Business Breakdowns
· Matt Reustle, Geoff Collette
[00:00:00] S0: When I think about the growth of the franchisees. You mentioned it a little bit there in terms of the recruiting tool. Is what you're typically seeing insurance agents from other agencies come over and create new franchises under the umbrella? Are they joining existing franchisees? I know it's going to depend a little bit, but is there anything else that goes into it besides a traditional recruiting process to open up a traditional franchise. [00:00:00] S1: From the time of its IPO through 2021, call it, the efforts on the franchising side leaned heavily on recruiting folks out of captive agencies that weren't necessarily the owners, but were motivated producers that could fit well into Goosehead's system and make a better livelihood for themselves. In the context of what Goosehead is able to sort of unleash with them? There's definitely always been a portion of folks that have no insurance background that can fit well into Goosehead's franchise system. But I think increasingly the company has been focused much more on high-quality franchise partners that have ambition to grow their business to be significant beyond one or two producers. And we can get into some of the components around that. But there was a pivot readjustment phase starting in late 2022 that has really been impactful to the level of profitable growth that the company has pursued and continues to pursue going forward. [00:00:00] S0: Maybe we can jump into that. What was the driver and the ultimate decision around what happened?
· Geoff Collette
[00:00:00] S1: Effectively, the company ran into a challenging period in 2021 and 2022 where recruiting standards had deteriorated, as they put it, resulting in a rising level of unproductive corporate and franchise agents. In addition to that, service hold times became elongated. These dynamics were amplified by a historically difficult real estate and insurance market environment. The company responded pretty forcefully with that. But I'll just walk through some of the dynamics on the housing market really quickly because that's really important to the go-to-market motion. And effectively, existing home sales drop from five and a half, six million in '21 and '22 to near four million more recently. And Goosehead has actually been able to more than offset this drop in lead flow per referral partner by adding more referral partners and actually generating materially higher lead flow per agent. Their value prop has become stronger to referral partners and clients with the housing affordability challenges that I mentioned. But it's worth noting that only 20% of Goosehead's revenue is new business and 80% of that is referral partner driven. So only call it 16% of their revenue is driven by the housing market. So what happened in 2022 was Mark Miller joined as COO in May of '22. He was a board member since the IPO. He has since become CEO in July 2024. Mark Jones Jr. was promoted to CFO in September '22. And in the second half of 2022, they basically developed a plan to refocus efforts and resources on growth that's more profitable and to strengthen its competitive moat. In short, an intense focus on operational excellence, putting in a firmer foundation for the company to scale to be a much larger business. They reorganized the sales management function, consolidating corporate and franchise sales management teams to drive significant improvements in productivity. They went through a very meaningful period of culling underperforming corporate and franchise agents and franchisees starting in late '22 that abated largely in early '24. To put some numbers around that, the corporate agent headcount peaked at over 500 in the middle of '22, troughed at around 275 in Q1 of '23 and has ramped significantly in the back half of 2024 after productivity reached excellent levels in '23.
· Geoff Collette
Corporate productivity was up 27% year over year despite those difficult housing and insurance market challenges. On the franchise side, operating franchises peaked at over 1400 at the end of '22 and has stabilized around 1100. And this is where it gets really interesting. More importantly, franchise producers has remained relatively stable, peaking at around 2100 near the end of '22. And only dipping down by about 7% in early '24 and now back up to 2100. And the company's really leaned in on partnering with a subset of franchisees who are in a position to scale further by helping them recruit new producers. So producers per franchise has increased from one and a half in '22 to 1.9 by year end '24. And franchise producers were up only 7% year over year. Yet franchise new business productivity was up 49% in 24. And what's really interesting is that when a new producer is added to a franchise, it improves the productivity of everyone in the agency. And every new producer added to a high performing franchise is equivalent to launching almost two new franchises. So what they've effectively done is taking a much closer look at where to add productive capacity into their system in the most efficient manner to drive success. And another way that they've done that is creating a pathway for very successful corporate agents to launch franchises, beginning with a very high level of productivity and ambitions to scale. In 23, 30 corporate conversions yielded the equivalent of 200 typical new franchises. And this pathway from a corporate agent to a franchise owner is now a key part of the campus recruiting effort that they bring to bear. And so in 2024, they onboarded over 800 sales agents across the business, a record recruiting effort. And EBITDA margins expanded from 14% in 2021 to 32% in 2024. And EBITDA dollars increased nearly 5x over that time period. One of the things that's most interesting is the next evolution from the company where they're building out a third distribution channel.
· Matt Reustle, Geoff Collette
[00:00:00] S0: I want to just focus on the financials for a little bit and then move on. It sounds like they had this period of time where they reevaluated the business, trimmed some fat, really focused on leading into strengths. On that EBITDA margin expansion, what did it look like in 22-23? Was there a drop before you saw that increase again in ‘24? [00:00:00] S1: The margins really dropped. The company generated EBITDA margins through 2020. In 2021, they dropped to 14% and scale from there. It's important to understand, hiring corporate producers initially weighs on profitability. They ramp pretty quickly within two years. Whereas if you're putting new producers into the franchise system, there's very little cost running through the P&L that's associated with that. Effectively, management's attention was being drawn to unproductive parts of the system. And so that culling process created a much healthier system. And they just became more efficient in sort of every way. One other aspect that's important to understand just from a P&L perspective that we sort of hit on before, but it's worth highlighting: this is franchise new business. 20% of the commissions go to Goosehead in year one and the renewals 50% go to Goosehead. So there is a mechanical increase that's very significant for the renewal side of the business. And really all the money is made in the renewal side as the business continues to mix shift to renewal. That's what's really driving the increased margin profile of the business, as is the continued mix shift to franchise and away from corporate.
· Matt Reustle
[00:00:00] S0: That all makes a lot of sense just in terms of understanding the ins and outs. If we focus on the top line, obviously there's the underwriting of policies, there's a renewal of policies. How do you just think about that formula for top line growth, whether it's recruiting new franchisees, bringing them into the system policies, anything that you can get into that describes what a reasonable rate of growth is for revenue?
· Geoff Collette
[00:00:00] S1: Gross written premiums are the leading indicator of revenue growth. Agent count is really the key driver, but really productive capacity, as mentioned before, highly productive agents versus low productive agents can have a really big difference. Aside from agent count, productivity per agent is also key. There's also a component to policy premiums growing over time. In recent years that's been very significant double digits but should trend down to a more moderate single-digit pace that will improve retention. And so the way to think about the way the company is growing is across the different programs that they have. So Corporate is roughly 20% of total producers. They are hiring more quality corporate agents with a large university recruiting program. On the franchise side, which is really the main focus, they have an agent staffing program whereby Goosehead has dedicated recruiters that are helping existing franchise accelerate their growth. They're launching additional franchises with a greater focus on franchises that have the willingness and ability to scale. They've doubled the franchise development team recently. There's corporate conversions that I mentioned before launching high-performing corporate producers into new franchises. Roughly 35 or so I believe have done that since 2023. And there's also these middle-market franchises that are partnership in nature where Goosehead's effectively embedding a franchise into other businesses that have built-in lead flow companies within real estate such as mortgage servicers. And this is actually an area of the business that's effectively going to turn into like the third leg of the stool in terms of their go-to-market strategy, which I find really interesting and is supported by a lot of what they've built over time. And it's hard to replicate their value prop that they are bringing to bear.