Q3 2019 Earnings Call
The conference.
Pardon me this the conference operator, today's call will be delayed approximately five minutes on the FCC I'd. Your system is down and we orbitz delayed we will give you a update here in approximately five minutes, we maybe beginning a little later than anticipated. Thank you very much.
Pardon me, Sir the conference operator, they try not conference call well start momentarily the try not conference call will start momentarily.
Good day.
And welcome to the trying to third quarter 2019.
Conference call.
I'll try not has given me a script to read to the audience.
Let's try not to AK and the 10-Q filings will both be delayed pending the fccs Edgar system coming back online. However, we will precede the call in a transcript of this call will be filed.
I would now like to turn the conference over.
Do you Alex Bauer Investor Relations. Please go ahead.
Thank you operator, good afternoon, everyone and welcome to try and its 2019 third quarter conference calls.
Joining me today, the burden M. goldfield, our president and CEO and Richard Becker, Our Chief Financial Officer.
Our prepared remarks, we're pretty recorded.
Certainly will begin with an overview for third quarter operating and financial performance.
Richard will then review our financial results in more detail.
Well then open up the calls for today's session.
Before we begin please note that today's discussion will include our 2019 fourth quarter and full year guidance and other statements that are not historical in nature, our predictive in nature or depend upon or refer to future events or conditions, such as our expectations estimates predictions.
Strategies beliefs or other statements that might be considered forward looking.
These forward looking statements are based on management's current expectations and assumptions and are inherently subject to risks uncertainties and changes in circumstances that are difficult to predict and that may cause actual results to differ materially from statements being made today or in the future.
Except as may be required by law, we do not undertake to update any of these statements in light of new information future events or otherwise.
We encourage you to review our most recent public filings with the FCC, including our 10-K in 10-Q filings for a more detailed discussions of the risks uncertainties and changes in circumstances that may affect or future results for the market price of our stock.
In addition, our discussion today will include non-GAAP financial measures, including our forward looking guidance for non-GAAP net service revenues adjusted EBITDA adjusted EBITDA margin and adjusted net income.
For reconciliations of our non-GAAP financial measures tour GAAP financial results. Please see our earnings release or 10-Q filing for third quarter of 2019, which are available on our website or through the FCC website.
A reconciliation of our non-GAAP forward looking guidance to the most directly comparable GAAP measures is also available on our website.
I will turn the call over to Burton force opening remarks.
Thank you Alex in the third quarter, we continued to accelerate our business momentum.
The trying to sales and services organization successfully delivered value in the verticals we serve.
The revenue and volume growth is expected to continue.
Our third quarter financial results were impacted by higher health costs as the trend we experienced in the first and second quarter continued with one national carrier.
We have taken steps to mitigate these higher costs and we anticipate returning to a normalized cost trend in 2020.
In the third quarter, we grew gap total revenues of 11% year over year to $969 million, while net service revenues declined by 4% year over year to $221 million.
Professional service revenues grew 8% year over year to $130 million.
The strength in professional service revenues in the quarter reflected our continued focus on keeping the customers at the center of everything we do.
Customer retention continued to improve in the quarter and was a key driver of this outperformance.
During the third quarter, we grew ensuring service revenues by 11% year over year debt $839 million, while net insurance service revenues declined 17% year over year to $91 million for the quarter.
Net insurance service revenues were impacted by higher health costs.
Later in my prepared remarks, I will elaborate on the drivers of the increase costs.
In the third quarter, our Q3 GAAP earnings per share grew 11% year over year to 78 cents per share.
Our Q3 adjusted net income per share grew 8% <unk> 81 cents per share both within our guidance range.
Finally, we finished the quarter with approximately 332000 worksite employees up 4% year over year, primarily due to further improvement in our customer retention, which continues a trend that began in February .
And continued strong hiring from our installed base, reflecting our solid business mix.
