Goosehead Insurance Inc

NASDAQ:GSHD

Earnings Call Transcript 2018-Q3

[Operator]

Good day, ladies and gentlemen, and thank you for your patience. You’ve joined the Goosehead Insurance Third Quarter 2018 Earnings Conference Call. At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will be given at that time. [Operator Instructions] As a reminder, this conference may be recorded.

I would now like to turn the call over to your host Senior Vice President of ICR, Garrett Edson. Sir, you may begin.

[Garrett Edson, Senior Vice President-ICR]

Thank you and good afternoon. With us today are your hosts, Mark Jones, Chairman and Chief Executive Officer of Goosehead; and 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 In addition, this call is being webcast, and an archived version will be available shortly after the call ends on the Investor Relations portion of the Company's website at www.gooseheadinsurance.com.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.

[Mark Jones, Chairman and Chief Executive Officer]

Thanks, Garrett, and welcome to our third quarter 2018 earnings call. Thank you to everyone for participating on our call and for your continued interest in Goosehead. Today, I will provide an overview on the quarter and some additional perspective on our long-term strategy. I'll then hand the call over to our President and Chief Operating Officer, Mike Colby, who will discuss some of our technological investments that we expect will enhance our competitive advantage in existing channels, open additional distribution channels for us in the future and facilitate our ongoing growth in revenue and profitability. Our CFO, Mark Colby, will then follow and provide more detail about our third quarter results.

In the third quarter, we continued to realize strong organic growth across our corporate and franchise channels and we delivered another quarter of strong profitability. We continue to focus in a laser light manner on executing our strategy and we believe this will continue to allow us to create sustained long-term value for our shareholders. For the quarter revenue and adjusted EBITDA grew to $16.1 million and $3.1 million respectively. This represents year-over-year growth of 49% for revenue and adjusted EBITDA growth of 42%.

Total written premium rose 50% and policies in force grew 50% from the prior year as we continue to execute and win. On top of our strong growth, we maintain our industry leading retention rates and actually increased our world-class Net Promoter Score to 88, which I'm particularly proud of given the high bar we have already set. This quarter gave us the opportunity to demonstrate the robustness of our new business development strategy, which centers on supporting professionals involved in the home and mortgage closing process.

We normally see a seasonal slowdown in the housing market after the summer months are over and kids are back in school. However, this year the referral partners who worked with us saw a much bigger reduction in transaction volume, more than double the levels we've typically seen. Well this produce some headwinds for us that will most likely carry into the fourth quarter. We were able to quickly pivot and pickup share by adding more referral partners to our network.

In Texas, for example, Goosehead gained approximately 100 basis points of market share of home closings we ensured by the end of the third quarter underscoring our ability to respond to changing market conditions quickly, so that our growth continues relatively unabated. We believe that by the end of the fourth quarter, our continuing share gains will have offset current housing market related volume reductions.

We also remained on a rapid recruiting pace that we set during the second quarter bringing on 26 new corporate agents and adding 39 net new operating franchises to our platform as of September 30. Well, we accelerated the onboarding of agents and franchises over the past few months. We're hiring the right people and properly training them to succeed, which sets us on the path toward continued long-term sales growth as well as expanded margins and profitability.

Our franchise pipeline remains robust and provides us with an abundant opportunity for growth in that channel. Goosehead was again rated a top company to work for by the Dallas Morning News for the third year in a row in 2018. Onboarding talent and investing in our people continues to be a key driver of our success. We are investing appropriately in the business to set us up for a successful 2019 and even more importantly beyond.

For those who may be less familiar with Goosehead, I wanted to talk a little bit more about our long-term strategy and our organization. We've built a truly unique and dynamic business. There are very few companies in any industry producing organic revenue growth over 40% year-over-year while generating attractive profits. The insurance distribution industry is typically characterized by low single-digit organic revenue growth with EBITDA margins in the mid-20s. We are highly differentiated and we're disrupting one of the largest industries in the country.

