Goosehead Insurance Inc

NASDAQ:GSHD

Earnings Call Analysis

Substantial Q3 Growth Despite Market Headwinds

In Q3, total written premiums surged by 30% to $803 million, while total revenue climbed 23% to $71 million. Despite challenges in product availability and housing market declines, the company achieved lead generation growth of 18% with a focus on streamlining operations and sales productivity, which should sustain into the future. Adjusted EBITDA soared by 104%, reaching $22.4 million with an adjusted EBITDA margin of 32%, up from 19% a year ago. Looking ahead, 2023 full-year guidance remains optimistic with total written premiums projected between $2.87 billion and $2.99 billion, corresponding to a 29-35% growth, alongside anticipated revenue between $260 million and $267 million, marking a 24-28% increase.

Building a World-Class Team and Strong Year-End Position

The company has focused on transforming its operations by building a team of experts, particularly technologists from outside the insurance industry, to enhance its Quick Quote & Issue (QTI) platform. The platform aims to simplify insurance sales and servicing, allowing agents to efficiently learn and work within a singular system rather than numerous carrier-specific systems. Investments in corporate distribution and talent acquisition have resulted in a 28-73% productivity increase among agents, while new recruits are reportedly 50% more productive than the prior year's class. Success stories like that of Bryson Ramsey from their Austin office, exemplify the effectiveness of the company's approach to attracting and retaining talent.

Strategic Response to Market Challenges and Operations Improvement

Despite market headwinds with product challenges, the company boosted sales production by creating a record number of referral partnerships and implementing an 18% increase in lead generation year-to-date. These strategies have offset the dip in bind and package rates, enabling agents to achieve new business growth. The service function has also been strengthened by increasing the service headcount by half and opening a new service office in Orlando, Florida, to cater to specific geographic needs. These improvements emphasize the company's adaptability and commitment to client retention and satisfaction.

Impressive Third Quarter Financial Results and Positive Outlook For Future Growth

With total written premiums increasing by 30% to $803 million, including a 34% rise in franchise premiums and a 21% increase in corporate premiums, the company demonstrated significant growth despite market difficulties. Revenue also grew by 23% to $71 million. These achievements set an optimistic tone for further expansion, with expectations of higher productivity among producers and improvements in retention rates leading to a re-acceleration of policy in force growth rate in 2024.

Prudent Financial Management and Strong Balance Sheet

The company managed to keep operating expenses in check with only a 4% increase compared to the previous year. Adjusted EBITDA rose by an impressive 104% to $22.4 million, and EBITDA margins expanded from 19% to 32%. Furthermore, with cash, cash equivalents, and available credit lines, the company maintains a robust balance sheet, providing significant financial flexibility for future growth and value creation.

Advancing Margin Goals and Financial Position

While the quarterly contingent commissions were reported at $4.8 million, the company is on track to maintain these contingents around 40 basis points of premium for the full year. Looking ahead, the firm aims to achieve margin growth from the current base. With an intermediate goal of over 30% margin and a long-term vision at around 40% margin, the company confidently advances its financial goals while managing growth-related expenditures.

2023 Guidance Confirms Continued Growth

The company reiterated its full-year 2023 guidance, projecting total written premiums to be between $2.87 billion and $2.99 billion and total revenues anticipated to fall between $260 million and $267 million. This reflects expected growth rates of 29% to 35% for premiums and a robust revenue outlook, signalling sustained momentum into the upcoming year.

A Robust Business Model with Upward Trajectory

Management underscored the strength of the company's business model, pointing out that the majority of contingencies stem from a few carriers, and emphasized the company's market value, especially during challenging times. They also noted the integration of digital aspects in the company's strategy and clarified that despite contingencies being primarily loss ratio-based, they imply more than 40 basis points for the full year, confirming the business's upward trajectory and potential.

Earnings Call Transcript 2023-Q3

[Operator]

Hello, and welcome to Goosehead Insurance Third Quarter 2023 Earnings Conference Call. [Operator Instructions]I would now like to hand the conference over to your first speaker Dan Farrell. You may begin.

[Dan Farrell, executive]

Thank you, and good afternoon. 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. 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 SEC filings for a more detailed discussion of the risks and uncertainties that could impact future operating results and financial condition of Goosehead Insurance. We disclaim any intention or obligation to update or revise any forward-looking statements except to the extent required by applicable law.I would also like to point out that, during the call, we will discuss certain financial measures that are not prepared in accordance with GAAP. Management uses these non-GAAP financial measures when planning, monitoring and evaluating our performance. We consider these non-GAAP financial measures to be useful metrics for management and investors to facilitate operating performance comparisons from period to period by including potential differences caused by variations in capital structure, tax position, depreciation and amortizations and certain other items that we believe are not representative of our core business.For more information regarding the use of non-GAAP financial measures, including reconciliations of these measures to the most recent comparable GAAP financial measures, we refer you to today's earnings release.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 goosehead.com.Now, I'd like to turn the call over to our Chairman and CEO, Mark Jones.

