Insperity, Inc. (NYSE:NSP) Q1 2024 Earnings Call Transcript May 1, 2024

Insperity, Inc. beats earnings expectations. Reported EPS is $2.27, expectations were $2.11. NSP isn't one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good morning. My name is Jenny and I will be your conference operator today. I would like to welcome everyone to the Insperity First Quarter 2024 Earnings Conference Call. [Operator Instructions] Please note this conference is being recorded. At this time, I would like to introduce today's speakers. Joining us are Paul Sarvadi, Chairman of the Board and Chief Executive Officer; and Douglas Sharp, Executive Vice President of Finance, Chief Financial Officer and Treasurer. At this time, I'd like to turn the call over to Douglas Sharp. Mr. Sharp, please go ahead.

Douglas Sharp: Thank you. We appreciate you joining us. Let me begin by outlining our plan for this morning's call. First, I’m going to discuss the details behind our first quarter 2024 financial results. Paul will then comment on our recent accomplishments, including the progress we have made in implementing our Workday strategic partnership solution. I will return to provide our financial guidance for the second quarter and an update to the full year guidance. We will then end the call with a question-and-answer session. Now, before we begin, I would like to remind you that Mr. Sarvadi or I may make forward-looking statements during today’s call which are subject to risks, uncertainties and assumptions. In addition, some of our discussion may include non-GAAP financial measures.

For a more detailed discussion of the risks and uncertainties that could cause actual results to differ materially from any forward-looking statements and reconciliations of non-GAAP financial measures, please see the Company’s public filings, including the Form 8-K filed today, which are available on our website. Now, let’s discuss our first quarter results in which we reported earnings above the high end of our guidance. We reported Q1 adjusted EBITDA of $142 million and adjusted earnings per share of $2.27. These results reflect the average number of paid worksite employees within the range of our forecast, continued strong pricing, lower than expected benefit costs and operating expenses in line with our budget. As for our growth metric, the average number of paid worksite employees in Q1 was approximately 304,000, a decline of less than 1% when compared to Q1 of 2023.

As you may recall from our prior earnings call, this slight decline was expected due to net layoffs incurred in our client base over the second half of 2023 into January of 2024, and the loss of a handful of large accounts during our year-end transition. Additionally, we experienced a 42% decline in net hiring in our client base in Q1 of 2024 when compared to the first quarter of 2023. Worksite employees paid from sales was at a similar level compared to Q1 2023 and when combined with client retention, came in at forecasted levels. Gross profit increased by 4% over Q1 of 2023, as strong pricing through our year-end transition of new and renewing accounts combined with a lower-than-expected benefit cost trend. This lower Q1 benefit cost was associated with a favorable adjustment to our reserves at the end of 2023 based primarily on subsequent claims runoff through the end of February 2024.

Regarding the last month of Q1, we believe the timing of claims payments under our plan in March were affected by the industry wide impact of the cybersecurity breach at Change Healthcare. Upon a detailed review of our claims data and discussions with our insurance carrier, we believe we have appropriately reserved additional amounts for Q1 2024 claims incurred but not yet reported due to the impact of this breach. The combination of our other direct cost areas, including workers’ compensation and payroll taxes, were generally in line with our forecast. Q1 operating expenses were also managed to budgeted levels, increasing 12% over Q1 of 2023. Operating expenses reflected our continued investment in our growth and our service and technology offerings, including approximately $5 million of costs related to the initial phase of implementation of our Workday strategic partnership.

First quarter’s effective tax rate came in at 29%, which was higher than Q1 of 2023’s rate of 23% and our forecasted rate of 26%. This was primarily due to changes in our stock price that resulted in less tax benefit on employee stock awards vesting at end of February. We believe that our financial position and liquidity remain strong, as we continue to invest in our long-term growth plans while providing returns to our shareholders. During the quarter, we repurchased 233,000 shares of stock at a cost of $23 million and paid out $21 million in cash dividends. We ended Q1 with $206 million of adjusted cash, an increase of $35 million over the December 31, 2023 balance. We continue to have $280 million available under our credit facility.

Now, at this time, I’d like to turn the call over to Paul.

Paul Sarvadi: Thank you, Doug and thank you all for joining our call. Today I will begin with comments on our solid first quarter performance including initiatives supporting our plans for future growth. Second, I will provide insights from our view into the economic climate and the reactions in the small to mid-size business community. Third, I will provide an update on the initiation of our new strategic partnership with Workday and provide a glimpse into our upcoming Investor Day. Overall, we had an excellent quarter exceeding the high end our adjusted EBITDA range against a backdrop of an economic slowdown. Our fundamentals are solid, and we expect our plan for the balance of the year will help mitigate the effects of the economic climate on our target small to medium size business clients.

