability to ultimately provide a complete quote-to-bind experience online to our clients. As noted before, we couldn't accomplish our strategic technology advantage without the enthusiastic buy-in from our entire team, which is a direct result of the forward-thinking culture we've created at Goosehead. We're never comfortable settling, and we're intensely focused on developing new ways to outperform our competition. We continue to invest in our technology platform and innovate as an organization, positioning ourselves to win big over the long term, and we look forward to updating you on our progress on future calls.
With that, I'll turn the call over to Mark Colby to provide some color on our first quarter.
Thanks, Mike, and good afternoon to everyone on the call. For the first quarter of 2019, we produced a 59% increase in revenues to $23.1 million, compared to $14.6 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 and increased contingent commissions. As a reminder, we receive most of our contingent commission payments in the first quarter of each year. Total written premiums during the quarter, which is a good proxy for the growth of our business, grew 45% year-over-year to $146.9 million. At the end of the quarter, we had over 365,000 policies in force, a 45% increase from one year ago. We continue to generate consistent year-over-year rapid growth, positioning us well for long-term success.
Total Adjusted EBITDA grew 86% year-over-year to $9.5 million, while Adjusted EBITDA margin was 41% compared to 35% in the prior year period. Adjusted EBITDA and Adjusted EBITDA margin growth was driven by higher margin renewal revenue in both channels and increased contingent commissions received, partially offset by additional employee compensation and benefits related to accelerated hiring of franchise sales agents, increased number of operating franchises, and material investments in technology, as well as public company costs. As a reminder, the cost of most investments we're making in talent and technology run through the current P&L. However, these investments provide opportunities for improved sales and service productivity over time, which should fuel sustained growth and long-term margin expansion. Breaking down our results by channel, in the first quarter of 2019, our corporate segment grew revenues 52% over the prior year period to $12 million.
This growth was driven by a 34% increase in new business revenue, primarily due to a rise in corporate agent headcount of 52% from one year ago and a 23% increase in renewal revenue as the number of policies in the renewal term grew over the past year. We also recorded a tripling of contingent commissions due to significantly higher total written premiums and producing increasingly profitable business for our carriers. Our Net Promoter Score, which is the key metric of our service team, increased to 90 from 87 one year ago and was largely responsible for the continued levels of high retention. As of March 31st, 2019, we had a headcount of 184 corporate sales agents, up 52% from one year ago as we re-energized our recruiting efforts during the quarter. As we've noted consistently, we manage the business on an annual and long-term basis.
As a reminder, because of our on-campus recruiting, the summer months are historically our largest for corporate sales onboarding. As our new agents become seasoned and ramp up their production and profitability over time, their production ultimately converts into higher margin renewal revenue. Adjusted EBITDA in the corporate channel grew 140% over the prior year period to $4.7 million. Adjusted EBITDA margin was 40% versus 25% in the prior year period. The growth in Adjusted EBITDA and margin was primarily due to the growth in renewal revenues, as well as contingent commissions received, which more than offset the company's continued investments in growth in corporate sales agent headcount.
Our franchise channel generated revenues of $11.2 million in the first quarter, a 66% improvement from the prior year period, driven by the greater royalty fee generated on renewal business versus new business, higher royalty fees from a larger number of operating franchises, and increased contingent commissions received. As of March 31st, 2019, we had 501 franchises operating, up 47% from one year ago. As we've noted previously, the period from signing a franchise to launching has lengthened due to additional best practice requirements we've instituted to ensure stronger long-term results and productivity. That said, our franchise pipeline remains robust, and we are continuing to invest significantly in our franchise sales team to continue the channel's rapid growth, which we believe will pay off very well for the company over the long term.
Adjusted EBITDA for the franchise channel in the first quarter was $5.6 million, up 80% from the prior year period, while Adjusted EBITDA margin was 50% versus 46% in the prior year period. The increase in Adjusted EBITDA margin was driven by higher margin royalties related to policies in their renewal terms and higher contingent commissions received, and partially offset by the delayed recognition of initial franchise fee revenues and the additional investment in our franchise sales department. Net income in the first quarter of 2019 was $7.3 million compared to net income of $3.8 million in the prior year period. Included in our first quarter results were approximately $368,000 in equity-based compensation costs. When adjusting for those expenses, Adjusted EPS in the first quarter of 2019 was $0.18 per share.
As of March 31st, we had cash and cash equivalents of $18.4 million, as well as $48 million of debt outstanding. On April 1st, we paid a special cash dividend of $15 million, or $0.41 per share, to holders of record as of the close of business on March 18th. Finally, as Mark noted in his remarks, we are maintaining our full year 2019 outlook with respect to our total written premiums and our revenue. Total written premiums for 2019 are between $700 million and $725 million, representing organic growth of 38% on the low end of the range and 42% on the high end. Total revenues for 2019 are between $80 million and $85 million, representing organic growth of 33% on the low end of the range to 41% on the high end. 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 how we would've performed under a full year of ASC 605. With that, I thank you for your time and will now open up the call for Q&A. Operator?