[Mark Jones, executive]

Thanks, Dan, and welcome everyone on the call. Our third quarter results continue to demonstrate the strength and consistency of our business, even in the face of substantial macro headwinds around both product availability and housing activity.For the third quarter of 2023, total written premiums increased 30%. Total revenue grew 23%. Adjusted EBITDA was up over 100% from a year ago, with adjusted EBITDA margin expansion of 13 points to 32%.I'm very pleased that we have continued to make strong progress on the strategic goals we laid out at the beginning of the year. Driving producer productivity improvement in both corporate and franchise networks. Upgrading the quality of our producer force by raising the standards of our recruiting process, to ensure the best possible talent acquisition for the company, focusing our resources on scaling our highest potential franchise partners, investing in technology efforts to progress toward creating quote-to-issue capabilities for our agents, clients, and carrier partners and strengthening our management capabilities to support accelerating growth and driving a culture of excellence throughout the organization.Our results this year are unfolding just as we expected. The strategic actions around quality in every part of the organization have resulted in significantly higher margins and a stronger, more sustainable base to support re-accelerating growth. As we continue improving the quality and consistency of our distribution force through the remainder of 2023 and beyond, the next phase of our execution will be driving re-accelerating new business production growth in 2024, which we expect to spring load into strong revenue and earnings growth in 2025 through a combination of producer headcount growth, further agent productivity improvements, particularly in franchise distribution, continued focus on retention, and increasing momentum of our digital business and partnerships.With our improved foundation, we're in a strong position to execute on these growth objectives and deliver a combination of headcount and productivity improvement over time that will support our goals of a 30%-plus compound annual growth rate in premium through at least 2027. As our growth accelerates, we'll be doing so at much higher margins than we have historically. As we stated previously, we believe long-term margins will be in the 40% range.Let me take a moment and share some brief thoughts on key areas of the business, and Mark Miller will provide more detailed comments in his remarks. With the tremendous improvements we've made in corporate productivity, we were very excited again to start growing our corporate sales force this quarter. Despite the addition of a significant number of new agents, we've continued to drive strong productivity growth, with overall agent productivity up 42% compared to a year ago.I'm particularly excited about the caliber of talent we're attracting from college campuses. Our ability to articulate the opportunity for business ownership through our franchise offering provides a truly unique and extraordinary career opportunity with a clear path to a 7-figure income, and that is resonating incredibly well on campus. We're now operating at very high levels of corporate agent productivity, and we look forward to unlocking even stronger productivity as macro headwinds moderate.Our scale corporate agent team is unique to Goosehead. We believe there is no other more productive group of agents in the personalized space. Our corporate agency also serves as a rich recruiting pool for future franchise agents, and the average corporate conversion to franchise is more than 5x as productive as franchises we hunt in the wild.Accordingly, growing this talent pool is a strategic priority for us and a key future growth driver. Brian Pattillo has done a tremendous job turning our corporate distribution around to achieve record levels of agent productivity. Given his powerful contributions over time, we've promoted Brian to Executive Vice President with oversight across both our corporate and franchise distribution networks. I look forward to Brian's continued leadership to drive overall growth and profitability.In the franchise network, we're continuing to improve the quality of our agent force and are seeing corresponding improvement in producer productivity. During the quarter, our franchise new business productivity increased 18% compared to a year ago, and the runway for further franchise productivity growth is substantial. We continue to put increased focus and resources on scaling our highest potential franchises, adding 107 producers to existing franchises in the quarter.As a reminder, agents that are added to successful franchises are substantially more productive than the average new franchise. We also recently hosted a mega agency retreat, which was focused on supporting our most promising franchises in their expansion efforts and helping them leverage our accumulated experience from growing our corporate agency.Shifting to technology, you've heard us speak of developing our quote-to-issue capabilities and the investment of time and money to make it a reality. This has been very challenging and has taken longer than we would like as we are inventing a truly unique business model that relies on heavy tech investment from ourselves and our carrier partners.Well, we have done it. Since our Q2 call, we successfully launched Clearcover and Nationwide auto. We're planning additional carrier launches for both home and auto products through the end of this year, and look forward to ultimately having a majority of our carrier premium base enabled for quote to issue over the next 24 months.We anticipate that we will be implementing an additional 3 to 5 carriers in the fourth quarter, which includes both home and auto lines of business and some of our largest volume carriers, including Safeco, Nationwide, and SageSure. We believe this technology will have a profound effect on the efficiency and quality of execution for our agents, allowing us to better and more quickly match risks with carrier underwriting appetite and to more efficiently execute on growing incoming partnership leads, open new partnership opportunities over time, and allow us to be very specific on the type of clients we onboard, again, matching carrier writing appetite with client demand.Our carrier partners have devoted significant time and resources to developing quote-to-issue capabilities with us, further underscoring the value they put on partnering with us as a consistent tech enabled, large scale independent distribution partner and the confidence they have in the long-term attractiveness of our personal lines insurance marketplace.While the current hard P&C market has created product and profitability challenges for our carrier partners. It has forced us to take our game to a higher level, and for that I'm grateful. It's also shown us who our friends are. I take partnerships very seriously. When you are a partner, you back your partner's play in good times, but more especially in challenging times. We will forever be grateful for the support we've received from companies like SageSure, Progressive, Safeco, and Mercury.We've been able to continue to succeed and grow because our partners backed our play, and we will reciprocate. I'm extremely pleased with the improvements we've achieved across people, process, and technology this year that will allow us to drive very high levels of revenue and earnings growth many years into the future. I feel incredibly excited about our ability to continue to execute on our strategy and continue to deliver for clients, agents, carriers, and shareholders.With that, I'll turn the call over to President and Chief Operating Officer, Mark Miller.