New booked sales of our Workforce Optimization solution were strong in the first quarter. We experienced a double digit increase over the same period last year reflecting the growth of our BPA team and an improvement in closing rates driving sales efficiency. This improvement reflects the experience gained over the last year by Business Performance Advisors and effective incentives for prospective clients and the sales team. Booked sales by our mid-market Business Performance Consultants was the highlight of the quarter. They continued their excellent performance since the last half of last year exceeding budget. Sales of our larger accounts have become more consistent over the last year. The steady flow from Business Performance Advisors funneling qualified leads into this process and our growing number of Business Performance Consultants is the reason for this improvement.

This is well timed for our new Workday strategic partnership I will discuss in a few minutes. We also had a strong quarter in our traditional employment Workforce Acceleration business as our WX employee count on this service increased 21% over the same period last year, including a notable improvement in client retention. Total client retention in our Workforce Optimization business for the first quarter was in line with last year except for the large accounts we discussed in last quarter. We also achieved an important marketing objective exceeding our lead generation goal for the quarter, however conversion of these leads into discovery call appointments was just under 90% of target. Reaching sales activity objectives remains challenging in this environment.

We have several initiatives to drive sales activity including the launch of our Account Based Experience marketing and sales strategy. This approach made possible by our investment in Salesforce provides insights from advanced technologies to leverage the ideal client profile and buyer intent signals to improve Business Performance Advisor effectiveness. This is a more strategic approach in sales research, planning, and execution focused on high value accounts and building relationships with key decision makers. All BPA's will begin with assigned target accounts this quarter, which we believe can lead to more Business Performance Advisor time in front of qualified prospects. We have additional initiatives underway leveraging our investment in Salesforce and AI enabled technology to drive efficiencies, speed, quality, and insights for our teams as they serve our clients and operate and grow the business.

The move to our enterprise-wide Salesforce platform as well as our implementation of modern data engineering and analytics technologies are well underway allowing us to put in place a data strategy that we believe will accelerate predictive analytics, AI, and other emerging capabilities. Now let me provide some insight regarding the economic climate our clients are facing evident from our client data, our interaction directly with business owners, and our recent nationwide survey. The key data elements we monitor to assess the small and medium size business climate are net hiring, wage inflation, overtime hours worked, and commissions paid to the sales staff of our clients. As Doug mentioned, net layoffs incurred in our client base over the second half of 2023 and has continued through the first quarter this year.

Wage inflation which peaked near 7% in 2022, has continued a downward trend all the way to slightly below the 2%. Overtime as a percentage of regular pay is down to 9%, the lowest number in few years. The most important metric that provides some insight to client sales and near-term revenues in their businesses, is commissions paid to their sales organization. This metric was down to 6%, also the lowest number in the last couple years. Recently, we have also had the opportunity to have direct discussions with a representative number of clients. While normal business owner optimism is still alive and well, comments about the effect of interest rates, inflation, and an economic slowdown were common. Our recent client survey reinforced these anecdotal comments across the broader nationwide client base.

Clients who feel their organization will perform better during 2024 than during 2023 has decreased to 66% from 74% one quarter ago. The percent of clients who expect to increase staffing has dropped to 39% compared with 54% a year ago. One-third of the respondents expect the economic climate to have at least a somewhat positive impact on their organization, while 42% anticipate a negative impact. Consistent with past quarters and looking forward to 2024, client optimism about their own business performance exceeds that of their expectations for the economy. Two thirds of clients surveyed were still optimistic for their own company performance similar to January. Now let me shift to the exciting update about our newest significant catalyst for growth, our exclusive Workday strategic partnership.

My enthusiasm for this opportunity was evident on our last call and after the first three months working together and gathering client feedback, has been reaffirmed. Our view of this strategic partnership as a potential game changer in the marketplace and at the same time, significantly elevating the trajectory of our company driving long-term growth, profitability, and value creation for Insperity has been strengthened. As a reminder, through this strategic partnership, Workday and Insperity are committed to jointly developing, marketing, selling, and supporting the preeminent solution for targeted small and medium-sized businesses that combines Workday’s HR technology with Insperity’s HR services. We expect to offer this unique combined solution to the target market for less upfront capital cost, ongoing expense, complexity, and implementation time than currently available to those businesses.