We focused on personal lines and I believe we're the best in the world at what we do. One reporter with Franchise Times described Goosehead “feasting on the lackluster service provided by many rivals in the industry”. Because we have a relatively homogenous client base and product offering, we were able to create economies of scale in the delivery of world-class service and we are maniacally focused and do not get distracted by shiny objects.

Because our growth is organic and not acquired, we believe we're generating a higher quality and more sustainable kind of growth and earnings. While we can never say never if the right deal ever came to us, we do not need mergers and acquisitions to succeed. We can win long-term by executing on our current organic focused strategy. There are lots of groups playing the M&A game and they're good at it and they're competing like crazy among themselves.

We are alone in the heavy organic growth game, and we like it that way. Mike will talk about our tech investments where there are a number of really exciting developments that over time could provide meaningful additional growth opportunities. We take pride in our ability to be nimble and to quickly incorporate new strategies and technologies into our business model on an ongoing basis. You've heard us discuss on numerous occasions that we do not focus on quarterly performance. We measure ourselves by annual performance and by hitting our long-term goals.

The big opportunity for Goosehead is scaling the business as quickly as possible, creating strong growth in new business that turns into higher margin renewal business. Accordingly, we make the investments we consider prudent to facilitate and accelerate our growth. It is important to understand that unlike acquisitions, which are mostly capitalized on the company's balance sheet, when we invest in people and technology, it generally runs to our P&L and it's not capitalized.

Thus there can be a near-term impact on our earnings whenever we make strategic investments in our business. Based on our experience in history, the investments we make in human capital and technology typically provide a return within 24 to 48 months. Well we're focused on the long-term creation of value. It is hard not to notice the volatility in our stock price from day to day and week to week. It has become crystal clear to me that the only thing we can really manage or control is how we run our business, and so that is where we focus.

While we need to report each quarter and our stock trades everyday, everything we do is focused on capturing the incredible growth opportunities we have and on long-term value creation for everyone in our business ecosystem that includes our investors, employees, franchisees, carrier partners, referral partners, and of course our clients.

Rapid growth in new business will convert to rapid growth and renewal revenues in the future bringing with it expanded profitability. After 15 years with building Goosehead making the right decisions for the long-term has created an extraordinary growth machine that produces sustained cash flow and earnings. We recognize this is a marathon, a fast marathon, and not a sprint.

This company is very personal to me as Goosehead’s largest shareholder. It is my intention to personally remain the largest shareholder for the foreseeable future because I believe in our long-term market and value creation opportunities. While members of our senior management team have entered into a 10b5-1, all of us have the overwhelming majority of our net worth in Goosehead, making us fully aligned with our public shareholders.

Our board and I have ensured that our incentive compensation structure for management is completely aligned with shareholders. Our team primarily builds their wealth through stock options and outright stock ownership, which become more valuable as the stock appreciates. We do not go through the contortions that many companies do to create complex incentive plans where the management team can still get rich even if shareholder don’t. Our people make money when our shareholders do and we don't make money when our shareholders don't, full stop.

Just a couple of additional words on our senior management team. We are peculiar and I mean this in a very positive way. The team is deeply committed to winning in our industry. We let ideas compete in a marketplace to determine the best course of action. The relationship between our company and our people goes far beyond the financial relationship. There is a deep personal commitment to reaching our collective full potential and winning in our industry.

This commitment is a key driver behind Goosehead being recognized as one of the nation's top ranked company cultures by Entrepreneur magazine. We don't have any mercenaries who are here for a quick buck and move on. It's truly different and it is powerful. To sum up, we continue to believe Goosehead represents an excellent opportunity for shareholders and the management team continues to put our money where our mouth is.

We are pleased for the opportunity to demonstrate the strength and flexibility of our business development model as we successfully deal with current healthy market headwinds and we're excited to be investing in technology that will both allow us to capture the incredible growth opportunities in our current channels and importantly to add new high volume channels over time. We're energized and committed to our long-term vision and opportunity and plan to continue to refine – redefine and one of the largest industries in the country and for that matter in the world.