[Mark Miller, executive]

Thanks, Mark, and good afternoon, everyone. I'm very proud of the progress our team has made on our key strategic initiatives for 2023. In 2023, we have experienced the tightest insurance market in our company's 20-year history. But our team has rallied and dialed in on the things we can control.As a result, we have seen significant lift in our new business productivity levels from both corporate and franchise agents. We've also refined and intensified our recruiting efforts to lock in a steady stream of high-quality talent for 2024 and beyond. Our service team has greatly improved many of our key performance indicators, and we're now focused on driving cost efficiency across this team.From a technology perspective, we've quickly built a world-class team with technologists from outside the insurance industry. This team is rapidly implementing our QTI platform that will radically simplify the way insurance is sold and serviced in the future. This technology will help agents come down the learning curve significantly faster and dramatically increase efficiency.Instead of having to learn 20 different carrier systems, our agents will utilize one integrated platform. As compared to a year ago, I believe the changes we implemented have significantly strengthened our core operations and positioned us to move quickly and effectively in coming years.Turning to corporate distribution, we are now in a very strong position with our corporate sales team for both a quality and new business productivity perspective. We ended Q3 with 316 corporate agents, up from a low of 250 agents in May. As MJ noted, average productivity is up substantially this year. On a year-to-date basis, our new business productivity is up 28% for greater than 1-year agents and 73% for less than 1-year agents. I'm particularly excited about the color of the talent we are attracting from college campuses.Our ability to articulate the opportunity for business ownership through our franchise offering provides truly unique and extraordinary career opportunity with a path to a 7-figure income. This summer, we have had large start classes, and these agents are some of the best we have recruited in years.To give you a sense of their strong early performance, our summer recruits this year are producing nearly 50% more new business than last year's class. And 3 of our new hires are pacing 6-figure incomes. To give a quick example of the success our new corporate agents are having, I'd like to highlight Bryson Ramsey in our Austin office.Bryson joined Goosehead in June after graduating from Baylor University with a degree in business. Since starting, Bryson has well exceeded his monthly ramp-up goals and has already activated 6 referral partners, laying the groundwork for what we believe will be a fruitful career.Most recently in September, Bryson exceeded our lofty ramp-up goals by over 200%, generating over $16,000 in new business commissions and finishing in the top 10% of corporate agents. We're very proud of Bryson's accomplishments and look forward to his continued success.The success of this year's new class is amplifying our value proposition at 12 college campuses this fall as a recruiter scout for the class of 2024. With all the changes, we've made in sales management, incentives, process, and career development, we will be in an even stronger position to attract and retain the highest quality sales talent in the industry. In longer-term, career paths for highly successful agents is even more compelling with the option to start their own successful franchise operation or to move into management ranks.Moving to franchise. We're making tremendous progress on our growth objectives, which include scaling our best and fastest growing franchises, converting corporate agents to franchises, and driving significantly higher productivity among the franchises. During the quarter, our existing franchises hired 107 producers to scale their businesses. Many of these hires were facilitated by our new franchise talent acquisition team.We're continuing to add recruiters and infrastructure to this team to keep up with the increasing demand from our growth franchises. We also had 8 corporate agents convert to franchise ownership in the quarter and we expect about 30 conversions for the full year. These conversions remain 5x more productive at generating new business than our traditional franchise launches.Although, we've seen consistent franchise productivity improvements over the last couple of quarters, we still have significant untapped potential in our existing agent base. Franchise productivity is still only about 51% of corporate agent productivity on average and we see no reason why this gap will not close meaningfully with better recruiting and support.To give one example of what is possible with the Goosehead franchise, I'd like to highlight the Hazeltine agency. Chad and Chance Hazeltine, 2 brothers, founded a franchise 7 years ago in their hometown of Sarasota, Florida. Today they have a $15 million premium book and they have grown by over 50% in the last 12 months. That allows the Hazeltine agency to take home roughly $1.3 million per year. They currently have 5 producers that sell at equivalent levels to our corporate agents and recently added a new 6th producer.We believe the best way to grow our franchise business is by investing time and resources behind our very best franchise partners to help them grow scaled businesses. The Hazeltines are the type of owners that we want in the franchise community and we could not be prouder of what they've accomplished.Last week marked Goosehead's 20th anniversary and we're well on our way to achieving industry leadership. We will continue to revolutionize the personalized insurance brokerage experience with our talented employees, disruptive technology and unique go-to-market approach. I believe our employees will out-hustle and out-smart the competitors and we will grow more rapidly and profitably than any company has ever done in our industry. This will provide amazing opportunities for our employees, agency owners and shareholders. We're in a great position as we close out 2023 and move towards higher growth in 2024 and beyond.With that, I'll turn the call over to Mark Jones Jr.