Certainly. We will now begin the question and answer session. To join the question queue, you may press star one on your telephone keypad. You will hear a tone acknowledging your request. If you're using a speakerphone, please pick up your handset before pressing any keys. To withdraw your question, please press star two. We will pause for a moment as callers join the queue. Our first question comes from Christopher Campbell with KBW. Please go ahead.
Yes. Good afternoon, gentlemen.
Hey, Chris.
Hey. Congrats on the quarter.
Thank you.
Great. I guess just a few questions, mostly around the contingents and things like that. I guess just how much of the revenues were contingents this quarter? I think Mark said something in his script about contingents being three times what they were a year ago.
That's about right. Combined, they were $7.5 million for this quarter, compared to $2.8 million in the prior year quarter.
Got it. Then I guess just, kind of what drove most of that? I guess are all your contingents now in the first quarter and not in the other three quarters? Is that how we should think about timing of those?
Most of our contingencies are received in the first quarter. Historically, there's been one carrier that we received in either the end of the third quarter or beginning of the fourth quarter, and that's still on the table.
Okay. Got it. Thinking about second quarter, there shouldn't be any contingents, correct? We should see-
No
kind of margin-
Nothing material
over at Sorry, go ahead.
Sorry. Nothing material.
Okay. Got it. Then that $7.5 million, how does that break out between franchise and then the corporate channel?
There'll be some more detail in the Q about that. Pull it up real quick. Sorry, Chris.
Over the last two years, being high.
$3.2 for corporate and $4.2 for the franchise channel.
Okay.
What's been interesting, Chris, this is Mike, is that when you look back over 2018, 2017, two of the worst catastrophic loss years that we've seen on record, I think it's a testament to our quality control efforts that we've been able to navigate through that and see increasing contingent commission revenue kind of every year since then.
Yep. Got it. Then the mortgage pipeline, I guess that was an issue, and have you guys kind of rectified that? Have you guys got it back to where you were before?
If you look at our market shares, specifically in Texas, which is a pretty good proxy, robust of our businesses, we went from around 11% market share in the fourth quarter to 14% for the first quarter of 2019. Yeah, our ability to kind of pivot and start grabbing share has really started to pay off.
Got it. Are you seeing similar trends in your newer states like California, Florida, Illinois?
Yeah, again, it's a much smaller sample size, but we've seen success nationally.
Okay. Got it. Just one last-
The market share outside of Texas, Chris, doesn't even register.
Okay. Got it. All right, just one last one on the franchise fees. I noted that helped drive revenues in franchise in 4Q. Didn't look like it was mentioned this time. I guess just what trends are you seeing on the initial franchise fees between first quarter of this year versus last year?
Yeah. As we've mentioned, in Mark's remarks and my remarks, we've seen kind of a delay in people coming to training, and that's on purpose. We've changed a lot of the onboarding tactics to make sure people are fully ready to commit to this business model in full, before they start with us. What we've seen is kind of a little bit of delay towards the end of last year, and that's continued into this year.
I think the important takeaway there, Chris, is that
Just kind of digging into that a little bit more. I know you guys have seen your retention was probably a little bit better than you expected in franchise. I guess just what is the impetus behind delaying the franchise channel if retention is lower than where you would plan?
Yeah, Chris, what we're focused on is we're focused on successful launches for our agents. There's a lot that goes into them, having a successful exit from where they're at currently to successfully onboarding and launching with us. Our primary concern is not about expediting that process to expedite the recognition of our franchise fee revenue. It's about a quality experience for that agent. If you look at our pipeline of our franchise agents, it's very strong. We're recruiting better and better agents every year. We're launching them more successfully every year, which I think kind of justifies our approach there. We're focused on the long-term value that those agents can create over a career with us, and having a successful launch provides just a lot more kind of lifetime value from that agent rather than focused on that initial franchise fee.
That makes sense. Just one last one, if I may. What retention trends are you seeing in the corporate and then franchise channel?
Very consistent trends with what we've seen historically.
Okay, great. Well, thanks for all the answers. Best of luck in the second quarter.
Thanks.
Thanks, Chris.
Once again, if you have a question, please press star one. Our next question is from Jay Cohen with Bank of America, Merrill Lynch. Please go ahead.
Thank you. Chris asked a lot of my questions. Just one follow-up on the contingent question. Is it fair to say there was nothing unusual in the contingents in the first quarter? In other words, as we look into 2020, that should kind of grow with your earnings. There was nothing unusual this quarter. Is that fair?