Through our differentiated business model and go to market approach, we primarily target white and gray collar customers. This as generally insulated us from some of the more cyclical verticals. One example of the benefits of this strategy was reduced impact.
To our volume from fewer seasonal workers, leaving in Q3.
Overall, I'm very pleased with the performance of our client services and sales teams.
Their efforts have led to improved retention.
And our overall WSE growth.
Returning to net insurance service revenues insurance costs were impacted by higher than expected cost at one of our carriers.
This is continue to trend we cited on our first and second quarter earnings calls.
This is best illustrated by two key drivers of the higher than expected costs at this carrier.
First we saw a shift in pharmaceutical utilization from brand name drugs to higher cost specialty drugs.
And second we saw significant health network cost increases in a geographic region serviced by this carrier.
As we look forward to 2020 , we've implemented specific changes that will mitigate these drivers of higher costs.
This should result in a strong 2020 financial performance properly, reflecting our broad return to growth.
These include three key changes.
First for plan year 2020 and beyond.
After proactive engagement with our carrier partner, we negotiated ongoing pharmaceutical costs relief, including rebates.
As a result, we expect overall pharmaceutical costs to return to its historical trend.
Second we have been working with our carriers to obtain greater cost trend visibility. This will help us further improve our underwriting and pricing of our health benefit plans.
Finally, we repriced our insurance book to risk.
Between the fourth and the first quarters, approximately 80% of our health book Renews.
The regional population, which drove these elevated cost we news on January one.
The recent health experience was captured in the renewal.
As a result of these changes we believe the 2020 performance of insurance cost as measured by net insurance margin should be in the 11% to 12% range.
In addition to the changes we have made we have added a new carrier available January 2020 for the benefit of our New York based customers.
Empire Blue Shield Blue Cross.
Empire has served new Yorkers for over 80 years, and now serves more than 4 million members and more than 38000 businesses and small employers in New York.
This addition means that trying at now offer small and medium sized businesses in New York access to United Healthcare at net and Empire.
We believe this comprehensive choice puts our customers at an advantage in this historically competitive labor market.
Stepping away from insurance overall, I'm very pleased with the momentum in our business, especially when measured by our GAAP revenue growth.
Professional service revenues growth.
And WSE volume growth.
Our improved client retention and service levels have been key drivers of our momentum and represent one of our most significant 2019 achievements.
As I stated on our last call. We have successfully combined our improved customer service with analytics.
By leveraging this combination we can identify and remediate problems sooner, resulting in an improved client experience for example, during the quarter a current 400, plus WSE customer was facing a slowdown in their overall.
Our business.
The customer embark on cost cutting measures, putting their trying that relationship at risk due to expense concerns.
Our analytics identified the customer as at risk and the client services team proceed to deliver a multi layered account management plan to support the customer throughout their slowdown.
This plan included an enterprise pricing contract, which provided the customer greater expense certainty over a longer period.
Expanded human capital support, including human capital roadmap.
The customers director of HR, laughed and rather than backfilling that position the customer expanded its reliance on trying its human capital support.
Finally, trying it delivered increased technical support which helped facilitate third party systems integrations and customize reporting.
As a result of these efforts the customer has re committed to trying it.
Anecdotes like this we're trying it is proactively engaging our customers with relevant solutions are not unique.
Ultimately, our 2020 financial and operational success will be supported by efforts like these.
We remain pleased with our new sales efforts during the quarter, we successfully sold our product and services in complex value added situations.
For example, trying to its vertical strategy won the business of a Florida based private equity group through the try net financial services team.
In this case the group also saw tremendous value using trying it for their portfolio companies.
Immediately following me Onboarding of this private equity group, we then onboarded one of their portfolio companies into our trying it professional services product.
We have found significant business opportunities when we leverage our vertical products and expertise for the portfolio companies of our private equity customers.
Our platform continues to evolve just last week, we announced the launch of our new benefits enrollment site.