[Mark Jones Jr., executive]

Thanks, Mark. Before touching on key areas of results, I'd like to spend a moment on how we have been operating to mitigate the unique market headwinds on product availability and housing transaction declines.As we have previously indicated, product challenges are representing a larger headwind for our growth than the tailwinds we've been experiencing from carrier pricing actions. These headwinds have manifested in several ways. A pivot away from recruiting new franchises in certain geographies, because of a lack of product and carrier appointments for new offices, some reduction in our bind rates and package rates on new business. Both measures that remain high, but are down from historically very consistent levels. And a modest decline in client retention despite significantly improving our service function, generating a Net Promoter Score at 92 compared to 90 a year ago.Our response to these challenges has been to improve our operations and processes across sales, service, and technology to gain increasing market share and relentlessly focus on serving the needs of our clients and partners. On sales production, year-to-date, we've added a record number of referral partners, despite intentionally reducing our producer headcount. Our lead generation is up 18% year-to-date, helping to offset the impact of lower bind rates and package rates amidst product challenges. This is allowing many of our agents to achieve record new business generation, despite unprecedented challenges in our 20-year history.In this environment, our value proposition is even more evident to our referral partners, because rising insurance costs and interest rates affect an individual's buying power, and our agents are able to add more value at the home closing process. We are also diversifying our lead generation from the housing transaction through partnerships and digital lead generation efforts.In the service function, we have significantly reduced call wait times and increased the service headcount by 50% to meet the demands of the environment. We're pressing forward with increasing geographic service specialization. This quarter, we opened a service office in Orlando, Florida, dedicated to meeting the unique needs of the Florida and East Coast markets. Our service function is uniquely powerful in the industry, and I have no doubt in a more normalized market, our client retention will reach new highs.We see no long-term structural impediment to getting our client retention into the 90s over time, and every point of retention has a meaningful impact on our long-term economics. In technology, our quote-to-issue efforts will revolutionize the way our agents serve clients and carrier needs. The time and resources our carrier partners are putting towards this effort in an environment where most are not looking to grow is a validation of the value our scaled independent agent model brings and the long-term attractiveness of the personal lines industry. This technology, over time, will help us more efficiently match clients to carrier risk appetites across product lines and geographies.Importantly, we believe these challenges in the marketplace will abate in time, and we are encouraged to be seeing some early signs of better underwriting profitability from our carriers, which may indicate we're beginning to see an inflection point with more products becoming available in the near to medium term. We have no doubt that our organization will act like a coiled spring for growth, as market conditions ultimately normalize across product and housing.Our agents have taken this time to hone their sales craft, become more efficient, and learn how to overcome more objections. We believe that the productivity gains we will see from improved product availability will be substantial.Moving to our results in the third quarter, our total written premium, the leading indicator for future revenue growth, increased 30% to $803 million. This includes franchise premium of $620 million, up 34%, and corporate premiums of $182 million, up 21% from a year ago. Our policies in force at quarter end were $1,456,000, up 18% from a year ago. We expect a re-acceleration of the policy in force growth rate in 2024 as aggregate new business production increases, more highly productive producers are added, and we see retention rate improvement from a more normalized product environment.Total revenue for the quarter was $71 million, an increase of 23% over the prior year period. This includes core revenue of $63.1 million, up 22%, driven by continued high client retention, improvements in agent productivity, and pricing tailwinds. Conversion of highly productive corporate agents to franchises will temporarily moderate our revenue growth, but should result in accelerating revenue and earnings growth longer-term as these franchises onboard new producers.The effects from aggregate new business production acceleration in 2024, driven by increased product availability, new producer additions, and increased agent productivity are not fully realized in the same year, because the royalty fee rate on new business is 20%, compared to the more favorable 50% on renewal business.Our actions taken over the last 12 to 18 months have set us up to drive accelerating revenue growth in 2025 and beyond. Contingent commissions in the quarter were $4.8 million, compared to $2 million a year ago. We continue to expect full-year contingents to be around 40 basis points of premium.Shifting to expenses, we continue to perform well as we optimize expense discipline and reinvestments for growth. Total operating expenses, excluding equity-based compensation and depreciation and amortization were $48.6 million, an increase of 4%, compared to the year-ago quarter.Compensation and benefits, excluding equity-based compensation, increased 7%, driven by our investments in partnerships, technology, marketing, and service functions, partially offset by a decline in producer count. Other G&A expense of $14.8 million was up 10% from a year ago. Bad debts declined to $797,000 from $2.3 million, as we have substantially improved the quality of our signed, but not yet launched pool of franchises.Adjusted EBITDA in the quarter was $22.4 million, up 104% from the year-ago quarter, while adjusted EBITDA margin increased to 32% from 19% in the year-ago period. Our margin has been strong in the first 3 quarters of this year. Given the timing of investments and normal revenue seasonality, we expect only moderate margin expansion for the fourth quarter over the previous year.Looking further out, we continue to expect to grow annual margin of our 2023 base. Our intermediate-term margin goal remains 30% plus, and our long-term, we see our business operating around 40% margin.As of September 30, 2023, we had cash and cash equivalents of $35.2 million. Our unused line of credit was $49.8 million, and total outstanding term notes payable balance was $79.4 million at quarter end. With our net debt to trailing 4-quarter EBITDA at just 0.7x, we have substantial balance sheet flexibility to drive future value and returns to shareholders.We are reiterating our guidance for the full year of 2023. Total written premiums placed for 2023 are expected to be between $2.87 billion and $2.99 billion, representing growth of 29% on the low end of the range to 35% on the high end of the range. Total revenues for 2023 are expected to be between $260 million and $267 million, representing growth of 24% on the low end of the range and 28% on the high end of the range.Again, thanks to our team for their hard work, discipline, and focus delivering such strong financial results as we continue on our journey to industry leadership.With that, let's open the line up for questions. Operator?