I'll now turn the call over to Mike Colby to discuss some of our recent technology investments and what they mean long-term for Goosehead.

[Mike Colby, President and Chief Operating Officer]

Thanks, Mark, and hello to everyone. As mark has noted on numerous occasions, innovation is part of the DNA of Goosehead. We've created an exciting and forward thinking culture where we're constantly evolving and improving our ability to deliver the best experience for our customers and our team. A major focus of ours is in the consistent investment in advancing our technology.

We've talked before about the technology platform enabling all of our strategic accomplishments and providing us with an ongoing competitive advantage. It would take an enormous amount of time, human capital and funding to replicate our platform, providing us with a very real barrier to entry. Today and on future calls, we want to take you further behind the scenes to talk more about the new capabilities we've developed and how each better positions us to win over the long-term.

While our growth in 2018 has been strong, we would also say that this year has been transformational for Goosehead with respect to the enhancement of our technology platform. Our objectives are to increase the efficiency and effectiveness of our sales and service to agents, creating productivity and client experience improvements that will lead to increase revenue and profitability over time. It's important to point out that our past and present development efforts have been focused on agent facing technology.

However, we are laying the foundation for exciting new omnichannel capabilities that will face our clients and referral partners in the future. We've developed the roadmap that we believe can leverage our technology backbone, industry expertise and accumulated experience to make Goosehead the first major insurance broker to bring a complete and integrated online choice model buying experience to the U.S. market. We believe this will create significant incremental growth opportunities for us over time.

This year our primary areas of investment have been around application integrations, data source integrations, analytics, and artificial intelligence in cybersecurity. After listening closely to our sales agents, we've integrated our comparative rating application into our salesforce platform. Now, instead of needing to enter data into multiple systems to get pricing from our carriers and process new policy sales, our agents input client data and risk rating factors into one interface, eliminating redundancy, improving accuracy and significantly expediting the entire sales process.

This integration in connection with the data source integration we'll discuss later eliminates approximately 75% of the required input fields while at the same time incorporating best practices from our top performing agents automatically into every quoting interaction, saving our agents approximately 15 minutes per quote. These new capabilities address a real pain point for our sales agents and create real efficiencies, enhancing our value proposition to both agents and clients. It's consistent investments like this that have allowed us to dramatically outperform the industry on sales productivity and client loyalty.

We've successfully rolled out this new technology to all of our corporate and franchise agents in Texas, California and Illinois and planned to be system wide by 2019. In addition to the comparative rater, we fully transitioned away from the traditional on-premise telecommunication system to the cloud with RingCentral’s unified communication platform. This has been fully integrated into our sales force environment, providing our sales and service agents with new omni-channel capabilities, enhanced call analytics, including voice analytics and new mobile capabilities.

Our agents can now engage our clients in new ways such as text messaging and live chat. Basically, we can go wherever the client goes. This addresses demand that we see from clients today to engage them in ways other than the traditional voice and email channels, creating a differentiated insurance buying experience. We've implemented this new voice technology in all of our corporate offices as well as in all of the franchise agents’ offices that have launched since the second quarter of this year. Our goal is to have it fully rolled out to the entire franchise channel in 2019.

Next, we have recently completed several critical data source integration projects within our tech platform that we expect will pay off handsomely for us as we grow. First, we've integrated with a data source that automatically pulls in property data from every single county in the U.S., providing us with information on insurable risks such as Asia home, construction type, square footage and roof type. This in connection with our comparative rating application, I previously mentioned, allows for a far more efficient and accurate quoting process, created opportunities for increased productivity and further enhancing the client experience.

Second, we've created a proprietary database that provides mortgage activity data across the country down to an extremely detailed level. Our sales agents now have the ability to market their services to large volume mortgage lenders with more sophistication and pinpoint accuracy. And finally, in partnership with our insurance carriers, we've created backend integrations that allow for increased automation in the service centers.