We believe this new solution has the potential to be competitively disruptive. Insperity and Workday are now strategic partners focused on four major objectives. All four of these priorities are off and running after just the first few months working together. First, a foundational step for this strategic partnership to be effective, is Insperity becoming a Workday customer for our corporate staff, which is ideal for our 4,300 employee company with dynamic future growth. We believe it is important to have our entire staff on Workday to be ready to support our clients as we launch our new solution. Our corporate Workday tenant project plan is progressing on schedule. A significant milestone for this to be started and completed effectively is the completion of the initial corporate HR data workbook in order to build the foundation tenant to use in configuration sessions.

This was submitted to Workday and the development site is up and running. Second, we are developing and embedding an instance of Workday as the client facing HR technology within our Workforce Optimization offering to create this new joint solution for the target market of larger accounts. This new Insperity Workday client tenant instance is a significantly more complex implementation. It is challenging to even describe how much work and detail planning has already happened on this project. We are very pleased significant progress has been accomplished detailing out the master plan for this project and the teams are working together extremely well. Third, we are establishing a deployment and enablement team within the Insperity service organization with the help of Workday.

Our goal for this team is to deliver implementations and provide support for the new solution in a similar efficient and effective manner as we do today. We are also off to a great start establishing this Insperity enablement team. A significant number of our service professionals have already completed training programs to establish a foundation for this team. The fourth major objective of the strategic partnership is a go to market plan for Insperity and Workday to address this target market including co-branding, co-marketing, and co-selling. The most significant effort accomplished since the launch has been the organization, staffing, and alignment of the teams to ensure the success of the strategic partnership and the go to market plan.

We are very pleased with the demonstrated commitment reflected in the leadership of both companies’ roles and responsibilities to make this partnership dynamic and effective for both companies. The first three months establishing the framework for this strategic partnership has not been without challenges as this type of relationship is new to both companies. However, the corporate culture match between the two firms continues to reaffirm my confidence around our opportunity for long-term success. My confidence is also supported by the client centric nature of this strategic partnership and the potential to deliver a highly scalable HR technology and service solution to a significant underserved market. Dialogue with clients and prospects about this solution has also been exceptional.

We were able to have personal interaction with over 200 business owners at recent client events and the energy from these discussions was encouraging. We are very excited about our upcoming Investor Day coming up on May 16 at our corporate office and available remotely online. The focus of this event will be an update on the fundamental drivers to our powerful business model and the specific ways we expect our new Workday strategic partnership to be a catalyst to improve the likelihood, degree, and speed of our success into the future. At this point I would like to pass the call back to Doug.

Douglas Sharp: Thanks, Paul. Now, let me provide our Q2 guidance and an update to our full year 2024 guidance. While we outperformed our earnings guidance in Q1, we are forecasting adjusted EBITDA over the remainder of the year consistent with our initial guidance. We are now thinking uncertainty and weakness in the macro-economic environment could persist over the remainder of the year. Based upon these factors and our starting point going into Q2, we have reduced our 2024 outlook for worksite employee growth to a range of flat to 2%. However, we expect the impact of this lower growth rate on our full year earnings to be mostly offset by continued strong pricing and slightly lower direct costs and operating expenses. We are now forecasting full year 2024 adjusted EBITDA in a range of $254 million to $293 million.

While we have lowered our overall operating expenses from our initial budget, we expect 2024 operating costs relating to our Workday strategic partnership to remain in the neighborhood of $60 million. As for adjusted EPS, we are now forecasting full year 2024 in a range of $3.17 to $3.90. This revised guidance assumes an increase in our 2024 effective income tax rate from 26% to 29% primarily due to less tax benefit on employee stock awards vesting in Q1, as I have previously mentioned. As for Q2, we are forecasting paid worksite employees to remain down about 1% compared to Q2 of 2023. As for Q2 earnings, we are forecasting adjusted EBITDA in a range of $53 million to $66 million and adjusted EPS from $0.61 to $0.83. This guidance considers our typical quarterly earnings pattern, where our Q1 results are typically higher than subsequent quarters, as we earn a higher level of payroll tax surplus prior to worksite employees reaching their taxable wage limits, and benefit costs typically are lower in Q1 and step up over the remainder of the year as deductibles are met.

Now at this time, I'd like to open up the call for questions.

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