[Operator]

Our first question comes from the line of Michael Zaremski with BMO.

[Michael Zaremski, analyst]

I guess first question, maybe on your comment reminding us about your 40% long-term margin goal, just curious, would you be able to share any breadcrumbs on what level of productivity lift that would imply versus kind of today's levels, or any kind of breadcrumbs around to help us kind of put our heads around a 40% margin?

[Mark Jones Jr., executive]

Hey, Michael. This is Mark Jr. So in order to get to 40%, you don't necessarily need to see massive productivity improvements. Now we've seen nice margin expansion this year. Some of that is driven by productivity improvements and generating profitability on new business. But naturally, the way that this business works, as you get more and more renewal bias in the book, you just become more profitable given that the servicing on a renewal policy is significantly less than a new business policy. There's much less fulfillment effort, all of those type of things, and the compensation to an agent is roughly 50%. So over time, as the renewal book becomes a larger and larger piece and you see the growth rate trend down, naturally you get a lot of operating leverage out of the business.

[Michael Zaremski, analyst]

And maybe just sticking to productivity since it's been a big plus lately and from your comments, you expect it to continue to increase. And I know that you gave different, that you about it differently productivity franchise versus corporate. But I guess you said a number of things about why productivity is likely to improve in the coming year. You talked about more product availability, knock on wood, if the industry heals. You talked about the existing franchises being substantially more productive as they hire new folks and the corporate conversions being 5x more productive. Are -- and then I guess there's QTI too. So I know there's a lot going on, but what -- it feels like there's a lot in the Mosaic that's going to be more of a big positive. What -- could you -- am I characterizing things correctly and there's kind of a lot of levers?

[Mark Jones Jr., executive]

Yes, I think absolutely. And I would point to the product challenges we're seeing today are dramatically reducing where productivity could be today, given the amount of leads we're receiving. So we mentioned in the prepared remarks that lead flow is up 18% year-over-year and a pretty challenging housing environment.Now, if we can get the product environment and carrier underwriting profitability back at a level where there's a wide variety of carriers looking to grow, there's no reason why we shouldn't continue to see pretty strong productivity improvements on a year-over-year basis for a while to come, along with all of the other technological efforts we're making with QTI and partnerships and things like that.

[Mark Miller, executive]

And this is Mark Miller. I would just add one thing on top of it. One thing we're also seeing is our retention rates of our employees is increasing. And as that happens, your tenure goes up, and there's a direct correlation between tenure and productivity. And so last year, a year before that, higher attrition rates, lower attrition rates now. So that also factors into your equation.

[Michael Zaremski, analyst]

And maybe lastly, on QTI, and I think it's -- since an outsider looking in, we appreciate you're saying it's a heavy lift and whatnot. But I guess just trying to better articulate why its impact could be profound. Like, I guess if a majority of your carriers went into kind of a QTI type, I guess, KPI or plug-in with you all, like, is there, would it save your average employee like X amount of minutes per day that they could use that saved time to just sell more? Or is that the way we should think about it? Or is it more profound and have -- than just saving time and giving them more time to sell otherwise?

[Mark Miller, executive]

Yes. This is Mark Miller again. I would say in this world current state today, I would think of it as a significant efficiency play for the sales team. So if you -- all the trailing paperwork and everything else that has to happen after the sale of the policy, it helps with that greatly. And then the service team that has to service it afterwards, today they have to go into a native system of the carrier.What we want to do in the future is the QTI connections are the same ones that you would have to use in the service side to get into service a policy. So, great efficiency savings. And I think we mentioned, it will help direct exact type of customer to the exact type of policy we want in the future.