That's fair to say. We did have one new contingency this year. We have every reason to believe that that will continue into the future. It's proportionate with our total written premium growth and the value that we're creating for these carriers. I agree with that.
Jay, it's Mark Jones. One of the things, as you know, the way that loss ratios are calculated, they're based on earned premium as opposed to written premium. When you're in high growth mode like we are, just the math works against you a little bit from a loss ratio standpoint. What we're really realizing, or you're seeing run through our financial statements, is the value of our investment in quality. It is that precise risk placement, it is the underwriting compliance that improves loss ratios. That has overwhelmed just the arithmetic where we're measured on loss ratios based on earned premium as opposed to written premium.
Got it. On the quality issue, it's a very interesting point. I'm wondering, is there some measure that you can say, for example, a certain percentage of your business goes through with a mistake versus a typical independent agency? Is there any way you could compare your quality quantitatively versus a typical agent?
Yeah. Our carriers don't make that available to us. It's beyond just errors in the underwriting process. It's also about identifying the type of risk that the carrier wants and being able to place that risk with precision. There's a lot of risk that a carrier may not want on their books. Their system doesn't prevent it, even if it's underwritten accurately, it doesn't prevent it from being written. I'd say that's probably the biggest value-added component of quality control, is being able to understand, kind of with our partners, what are their business objectives, what are they seeing kind of real time in their loss trends, and being able to react very quickly to that.
If a carrier files a rate and they see maybe quickly that they're positioned for higher losses than expected, and they communicate those details with us, we can make a systematic change in our agency management system, and that will be the last time we place that type of risk on their book of business. I'd say there's obviously a component of accuracy and holding to the underwriting guidelines, eligibility guidelines, but really it's about understanding what they're seeing be profitable for them and being able to quickly react to that and place that type of business with them.
Just to follow up on that, because you have that capability, and I guess I could argue most independent agents really just couldn't do it just because of their size. Are you able to get, I'll use the word better, more attractive terms for your contingent deals with the carriers than a typical mom-and-pop independent agent?
I think absolutely. One is, I think the mom-and-pops just typically aren't at a scale where they would really kind of have a material benefit from those type of arrangements. It's about two things. It's about growth, and it's about underwriting profitability. You have to be able to deliver both to really maximize your opportunity there, and that's where we shine.
My last question.
mom-and-pops aren't growing
Right. Exactly. Last question on the franchise side. You just passed one year as a public company, and I'm wondering if you could just reflect on any surprises, either good or bad, that you've had in th e franchise model.
I don't think being a public company has impacted our franchise business. The people that are involved in running the public nature of the company are very focused. It's a very specific group, everyone else is focused on executing their business as opposed to focused on the share price. I explicitly tell people, "Don't look at the price of the stock," because looking at that isn't going to help. What's going to help is you doing your job, and we reiterate to people that we're here for the long term, the management team is here for the long term. There's no mercenaries among us, and we're going to continue to sort of focus on reaching toward our full potential, which is industry leadership.
Being a public company hasn't impacted that other than sort of raising people's aspirations, I think, a little bit about the kind of organization we are. There's been no distraction associated with it.
I agree with that completely. I would say anecdotally, Jay, that maybe there's a heightened sense of awareness from our franchise candidates as we're kind of marketing in these new territories. I would say just feedback from people in that process, the additional level of transparency, being a publicly traded company and having our filings that they can read through has been positive.
Yeah, I probably misphrased the question. I don't mean really the effect of being a public company. I'm just saying, we've known you for about a year. You've been scrutinized by new people for about a year. I just want to get a sense, as you look back over the last year, forget the fact that public, not public, what has surprised you, either good or bad, in the franchise channel?
I don't think there's anything in the franchise channel. The only thing that has surprised me, I chalk this up to rookie mistake as a newly public company CEO, was on our third quarter call. In the interest of trying to be transparent, I noted that we were facing some housing market headwinds. I tried to go on and explain what we were doing to address that. No one listened at that point. They just heard housing market, we saw some sell-off in our stock. When we announced the fourth quarter, we were able to sort of back that up, back my statements up from the end of the third quarter, and tell people that, yes, our system works. We've fully recovered all of the volume that was impacted by housing market headwinds.
I think I learned a little bit how to talk to the investing public a little bit more. Other than that, there hasn't been a lot of surprises.
Got it. Thanks.
Thanks, Jay.
This concludes the question and answer session. I would like to turn the conference back over to Mark Jones for any closing remarks.
I'd just like to thank everyone for joining us on this call. We appreciate your support, and I'll just reiterate our management team's commitment to delivering a great business, something special. Thank you.
This concludes today's conference call. You may disconnect your lines. Thank you for participating and have a pleasant day.