With these new application and data integration capabilities, we have a heightened level of visibility across our entire business cycle, allowing us to leverage exciting new technologies on the analytics and artificial intelligence front. We’re using new tools that allow our business leaders to quickly analyze large volumes of data across a number of dimensions to more rapidly assess agent performance and market opportunities.

In the future, we plan to embed these key measures into the agents user interface so that we can deliver actionable insights contextually. We're also beginning to leverage artificial intelligence to answer key business questions, uncover insights, and make predictions based on our comprehensive data. A current application of this new technology allows us to predict client defections and take proactive steps to retain our clients. We can efficiently evaluate millions of data points to make accurate predictions and leverage machine learning to make us smarter every time client effects. Client retention is the longest lever in our business, but this technology has many uses and we plan to expand it to sales, recruiting and many other areas of the business in the future.

This has been and will continue to be a massive effort by our team and to replicate these efforts would take an enormous amount of time and money. Along with enhanced efficiency, improved service delivery and better analytic capability, our technology provides us a valuable competitive mode.

In summary, you don't develop world-class customer service and our growth numbers by resting on your laurels. You need to be constantly innovating to stay ahead. That's exactly how we operate at Goosehead and the technology investments we're making now and will continue to make in the future will position us even more strongly to win over the long term. We look forward to providing you with additional updates on our tech initiatives on future calls.

And with that I'll turn it over to Mark Colby to provide some color on our third quarter.

[Mark Colby, Chief Financial Officer]

Thanks, Mike, and good afternoon to everyone on the call. Let's go right into our third quarter results. For the third quarter of 2018, we produced a 49% increase in revenues to $16.1 million compared to $10.8 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 as well as $660,000 and contingent commission payments received in the quarter that were initially expected to receive in the fourth quarter. As a result of the timing shift, we do not expect to receive any contingent commission payments in the fourth quarter.

Total written premiums during the quarter, which is a good proxy for the growth of our business, also grew 50% year-over-year to $140.3 million. At the end of the quarter, we had over 310,000 policies in force, a 50% increase from one year ago and 10% sequential growth from the end of the second quarter of 2018. We continue to produce consistent high year-over-year growth in our key performance indicators, which positions us well for long-term success.

As Mark mentioned earlier, a larger than expected slowdown in the housing market was a headwind we battled during Q3. Fortunately, our sales process and proprietary technology allow our sales agents to pivot relatively quickly to expanding market share during times of slower lead volume. However, because of the time it takes to develop relationships and truly see the benefits of additional marketing efforts, we believe new business production will also be impacted somewhat in Q4. That being said, all signs suggest our fundamental go to market strategy remains very robust and competitively defensible. So we remain confident the impact to Goosehead of these headwinds are purely a temporary phenomenon.

Based on the market share growth we are seeing, we believe by the end of Q4, we will have offset the current housing market related headwinds. Total adjusted EBITDA grew 42% year-over-year to $3.4 million, while we recorded adjusted EBITDA margin of 21% compared to 22% in the prior year period. Adjusted EBITDA growth was driven by higher margin renewal revenue in both channels in the timing of contingent commissions while adjusted EBITDA margin in the third quarter of 2018 was impacted by additional employee compensation and benefits related to our decision to accelerate hiring of franchise sales agents.

As we've noted in the past, any accelerated hiring causes us to incur more upfront employee compensation and related G&A expense, which naturally impacts our margin in the short-term, while they begin to ramp their productivity. We also made significant additional investments of a few hundred thousand dollars into technology that we believe will provide us with competitive advantages in additional markets over time.

Finally, our ongoing costs related to being a public company have proven to be approximately $100,000 more per quarter than originally anticipated. All the investments we're making in people and most of the investments we're making in technology creating the immediate P&L impact, but these strategic investments are positioning us well to further improve sales and service productivity, ultimately leading to sustained growth and margin expansion over time.