[Mark Jones Jr., executive]

Yes. I think there's also kind of an ancillary benefit here that this is a technology that doesn't exist anywhere else in the marketplace. And so as you go to acquire new talent and people evaluate their options for an independent agency, why would you ever choose anywhere else that has lesser technology and something that they don't even have a roadmap to be able to accomplish. We already have it. We've got first-mover advantage there.

[Operator]

Our next question comes from the line of Paul Newsome with Piper Sandler. Our next question comes from the line of Brian Meredith with UBS Securities.

[Brian Meredith, analyst]

A couple of quick ones here for you. First one, I'm just trying to understand a little bit the margin guide that you've got for the fourth quarter, just modest increase given what we saw this quarter. It looks like comp and benefits have stayed relatively low, and usually we see a ramp up there. Is there some seasonality or something going on that we're just not seeing?

[Mark Jones Jr., executive]

Yes. So, typically, if you look at the seasonality of revenue from Q3 to Q4, you don't see a big lift in revenue from Q3 to Q4, and if you think about our revenue guide, you can get to where you would expect that to be for the fourth quarter.On the cost bar, I'm not expecting a big move from the third quarter to the fourth quarter. So, you can come up with what you should expect a margin number to be for Q4, I think.

[Brian Meredith, analyst]

And then second question, I'm just curious, you gave contingent commission guide, I guess, for the year, but it was pretty strong in the third quarter. I'm just curious, what's driving that contingent commission? I know last quarter you talked about some volume benefits, but really stepped up again.

[Mark Jones Jr., executive]

Yes. So, there's a couple of things going on there, one being, you're right, more volume benefits. So, the majority of our contingencies are made up of a handful of carriers, and if the premium in those carriers grow faster than the premium of the whole book, you'll see slightly outsized contingency.The other thing is there's a couple of smaller contingencies that are loss ratio based that we are, it looks like now at this point, tracking to hit, and the way that the revenue recognition would work on that is you've got to wait until you have that information to actually record it. And so, that could look more like 9 months of contingency in the third quarter as opposed to an even distribution throughout the year that you would see from a growth-based contingency.

[Brian Meredith, analyst]

And then last question, just curious, geographically, if you kind of look at geographically where things are, is there any kind of area that you see opening up a little bit more from a product perspective, carrier perspective versus others in other areas of the country?

[Mark Jones Jr., executive]

It's pretty tight across the board, but I think we're doing a good job of adding product where we can, whether that be admitted product or E&S product, and we have a few really, really good carrier partners that are keeping us open in places where they've shut down other agents. I think that's just the value of our model.

[Operator]

Our next question comes from the line of Mark Hughes with Truist Securities.

[Mark Hughes, analyst]

In times past, you've given the source of new business. I think you -- earlier on, it was kind of 60% came from the mortgage market. I hear what you're saying, that you're looking at expanding that, going through other electronic sources. Is there an updated mix of new business you might be able to share?

[Mark Jones Jr., executive]

So today, that's still about right, where it's in excess of 50% of the lead generation from new business comes out of a mortgage transaction. We're building up the partnership and the digital lead generation efforts, which I think that's why it's even more impressive that our lead flow is up 18% year-over-year with fewer agents and considerably less housing transactions.Our agents have just been doing a really good job marketing out there, and the value to referral partners today, as we mentioned in our prepared remarks, it's never more evident than it's been in our history. The insurance cost on a mortgage transaction now is a real consideration, especially with rising interest rates. And so we're able to provide a really differentiated service today in the face of those headwinds.

[Mark Hughes, analyst]

I had a question about the geography or the flow in the income statement. When I think about renewal commissions, say for this quarter, the line items that flow into that would be renewal commissions in this quarter last year, presumably that business would be renewing again, and then the new business commissions, those would also be up for renewal, and therefore, would be reflected in the renewal commissions. Is that right? It's those 2 categories from last year that flow into the renewal commissions this year, and that's all corporate agent activity, is that correct?

[Mark Jones Jr., executive]

Yes. That's the right way to think about it.

[Mark Hughes, analyst]

And same with the renewal royalty fees, that renews, but the new business royalty fees, they step up kind of the 5 to 2, 50% retention versus the 20%.

[Mark Jones Jr., executive]

Right. So the way you would do the math with the royalty fees is you would just gross them up, so you would do your new business royalties, our portion of that is only the 20%, so you gross that up, and then same thing on the renewals, our portion is the 50%. And then to get to the next years, you obviously just multiply that by 50% that would be our portion.

[Mark Hughes, analyst]

Yes, yes, exactly. And then one other quick question, just the rate contribution to growth, any meaningful changes this quarter, by that I mean the kind of pricing, the premiums that the policyholders are paying for auto and homeowner's insurance, how has that contribution changed perhaps?

[Mark Jones Jr., executive]

We're still seeing price inflation, but in our minds, the product availability, that's the other side of that price inflation, has been a bigger headwind than the price inflation has been a tailwind. And you can see that in retention, you can see that in some stats that we track internally, like policies per lead, we mentioned buying rate and package rate as well in our prepared remarks, so we believe that the product environment is more of a headwind today than price inflation has been a tailwind.