This timing launch is critical with 2020 open enrollment quickly approaching.
The new site will improve be enrollment experience by providing our wses within intuitive experience for comparing and contrasting our extensive health plan offerings.
We have made significant progress in 2019 with continued sales successes increased product functionality and improved customer experience.
We are experiencing positive business momentum as the result of these efforts.
We are excited from important fall selling season, and look forward to a strong 2020.
Now, let me turn the call over to Richard for review of our financials.
Richard.
Thank you Burton.
As a review the financials I will focus on the GAAP and non-GAAP numbers where appropriate.
During the third quarter GAAP total revenue increased 11% year over year to $969 million net service revenue declined by 4% year over year to $221 million.
We finished the third quarter with approximately 332000, worksite employees, showing 4% year over year growth.
Average WSE count for the third quarter was approximately 331000 also a 4% year over year increase.
Professional service revenue for the third quarter increased 8% year over year to $130 million professional service revenues benefited from improved WC retention as client services continued to constructively engaged your clients and continued strong hiring from our installed base.
Insurance service revenue for the third quarter increased 11% year over year to $839 million net insurance service revenues decreased 17% year over year genuine million dollars as Burton discussed net insurance service revenues was impacted by increased cost of care, where we saw a mix shift to specialty pharmaceuticals from brands.
And a higher than expected provider network cost increases in a segment of this business.
To help costs move into third quarter represents a four point variation from our quarterly health costs forecast.
The health costs move outside of our normal two to four point quarterly health costs variation occurred with one of our national carriers, where we saw higher cost we experienced adverse selection with a segment of the customers on their plan in one region the mix shift and adverse selection together accounted for approximately half of the third quarter.
Health costs variation.
As we listed in the past the bottom end of our annual guidance range attempts to capture a two point variation from our insurance costs fortress.
Experiencing that move in 2019.
For 2020, we believe we have mitigating these higher insurance costs by capturing pharmaceutical rebates from the underperforming national carrier improving our visibility into the drivers of our insurance cost trends repricing. The underperforming segment in our one region and adding additional cared choices for our wses.
Our third quarter GAAP effective tax rate was 18% our tax rate in the quarter was impacted by the benefit from the tax treatment of employee equity compensation for the quarter, our non-GAAP tax rate was 26%.
GAAP net income increased 8% year over year to $55 million for 78 cents per share compared to $51 million for 71 cents per share in the same quarter last year.
Adjusted net income increased 6% year over year to $58 million for 81 cents per share compared to $55 million or 75 cents per share in the same quarter last year.
Adjusted EBITDA for the third quarter increased 8% year over year to $93 million compared to $88 million during the prior year period for an adjusted EBITDA margin of 43%.
We closed the third quarter with total cash of $260 million in working capital $253 million versus $290 million and $236 million, respectively. In the second quarter 2019.
Through the nine months ending September Thirtyth 2019, we generated $146 million of positive corporate cash flow from operating activities.
And used $357 million, primarily comprised of WSE related payroll tax obligations. As a result total cash outflow from operations was $211 million, we spent approximately $22 million to repurchase approximately 307000 shares of stock in the third quarter.
Turning to our 2019 fourth quarter outlook I will provide both GAAP and non-GAAP guidance.
Our outlook reflects our expectation that the health cost trend discuss today will continue in the fourth quarter.
For Q4, 2019, we expect GAAP revenue of approximately $1 billion, representing year over year growth of 9% to 10%.
Net service revenues in the range of $250 million to $232 million, which represents a year over year decline of minus 4% to 3% growth.
Adjusted EBITDA is expected to be in the region $80 million to $105 million for the quarter.
Representing an adjusted EBITDA margin range of 41% to 45%.
We expect GAAP earnings per share in the range of 61 to 79 cents per share.
And adjusted net income per share in the range of 74 to 91 cents per share.