Breaking down our results by channel, in the third quarter of 2018, our corporate segment grew revenues 41% over the prior year period to $9.4 million. This growth was driven by a 65% increase in new business and agency fees revenue primarily due to a rising corporate agent headcounts to 55% as well as 19% increase in renewal revenue as the number of policies and the renewal term grew over the past year.

We're extremely pleased with the growth in new business and agency fees revenue considering the housing market headwinds we experienced and believe we will continue to experience. Our Net Promoter Score, which is the key metric of our service team, increased to 88 from 86 a year ago and it was largely responsible for the continued high levels of retention.

As of September 30, 2018, we had headcounts of 174 corporate sales agents up 55% from one year ago and up 18% since June 30, 2018. Even with the near-term impacts previously discussed, we will able to grow our adjusted EBITDA in the corporate channel, 39% in the quarter to 2.0 million. Adjusted EBITDA margin was 21% versus 22% in the prior year period. Our corporate adjusted EBITDA margin is also consistent with our prior commentary that there would be some near-term pressure given our recent and significant investments in agent hiring.

As a reminder, it typically takes several months before an employee’s commissions outpaced their base salary, but we continue to expect the investments will translate into long-term margin expansion. Additionally, we made great strides over the past couple of quarters in terms of training and onboarding the large influx of agents, which should position us well into the longer-term to win new business and gain market share. Our franchise channel generated revenues of $6.7 million, a 60% improvement from the prior year period, driven by higher royalty fees from the larger number of operating franchises as well as the greater royalty fees generated on renewal business versus new business.

We continue to refine and develop best practices for how and when our new franchises launch. An agent success is largely dependent on how successful they are during training and within the first several months of going live. Because of this, we have added more pre-training requirements, lengthening the period from signing a franchise to launching.

While better for the strength of our business, this does differ the timing of when we can recognize the initial franchise fee revenue. We expect a short-term deferral of initial franchise fee revenue of about $300,000 per quarter, which flows directly to EBITDA given the fixed nature of our training and onboarding costs. However, we believe this will yield stronger long-term results with higher margin renewal revenue driven by more productive agents.

As of September 30, 2018, we had 424 franchises operating, up 59% from one year ago and up 10% since June 30, 2018. We also continued to have a robust franchise pipeline and expect to further grow this channel. We invested an additional $250,000 in our franchise sales team during Q3, including additional hiring, traveling and other sales costs that we expect to pay off handsomely in the long-term.

Adjusted EBITDA for the franchise channel was $1.8 million, up 75% from the prior year period, while adjusted EBITDA margin was 28% versus 25% in the prior year period. The increase in adjusted EBITDA margin was driven by higher margin royalties related to policies in the renewal terms and partially offset by the delayed recognition of initial franchise fee revenues and the additional investments we made in our franchise sales department.

Remember over time the benefits from renewal revenue, particularly in the franchise channel, should lead us to achieve considerable long-term renewal growth and margin expansion as our mix of new business converts into higher margin renewable business. Net income for the third quarter of 2018 was $0.8 million compared to net income of $0.2 million in the prior year period. Included in our third quarter results were $871,000 in one-time loan origination charges from previous debt immediately recognized upon refinancing and approximately $350,000 in equity based compensation related to the IPO.

We would expect to incur some ongoing equity compensation expense as part of our overall compensation moving forward. When adjusting for those expenses, adjusted EPS in the third quarter of 2018 was $0.05 per share. On August 3rd, as we previously communicated, we refinanced our debt with a new $40 million term note payable and a $13 million revolving credit facility, reducing our borrowing costs by at least 300 basis points. The company has the option subject to approval to increase the commitments under the credit facilities an additional $50 million.

While we incurred the one-time interest expense charge in the quarter as a result of the refinancing beginning in the fourth quarter, we expect to achieve ongoing interest expense savings in excess of $1.4 million on an annual basis. As of September 30, we had cash and cash equivalents of $18.1 million as well as $48.9 million of debt outstanding.