[Operator]

Our next question comes from the line of Meyer Shields with Keefe, Bruyette, & Woods.

[Meyer Shields, analyst]

A couple of small questions. First, are there additional expenses associated with pursuing leads through the partnerships and digital channels? Does that change the equation at all?

[Mark Jones Jr., executive]

No, so we -- the digital channel is A, our digital agent, as well as leads from our partnerships, and other organizations. The digital agent, all of that is already built in from previous spending. The partnership leads, there's some reciprocal dollars that flow back and forth, but there's not any more customer acquisition costs than would be a traditional go-to-market strategy.

[Meyer Shields, analyst]

And going back to contingents, I'm probably a step behind, but if the increasing certainty with regard to loss ratio-based contingents is what drove the contingents in the quarter, shouldn't that and the year-to-date numbers imply more than 40 basis points for the full year?

[Mark Jones Jr., executive]

Yes, the language we use is around 40 basis points. You know, things could still happen in the fourth quarter that could have adverse impact on that, but we feel comfortable that we will be at least a 40 basis point flow.

[Meyer Shields, analyst]

And I guess kind of a question, just because I don't know if there was an explicit comment, but I think, Mark, you talked about some initial signs of carriers, app sites expanding. Is there any initial change or inflection in what you're seeing with regard to housing?

[Mark Jones, executive]

We have not seen sort of a turnaround in the housing market yet, no. I wish it were different, but it's not.

[Meyer Shields, analyst]

Absolutely understood.

[Operator]

Our next question comes from the line of Paul Newsome with Piper Sandler. Our next question comes from the line of Scott Heleniak with RBC Capital Markets.

[Scott Heleniak, analyst]

I was just wondering, with the franchise reductions probably just about over, it seems like, at least that's kind of what you had said on the last quarter of the call. Can you just comment on the franchise inquiries that you're getting and your plans to expand that in 2024 and beyond, and just any kind of information or backlog information you can share on the franchise side?

[Mark Jones Jr., executive]

Yes, Scott, just to clarify one point. On the last call, we said we were over the halfway point in franchise terminations and those calling efforts. So, in this quarter, we had 89 terminations. We still think it will be high in the fourth quarter, higher than historical average. We believe in 2024, we will trend back down towards that historical average of 15%. And we don't see a reason why kind of medium term, it should be higher than a 10% to 15% range as we gross up the gene pool.

[Mark Miller, executive]

Yes. Scott, this is Mark Miller. So, if we just go back and think about franchises in general, the way that I think about it, it's not about the absolute number of franchises. It's more about how many agents we have. And so, where we're really doubling down is adding franchises or adding agencies back into the franchises that we feel really strongly about. What you're seeing in the numbers is kind of a net out number. So, you're losing about quite a few agents that aren't very productive and replacing them with highly productive agents. That includes corporate agents that are converting to franchise ownership. We're also being very, very selective in the franchises that we're putting into the community now. So, the number of launches you'll see are greatly reduced from what it was last year, but they're much more productive and they're in the geos that we want.And I think the final part of your question was, how many kind of inbounds are we getting now? We've transformed the way we hunt for franchises, if you will. Instead of doing a lot of outbound calling, about 50% of our leads will be coming from, in this quarter, from inbound digital marketing type of capabilities, which is a new muscle for us and working tremendously well at finding really high-quality franchises.

[Scott Heleniak, analyst]

And then just the agent to franchise conversions, you said expect to do 34 this year. Is there any kind of target you have in mind, just annual conversions kind of going forward? Is that kind of a good number to use, just assume the next few years?

[Mark Miller, executive]

I mean, it is our best source of high-quality franchises. I'd love to ramp that up. But I also don't want to jeopardize the health of the corporate business. So a lot of it depends on how big the incoming class is going to be, which we mentioned we're doing really, really well on college campuses. We're still in the budget process. And so we literally budget out how many people we want to convert and how much we can take out of the corporate business. But I would say, consistent with this year would be a good estimate for next year until we have information. And if the class grows bigger and we have more qualified people, I'd certainly like to up that. But right now, I would use what we had this year.

[Scott Heleniak, analyst]

And then just final last question, just the product availability that you're citing, I'm assuming that's in Florida, California, Texas. Are you seeing that anywhere else or is it just mostly those 3 states?

[Brian Pattillo, executive]

Hey, this is Brian Petillo. It's really across the board. Those are certainly the most difficult states. California and Florida have been difficult for a long time. In fact, California, we've actually seen, in many ways, a better market because of many of the large captive carriers have shut down new business, which has given us actually a lift on that. But really, it's across most states. We're seeing many of these carriers are looking to slow down growth as they seek to restore profitability. So, almost every single state has been challenged from a product perspective, just some more pronounced than others.

[Operator]

Our next question comes from the line of Josh Shanker with Bank of America.

[Joshua Shanker, analyst]

A couple quick numbers questions. What were on boardings the quarter and how many contracts for new franchises do you have pending?