Regarding our full year 2019 guidance, given three quarters of performance and our fourth quarter guidance, we're lowering our net service revenue adjusted EBITDA and GAAP and adjusted EPS guidance ranges.
We are forecasting GAAP revenue to be approximately $3.85 billion, representing a year over year growth of 10%.
We now expect net service revenue in the range of $918 million to $935 million, representing year over year growth of 3% to 5% and down from $938 million to $951 million.
Adjusted EBITDA us now expected to be in the range of $374 million to $391 million down from $385 million to $400 million and represents a 41% to 42% adjusted EBITDA margin GAAP earnings per share now in the range of $2 in 90 to $3, a nine cents down from $2 and 99 to $3.
16 cents and adjusted net income per share is now in the range of $3.22 to $3.40 down from $3.34 to $3.50 with that I'll return the call to burn for his closing remarks Burton.
Thank you Richard our professional service revenues.
WSE volume and resultant GAAP revenue growth has set the stage for continued momentum into 2020 and beyond.
We look forward to completing a successful fall selling season and are optimistic about the large addressable market in the six verticals that trying it serves.
Operator.
We will now begin the question answer session to actually question you May Press Star then one touchtone phone if you're using speakerphone. Please pick up your has said before passing the keys.
Your question. Please press Star then to be please limit yourself to one question and one follow up if you have additional questions. You may reenter. The question queue. At this time, we'll pause momentarily to assemble our roster.
Our first question will come from Kevin Mcveigh of Credit Suisse. Please go ahead.
Great. Thanks, Hey, just to follow up on the healthcare cost a little bit it sounded like there were some impact in Q1 in Q2, and then outsized in Q3.
Any sense of what the incremental was that it was so much more impactful in Q3 relative to one too.
Sure. So the first part Kevin is that as you know theres still burning through their deductibles in Q1 and as we've said on a regular basis. As you know you can have volatility to anyone quarter up to four points, we experienced that in Q3.
As we previously noted the one national carrier continued to see higher costs and in particular, we experienced adverse selection with a segment of the customers and the farm and mix shift as well. These two latter things were approximately half of the Q3 cost variation.
As we said on the call, though we've already mitigated that for 2020.
We've secured a farmer rebate for one of the national carriers that was running hot we've obtained greater cost visibility into their book of business and we've also already reprice. The Q4 in Q1 cohorts that reflect to their new risk profile.
As an insurance carriers that additional please.
That particular region and we believe for 2020, we will now have an 11 to 12 net insurance margin.
Got it and then.
Thank you see other things any sense of.
If you're able to share kind of what percentage of that wses that would have impacted.
The very small percent, if you're asking about from an adverse selection, it's very small.
So if they all decide that they would like to.
Select out when the price terrific that's already factored into the forward looking guidance for the end of this year and next year less the 1%.
Got it and then just one we'll get back end of Q.
You are still able to maintain kind of the EBITDA come within that range.
Where was the offset or would it just been had it not kind of.
Broken this way there would have just been that much more upside to the print.
No. So you had said earlier we were.
Are you seeing that that one carrier was starting to get hot in Q2 as that continued we started to take the necessary actions in the quarter to start to mitigate that and then we lowered the variable incentive compensation, reflecting the financial performance that we're now forecasting.
Okay.
The next question will come from Andrew Nicholas with William Blair. Please go ahead.
Hi, guys good afternoon.
No.
First I, just I wanted to touch on WSE growth.
Obviously.
Quite strong in the quarter I think nearly 45%.
We're saving a bit higher than what we had miles I'm. Just wondering if you could help me size the different drivers of growth there.
Talked quite a bit about retention being improved was that the bulk of the strengths or did you also have.
Continued strength in hiring and then.
Got it related note, if you're seeing a strength in a particular vertical or geography.
So, yes, I'll start with them the renewals and change in existing I'll, let Burton talk about the Salesforce. So as you all recall about a year ago now weve invested heavily in our ability to retain and make happier customers. We have been on that path for a year and as we said last quarter, we started to see significant.