With that, I thank you for your time and we'll now open up the call for Q&A. Operator?

[Operator]

Thank you, sir. [Operator Instructions] Our first question comes from the line of Chris Campbell of KBW. Your line is open.

[Chris Campbell, KBW]

Yeah, hi. Good evening, gentlemen.

[Mark Jones, Chairman and Chief Executive Officer]

Hey, Chris.

[Mark Colby, Chief Financial Officer]

Hey, Chris.

[Chris Campbell, KBW]

Yeah, I guess, kind of first question just talking about the trading plan, which I think will definitely help the liquidity and dampen the volatility in the stock. So I guess how should we think about modeling the dilution over time within the plan and then what variables could impact that in like a particular quarter?

[Mark Colby, Chief Financial Officer]

Yeah, really, Chris. There shouldn't be any dilution impact from it using the adjusted EPS number. We always account to make – to account for Class Bs that will be converted to Class A and the income tax impact of all that. So really the way to look at it is just kind of net income divided by the total of Class A plus Class B expenses plus a couple of adjustments which we've laid on the earnings release.

[Chris Campbell, KBW]

Okay, got it. So there's no new like options or shares or restricted shares or anything like that?

[Mark Colby, Chief Financial Officer]

No, just the options from the IPO that those are the only options that will have any kind of dilutive effects in the future.

[Chris Campbell, KBW]

Okay. And then like how – I guess how many of those would be outstanding on a share equivalent basis?

[Mark Colby, Chief Financial Officer]

There is 1.6 million shares related to the IPO. They're outstanding.

[Chris Campbell, KBW]

Okay and that's above the current share count. Correct?

[Mark Colby, Chief Financial Officer]

Correct.

[Chris Campbell, KBW]

Okay, got it. And then just kind of looking at the balance sheet, just particularly cash and cash equivalents, I know you just refinanced the debt, but you've had $18 million in the past few quarters. I can’t imagine you need that much to run the business day to day. So just how are you thinking about deploying that that into the business? Is that more technology? Could that be accelerating your growth plans, spending into new corporate offices, I guess just how are you thinking about putting that money to work?

[Mark Jones, Chairman and Chief Executive Officer]

Yeah, Chris, it's Mark Jones. As we – as I have mentioned previously, we're not in a business where you can grow faster just by throwing more money at it. We are growing as quickly as we can responsibly absorb new people and new franchises. So we will be deploying some of that cash in technology investments. And the – I think one of the really important things for people to take away from this is the insight that kind of Mike communicated when he was talking about our tech investments that we have – we are now in a position that we can start to point some of those things at consumers and at referral partners, which opens up – which will open up over time as significant incremental growth opportunities over and above anything that we've sort of built into our forecast at this point.

So we'll be using some of it for that, but primarily what we're going to do is fundamentally when we get to the end of Q1 or when we close out the year, we will determine what our cash needs are. And as anyone that heard me, I guess, we were going through the road show that asked me about this. I said, we're going to retain the cash in the business that we need to fund sort of growth. But the cash that we don't need is going to be returned to the people that own that cash, which is our shareholders. So it's premature to announce any sort of specific dividend, but I would anticipate that there will be some dividend in the first quarter.

[Chris Campbell, KBW]

Got it. And so are you thinking of that just as like an annual special dividend type of capital management process you would go through just after you finalize your budgeting process annually?

[Mark Jones, Chairman and Chief Executive Officer]

That's exactly how – that's exactly how we're thinking of it, Chris.

[Chris Campbell, KBW]

Okay, got it. That makes – that makes a lot of sense. So thanks for that color. And I guess just kind of on the homeowners headwinds, it sounds like – I mean you still – got still awesome growth rates, but it sounds like there could be a little bit of weakness relative to the strong results in homeowners lead gen. So I guess just what metrics are you seeing the biggest pressure on right now on homeowners? And then how sensitive is the new business production to the interest rate movements that we're seeing?

