Business Breakdowns
· Geoff Collette
[00:00:00] S1: It's massive. Anyone with a mortgage is effectively going through a mortgage servicing process. Those businesses are seeking to integrate insurance economics by embedding a franchise into their existing operations or partnering with Goosehead in what they call their enterprise corporate agents where those agents are effectively being fed inbound leads rather than the core referral partner go-to-market strategy. An example of this is a partnership with Vivint Smart Home. At year end 2024, enterprise agents grew to 65, roughly doubling year over year. That embedded middle-market franchise category is really unlocking new customer pools that are distinct from their existing go-to-market approach. They have an embedded franchise with a national bank that spans both its mortgage origination and servicing divisions. These efforts are being powered by Goosehead's proprietary technology. Its digital agent and its QTI technology really enhance the productivity of those efforts and accelerate the onboarding of new agents. Goosehead's seen a significant uptick in inbound interest from national mortgage servicers to integrate with them through one of these different options. They have a unique ability to provide product access effectively nationwide with extraordinary client service and technology that helps those brands cross-sell and makes Goosehead kind of the natural partner of choice. The pipeline for those types of partners is quite large. There's really a potential for the enterprise agent production to exceed Goosehead's traditional corporate agent approach over time. Mortgage servicers could be a massive unlock. Relatedly, DTC Auto, which we touched on earlier as part of the industry, is predominantly so-called nonstandard customers. Goosehead could potentially use its digital agent, its QTI and its partnership approach to be a leader in a different segment of the market in a manner that doesn't currently exist in the market today. They're talking about all these different aspects and today they're relatively small, but they could certainly grow in terms of the size of the overall mix and it would further temper the company's exposure to the housing market dynamics that we walked through previously.
· Matt Reustle
[00:00:00] S0: It's always interesting when you have an industry that's evolving and a player that's sitting in the front row seat to drive that evolution, even if they are smaller in size today. On that point, just in terms of navigating certain market exposure, housing exposure, what type of cyclicality do you see in the top line? I think you described a little bit from an EBITDA margin perspective, but how sensitive is this business to the economy when you see swings? I know we haven't seen a material swing necessarily in a while, but any gauge for that?
· Geoff Collette
[00:00:00] S1: It's worth mentioning at the outset of the answer to that question that anyone with a mortgage or that drives a car must have homeowners and auto insurance. It is a required purchase. It's not something that people can typically stop having in times of economic stress. Goosehead as a business is still relatively small in the context of the industry and within the home purchasing side of the business. So what they've been able to effectively do is focus on geographies that have product availability where they can match productive capacity to that. That has allowed them to navigate a historically tough environment relatively well. We didn't go into this in a lot of detail before, but effectively an agent develops these relationships with the referral partners. Well, if the lead volume per referral partner is going down because of housing market transactions, they've been able to go out and cultivate additional referral partner relationships and more than offset the decline in the home transaction market. That's been a particularly impressive aspect to the business. The most important aspect to the trajectory of the business is really around the insurance market cycle, that product availability piece. The hard market cycles are when loss trends basically unexpectedly increase such that the insurers are no longer profitable and need to go through that filing process on a state-by-state basis. As mentioned before, that can really hurt the ability to convert new business. But what we've been seeing more recently is that there is a healing process that has taken shape. Auto is out in front of homeowners insurance. The first nine months of '24 the industry statutory auto direct loss ratios were about 65% versus 75% a year ago. Many of the large auto insurance carriers are pursuing growth. Homeowners direct loss ratios were 67% versus 81% a year ago. There is that process that happens where carriers on an individual basis need to stop pursuing growth to heal their profitability. And I would just go back to like the natural hedging that Goosehead's business model has whereby as that product availability becomes more scarce, premiums are actually increasing. So while it places challenges on the new business production and can hurt retention, it's driving up the value of that renewal book.
· Geoff Collette, Matt Reustle
And as that cycle turns, it's clear that the product availability aspect, when it's pronounced, hurts them more than the increase in the premiums that they're getting. And now they're going through a cycle where through the course of '25, the premium increases are going to come down. The rate at which the renewal book improves may not happen on a one-to-one basis, but effectively their client retention should go back to historical levels and they should be able to grow on a much more unfettered basis going forward. And so we've really gone through this particularly intense period of time and the company has been able to grow very effectively right through it. [00:00:00] S0: Piecing it all together. You talked about the capital efficiency associated with the franchise model. Does the business produce cash flow? How does it manage the various capital allocation opportunities that it has?
· Matt Reustle, Geoff Collette
[00:00:00] S0: Piecing it all together. You talked about the capital efficiency associated with the franchise model. Does the business produce cash flow? How does it manage the various capital allocation opportunities that it has? [00:00:00] S1: The business does produce free cash flow, generated about $60 million in 2024. The bigger the business becomes, the larger that renewal book is. Particularly as it becomes more weighted to franchise, the higher the margin the company will have and the more free cash flow will produce. Historically, the company had not pursued share repurchases. They did in fact do so in 2024 when the stock became dislocated for some period of time, which was great to see them make that choice. They've done special dividends periodically. They just did one recently. I think the company's effectively committed to increasing margins on an annual basis, but they're really squarely focused on that long-term target of becoming the leader in the industry. And there's not a real big trade-off between growth and profitability, particularly as you add productive capacity on the franchise side. That cost isn't really being borne on their P&L. And there's that delay effect that we talked about in terms of the new business being 20% to Goosehead, but then flipping to 50% on renewals. And so you've seen revenue growth come down because the corporate agency side has slowed where franchise has remained a fast grower. But there's that effect on the accounting side where it will then catch up as that renewal takes place.
· Geoff Collette, Matt Reustle
[00:00:00] S1: The business does produce free cash flow, generated about $60 million in 2024. The bigger the business becomes, the larger that renewal book is. Particularly as it becomes more weighted to franchise, the higher the margin the company will have and the more free cash flow will produce. Historically, the company had not pursued share repurchases. They did in fact do so in 2024 when the stock became dislocated for some period of time, which was great to see them make that choice. They've done special dividends periodically. They just did one recently. I think the company's effectively committed to increasing margins on an annual basis, but they're really squarely focused on that long-term target of becoming the leader in the industry. And there's not a real big trade-off between growth and profitability, particularly as you add productive capacity on the franchise side. That cost isn't really being borne on their P&L. And there's that delay effect that we talked about in terms of the new business being 20% to Goosehead, but then flipping to 50% on renewals. And so you've seen revenue growth come down because the corporate agency side has slowed where franchise has remained a fast grower. But there's that effect on the accounting side where it will then catch up as that renewal takes place. [00:00:00] S0: On the risk side of the equation, thinking about competition, how much of a threat is either existing competition or the potential for new entrants or incumbents in new markets that they try to enter?