[Mark Jones Jr., executive]

Josh, we launched 30 franchises in the quarter, and I believe the signed, but not yet launched pools in the 200s.

[Joshua Shanker, analyst]

I'm looking back to 2019 before the pandemic shook everything up. And by my count, it seems like this is a winner or loser type environment you guys operate. And maybe about 30% of franchises didn't make it out of their first year, could get traction. Is that a good way to think about long-term how the company ought to operate among new hires, new franchisee hires?

[Mark Miller, executive]

I mean, Josh, this is Mark Miller. I would assume that we can bring that number down with the way that we're, like, corporate franchises that are corporate agents that convert into franchise ownership are not going to fail at the same rate. I mean, we're bringing in much higher quality franchises, so we would certainly expect to bring that number down over time.

[Mark Jones Jr., executive]

Yes, I would point to, in this quarter, franchises we launched in Q3 of 2023 were 48% more productive excluding the corporate launches. So just ones we hunted in the wild compared to last year, 48% more productive. So the quality of the franchise pool is going up dramatically, which helps that we don't need as much volume. We still would like to see some increasing volume on new franchises, but the productivity is so high at this point that we feel very good about the success rate of new launches.

[Mark Miller, executive]

Yes, and obviously the productivity correlates directly to the success. Like, they're going to stay in the system a lot longer if they're more profitable.

[Joshua Shanker, analyst]

And if I can get one more in, you talked about the opportunity to earn a 7-figure annual compensation from a college hire. Just to understand the pathway someone joins as a corporate agent, they prove successful, you convert them into a franchise agent, and they work for a number of years and get up there. And do we have examples of corporate agents who have become 7-figure earners?

[Mark Jones Jr., executive]

Yes. Yes, we do. And it's a pretty clear path. These are typically people that have had a team underneath them before. They know how to recruit. They know how to onboard and to get people down the ramp. And so it's a relatively, I won't say easy proposition, but it's simple for them to understand. They know how to be a good producer. They know how to get people up to be a good producer. So you don't need very aggressive hiring targets to get there. It's a very clear path, and we have examples of it in the past.

[Joshua Shanker, analyst]

Are the corporate agents still those 7-figure earners, or are they franchisees at this point?

[Mark Jones Jr., executive]

Franchisees.

[Operator]

Our next question comes from the line of Pablo Singzon with JPMorgan.

[Pablo Singzon, analyst]

Mark Jr., if I heard you correctly, I think you suggested that revenues and costs would be roughly consistent sequentially when thinking about the 4Q? Would that then suggest a similar margin profile for the fourth quarter, or are there discrete items that you should think about?

[Mark Jones Jr., executive]

Yes. So we've got the revenue guidance for the full year. I would point you to that for the fourth quarter revenue numbers. From a cost bar perspective, those should be relatively consistent with the third quarter. We've on-boarded a few people, but nothing that's going to move the employee common benefits line too dramatically. So I would just point you to the way seasonality looks from Q3 to Q4 historically, our revenue guidance, and then a relatively consistent cost bar from Q3 to Q4.

[Pablo Singzon, analyst]

And then as I look at employee comps maybe beyond the fourth quarter, clearly this quarter grew much lower than revenues. I think partly you're reflecting what you said about the renewal book hitting a much leaner expense base. Do you think you can maintain this comp ratio as you scale up in '24 and '25, or is there some giveback as you ramp up and do more investment?

[Mark Jones Jr., executive]

Yes, so as we stay laser focused on productivity, specifically with corporate agents, that will help make sure we don't see that employee comp benefits start to lose scale. The other big piece of that, and actually the biggest piece of that, is the service department. And so making sure we can drive efficiencies and scale out of the service department will keep that employee comp benefits line continuing as a smaller and smaller piece of total core revenue.And then obviously we'll make investments in areas that we need to make investments in, things like technology and the partnerships department, franchise development, those type of areas. But you shouldn't see us losing scale dramatically in employee comp benefits as we onboard new agents. We're just too focused on productivity to let that happen.

[Pablo Singzon, analyst]

And then last question for me, also related to employee comp. If you look at stock comp as a percentage of overall employee comp, it's increased from let's call it high single-digit to mid-teens level now. Is that a consistent ratio to think about, right? So say mid-teens for the foreseeable future?

[Mark Jones Jr., executive]

So we've talked about stock comp a lot. The way we think about it is the dilution effect on the total share count. And so what we've said historically is that 1% to 2% dilution rate in annual stock option awards. Obviously, the gap recognition of that is a Black-Scholes valuation, which has other factors of our control that drive that compensation number. And so as you go forward on an annual basis, you should expect a share count dilution in the 1% to 2% range. And the Black-Scholes calculation will be what it will be depending on volatility in the stock market and risk-free interest rates. And it is a non-cash expense.

[Operator]

At this time, I would now like to turn the call back over to CEO, Mark Jones for closing remarks.

[Mark Jones, executive]

Thanks, everyone, for your time and participation. We appreciate it and hope you have a good day.

[Operator]

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.