[Michael Colby]

Hey, Chris. This is Mike Colby. I can't speak exactly to the interest rate movement and how that's impacting the home sales. That's not my area of expertise. But I can tell you that we've seen a more dramatic decline in housing sales towards the end of the third quarter than we've seen in previous years. So what that means is our team has to pivot and find new relationships to bring online and we've started to see very good results with that as Mark mentioned in his prepared remarks that we saw about 100 basis points of share grab towards the end of the third quarter, suggesting that our team is being successful turning on those new relationships.

[Mark Jones, Chairman and Chief Executive Officer]

So we anticipate being able to sort of backfill slowness in the market as it's presented itself thus far by the end of the fourth quarter. So we'll see some headwinds for the fourth quarter, but we are really good at gaining share and we'll continue to do that.

[Chris Campbell, KBW]

Okay, got it. And then just one more if I could circle back kind of like the capital management issues. I guess just how do you think about your day to day cash needs relative to the premium you're generating, the employees et cetera like your different cost drivers? What would be like a way that we can think about kind of potentially modeling that?

[Mark Jones, Chairman and Chief Executive Officer]

Well, again, Chris, I'm very simple minded. I think it's important that we have an efficient capital structure. So that's going to include debt and equity. And that as a rule of thumb from a capital management standpoint, my rule of thumb is if your debt service costs or covenants ever have an impact on operating decisions that you're making, you've got too much debt. If they are completely irrelevant to any operating decisions you make, which our debt level is, then you're okay. So, we generate cash every month, our operations are very cash flow positive. And so as we go throughout the year, we accumulate cash.

And as I said, when we close out the year, we'll see where we're at and what we anticipate our needs are going to be in 2019 and we'll return cash that we don't need to the shareholders. I will also say that over time, we will look at making sure that we have an appropriate amount of debt on our balance sheet, so that we have an efficient capital structure. We feel like our current capital structure is nice and efficient.

[Chris Campbell, KBW]

Okay, got it. Well, thanks for all the answers and best of luck for rest of the year.

[Mark Jones, Chairman and Chief Executive Officer]

Thanks, Chris.

[Mark Colby, Chief Financial Officer]

Thanks, Chris.

[Operator]

Thank you. [Operator Instructions] Our next question comes from the line of Adam Klauber of William Blair. Your line is open.

[Adam Klauber, William Blair]

Good afternoon guys.

[Mark Jones, Chairman and Chief Executive Officer]

Hey, Adam.

[Adam Klauber, William Blair]

A couple different questions. The franchise count has almost doubled in the – maybe in the last year and a half it has doubled. Is there any reason that will slow down? And instead of that, the large numbers going from 200 to 400 to double again, you have to go to 800. So will that pace just large numbers begin to slow somewhat?

[Michael Colby]

Adam, this is Mike. Thanks for the question. We're seeing our value proposition to agents resonates strongly across the country in the markets that we're focused on. When you provide your agents with a choice model, so that they can serve their clients better when you give them smart technology to go to market and when you take all the non-sales activity – non-sales related activity away from them, they are able to grow larger books of business faster and more profitably. That is really resonating.

So, our growth year-over-year is consistent with our past years and we expect that trajectory to continue going forward. We don't see any reason why that would slow down year-over-year. At the end of Q3, we had 424 operating agencies that was up 59% from the same time last year.

[Mark Colby, Chief Financial Officer]

Yeah, and Adam, this is Mark Colby. One of the things that's really encouraging to us is the success we've had outside of Texas. During the year, we've launched over 80% of our franchises have been outside of this date and during Q3 about 90% of the franchises we launched were outside of the state, not only are we launching a bunch of outside of Texas, they're also more productive than ever outside the state. So, again, we're extremely encouraged with that.

[Adam Klauber, William Blair]

Great. And can you give us, I guess, some idea of how is that productivity, I guess, you know – the franchises is non-Texas. How is that running now compared to a year and year and a half goes? How is that improving?