And if it from that we're seeing that again in Q3, and we expect that to continue into Q4 and into next year and we also have seen again for another quarter of strong change in existing for our current installed base. That's a statement as we have moved into more white collar and blue and gray that.
Form lightweight color, we've seen although that's a very tight job market. They really see a benefit to everything that trend. It brings to them and we believe the company selections that we have has actually grown fairly well with that I'll pass it over to burden to talk about the top end with the sales reps, Andrew I think they'd be vertical strategy is work.
King and just essentially what.
What was just said.
The customers are hiring new employees and the growth than what we call Cie or change in existing has been strong and I believe that the companies that were serving our growing and prospering I'm also happy with the sales productivity.
And then sales results so it's across the board.
All of the verticals are are moving forward and growing and I believe but we'll see strength in all six of our verticals as we approach the new year income into 2020, so as I said in my prepared remarks. It is a combination of the.
Change in existing the retention in the focus this last year and retention and new sales all three.
Great. Thank you.
Going back to the to health care costs.
I would like and correct me if I'm wrong you.
The addition of nothing new carrier was partly to try to mitigate.
That issue in that region I'm, just curious maybe if you could talk about your broader strategy around carriers what are the considerations.
About adding carriers in different areas and regions and how that could potentially be maybe a more proactive.
Hey, proactive way of avoiding some of the higher costs, there that are more than expected.
One of the biggest separations between China and other companies is that we try to have multiple choices for our clients. We felt it was important that in the newer metro area. That's an important add on carrier, we're very happy that they joined US. It does allow us to have selection for our clients and we think thats benefit.
So we also use that strategy, we have some national carriers, we have to national carriers, and then we have regional carriers. So a lead by far have more choices in any other.
PEO and we're proud of that.
Hi, Thank you.
Thank you.
If you have a question. Please press Star then one.
The next question will come from David Grossman Stifel.
Stifel Financial please go ahead.
Thank you good afternoon.
So I'm wondering is first just sorry, I didn't get all the guidance down rich can you, perhaps just slowly repeat the fourth quarter guidance.
Sure. If you look at guidance for the quarter, Let me just turn to that place.
You are asking for where we will be $1 billion, representing year over year growth of 9% to 10%.
Net services revenue will be in the range of $215 million to $232 million, which represents year over year decline of minus 4% to 3%.
Adjusted EBITDA is expected to be in the range of each $105 million for the fourth quarter, representing adjusted EBITDA margin range of 41% to 45%.
GAAP earnings per share in the range of 60 179 cents per share and adjusted net income per share in the range of 74 to 91 cents per share.
Got it.
Thank you for opinion.
And just to go back.
To the various issues and.
You know the health insurance book.
Maybe you could under help us understand like how these things come about and.
Transition into the remedies three or four remedies.
Articulated that you think will returning back to a more normalized margin.
You know because it's not always obvious to us like how these things come about.
You can anticipate are just not anticipate that these things happen.
Sure as we have set on the call you'd said on our previous call. We had one national carrier that was running hot.
We started to see a mix shift to specialty pharmaceuticals from brand drugs, and we had higher than expected provider network costs in segments of the business. So what we were able to do over the course of last quarter was negotiate with them as a partner and we will now getting rebates from that particular national carrier, which mitigates that in 2020.
And we've also been able to get greater visibility into their farmers, which allows us to also do a better job of forecasting in pricing to risk or our clients. We are able to then take that information and reprice. The Q4 in Q1 cohorts. So people understand as approximately 80% of our installed base. So that is there any print.
Performed we added Empire, which has been a great AD for us and we believe all these actions will allow us to be in the 11% to 12% range for 2020 .
Again, if you have a question. Please press Star then one.
The coffin says no concluded. Thank you for attending today's presentation you may now disconnect.