[Mark Colby, Chief Financial Officer]

We're not disclosing that information right now. That will be a part of the 10-K as part of that kind of – we'd like to get a whole year of data before we disclosed that just because of some of the seasonality with the insurance market.

[Adam Klauber, William Blair]

Okay. So we can – so 10-K, we’ll be able to get better, better granular in that…

[Mark Colby, Chief Financial Officer]

Yeah, similar disclosures to what we had in the S-1.

[Adam Klauber, William Blair]

Okay, okay. Yeah, that will be helpful. But you think the productivity out of state franchise is actually getting better. Is that over time, not just quarter over quarter, is that a fair assessment?

[Mark Colby, Chief Financial Officer]

Yes, year-to-date we've seen some improvement there.

[Adam Klauber, William Blair]

Okay.

[Mark Jones, Chairman and Chief Executive Officer]

We're fortunate in that we're – that the more successful we get the more really high quality candidates we attract. And so, the gene pool is getting constantly averaged up.

[Adam Klauber, William Blair]

Okay, okay. And does it help that as you move to other states? I mean is the home value higher on average than Texas? Does it help also?

[Mark Jones, Chairman and Chief Executive Officer]

Adam, the home value is not typically the driver of insurance costs. It's the risk. So although, home values are very sort of reasonable in Texas, we have among the very highest property insurance rates in the country because you've got both hurricane exposure along the southern coast and you've got a tornado and hail exposure in the northern part of the state. And so, there is – home values are typically not the leading indicator of premium.

[Adam Klauber, William Blair]

Yeah, but that makes sense. Makes sense, okay. Then as far as talking about the impact of the housing market, when new business commissions and agents – agency fees, does that mean next quarter they may be flattish or do you think that should be down moderately compared to this quarter?

[Mark Colby, Chief Financial Officer]

Our best estimate so far is that we'll have a – probably a couple hundred thousand dollars impact on our new business revenue for Q4.

[Adam Klauber, William Blair]

Okay, okay. That's helpful. And then as I think you mentioned that giving a bit of slower market that you've – you began to pivot. I guess what are the strategies are the corporate agents and the franchises using? Is it different than going to the real estate channel?

[Mark Colby, Chief Financial Officer]

No, it's the same strategy, Adam. It's just you have to – when your current relationships slow down, and again we have a very small market share. So there is still a lot of market that we can pivot to and grab. So if I'm working with a loan officer or a realtor, whose business drops, I can increase my efforts of establishing new relationships and activating those relationships that take a little bit of time, but that's what we were focused on towards the end of Q3 and what we'll continue to focus on in Q4 is activating those new relationships to backfill for any type of decrease in volume. And we're confident that through Q4, we're going to be able to do that…

[Mark Jones, Chairman and Chief Executive Officer]

On the technology you had to pinpoint…

[Mark Colby, Chief Financial Officer]

And yeah, that's a good point, thanks. The technology that we've rolled out that I mentioned allows us to be much more effective than we have been in the past because our agents know down to the individual kind of loan officer, where the mortgage activity is happening and they can focus their efforts with precision and understanding exactly kind of where they can focus their marketing activity to generate lead volume.

[Adam Klauber, William Blair]

Okay, that’s very helpful. Thanks a lot guys.

[Mark Jones, Chairman and Chief Executive Officer]

Thanks, Adam.

[Mark Colby, Chief Financial Officer]

Thanks, Adam.

[Operator]

Thank you. [Operator Instructions] As there are no further questions at this time, I'd like to turn the call back over to Mark Jones for any closing remarks. Sir?

[Mark Jones, Chairman and Chief Executive Officer]

Thank you and thank you to everyone that has taken an interest and listen to our call. And I know many of you are shareholders and we look forward to being in business with you for the long-term. Thank you and good night.

[Operator]

Ladies and gentlemen, this concludes today's conference. Thank you for your participation and have a wonderful day.