Insperity Inc. Q1 2023 Earnings Call
[music].
Good morning, My name is Holly and I will be your conference operator today I would like to welcome everyone to the inspire D first quarter 2023 earnings conference call.
All participants are in a listen only mode. A question and answer session will follow the formal presentation.
If anyone should require operator assistance during the conference. Please press star zero on your telephone keypad.
Please note this conference is being recorded.
At this time I would like to introduce today's speakers joining us are Paul Salvati, 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.
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 of 2023 financial result.
I will then comment on our recent accomplishments and our plan over the remainder of the year.
I'll 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. Sorry body or I may make forward looking statements during todays call, which are subject to risks uncertainties and assumptions.
And some of our discussion may include non-GAAP financial measures.
For more detailed discussions 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 on our website.
Now, let's discuss our first quarter results in which we reported earnings above our expectations.
We achieved a 29% increase in adjusted EBITDA over Q1 of 2000 $22 million to $152 million and a 34% increase in adjusted earnings per share to $2 67.
These results reflect double digit worksite employee growth strong pricing operating cost and operating cost in line with our forecast.
That's where our growth metric the average number of paid worksite employees increased by 10% over Q1 of 2022.
Which was within our guidance.
This growth reflects our successful year end transition associated with our recent sales campaign and heavy client renewal period.
Both worksite employees paid from new client sales and client retention, where near our forecasted levels.
As expected net hiring by our clients slowed it was about 50% of the Q1 2022 level.
Gross profit increased by 16% over Q1 in the prior year on the 10% Worksite employee growth.
And strong pricing through the year end transition, which was a key objective given the current inflationary environment.
The first quarter contribution from our direct cost programs, including benefits and workers' compensation were in line with our expectations.
As forecasted Q1 operating expenses increased 13% and included an 11% increase in the average number of hired business performance advisors as.
As we plan for our future growth.
The operating expense increase also included additional service and support personnel necessary to maintain our premium service level and a period of continued growth.
We also continue to invest in our technology, including the ongoing implementation of Salesforce.
Net interest income increased $4 million over Q1 of 2022 on higher interest rates and invested balances.
And first quarter's effective tax rate was 23, 5%, which is lower than our expected full year rate due to the tax benefit associated with divesting of employee stock awards during Q1.
Our financial position and liquidity remains strong as we continue to invest in our growth, while providing returns to our shareholders.
During the quarter, we repurchased 289000 shares of stock at a cost of $35 million and paid out $20 million in cash dividends.
We ended Q1 with $231 million of adjusted cash and $370 million of debt now.
At this time I'd like to turn the call over to Paul.
Thank you Doug and thank you all for joining our call.
Today I'll provide some detail regarding our excellent results in the first quarter and the challenges we observed in the small to medium sized business community.
I'll also comment on the plans for the balance of the year to continue to capitalize on our market opportunity and I'll finish with some perspective regarding how this year fits into our current five year plan.
One key factor to our first quarter every year is a successful completion of our <unk> selling and retention period to achieve a solid starting point for the year in paid Worksite employees.
This year results were strong on both fronts and when combined with some hiring within the client base over the quarter led us to achieve double digit growth.
The other important factor in every first quarter is the pricing reflected once a year end transition is completed.
This was also a strong highlight in the quarter. We believe the combination of these two key factors puts us in position for a solid year in both growth and profitability. Despite the current economic climate.
These were strong results against the backdrop of a changing dynamic in the marketplace due to persistent inflation rising borrowing cost a weakening economy and elevated uncertainty in the small to medium sized business community.
In Q1, new booked workforce optimization sales reflected this dynamic coming in below our budget.
A degree of hesitation decision, making process was reflected across the country and to a greater degree in California, coinciding with the turmoil in the financial system sparked by the collapse of Silicon Valley Bank and signature bank.
This was also reflected in the recently reported National Federation of independent businesses optimism Index decline in March. These survey results were in alignment with our internal client survey. The most significant change in our client base outlook was the expected impact of the economic climate one quarter ago.
We're expecting a negative impact was less than 10% and is now over 20%.
Those expecting a positive impact from the economic climate dropped from 65% to 55%.
Our internal data we monitor in our client base also reflects some slowdown in the economy.
Both the average increase in pay year over year dropped below 4% and overtime pay as a percentage of total payroll dropped below a 10% threshold for the first time in a couple of years.
The commissions, we pay to Worksite employees of our clients, which reflects the recent strength of the sales pipeline in our client companies was down to mid single digits for the second quarter in a row compared to strong double digit seen in prior quarters.
Now none of these developments, we are staying in our client base and the overall small to medium sized business marketplace are unfamiliar to us over our 37 years of experience, we understand what our clients and prospects are experiencing and how their needs for sophisticated HR solutions change in this environment.
We also know what tweaks to make it our sales service and support organizations that have worked before to meet these types of challenges and continued solid growth and profitability performance.
Most important factor to drive growth in this environment is the number of sales opportunities we generate the two most important drivers for this factor or the number of business performance advisors and the number of discovery calls.
And we believe we are in excellent shape on the most critical long term growth driver for the company. The number of business performance advisors as Doug mentioned currently we've ramped up to more than 700 BP as an 11% increase in this key metric over last year.
Now our focus is on driving the activity numbers up across the board in discovery calls and opportunities to bid our services our marketing efforts an important driver of these opportunities and we're off to an excellent start this year with marketing leads up 13% discovery calls up 11% in Q1 year over year.
We also launched our spring brand awareness campaign early this month, which continues into mid June . This includes market specific media plans designed to continue this momentum in all our markets across the country.
The combination of our growth in the number of BPA as our marketing plans and our sales management focus on activity levels gives us confidence in our growth plan for the balance of the year and beyond.
We also believe we are in excellent position for solid profitability for the year as you will see US does provide specific guidance in a few minutes.
Our strong pricing is the key driver of our raised guidance in the near term and our progress in our workforce acceleration offering is contributing to our long term outlook, new booked workforce acceleration sales were up 36% year over year in Q1, reflecting the increased focus of our sales organization on this offering right.
Adjustments to our sales compensation and recognition programs have successfully enhanced this effort.
Our workforce acceleration operating has significant long term potential to enhance our business model by leveraging our current sales process that allows us to see nearly 40000 business owners face to face each year.
Workforce acceleration has the potential to further improve our sales efficiency lower BPA turnover and enhance our customer for life strategy for client retention. So as we look at this year in the context of our five year plan.
We remain on track to meet and exceed our year two targets on our two key metrics paid worksite employees in adjusted EBITDA, even in a challenging economic environment, we have the potential for high single digit growth in worksite employees and double digit growth in adjusted EBITDA. This year.
I look back at our 10 year history compound annual growth rates on these key metrics demonstrates the strength of our business model with rates of 10% in worksite employee growth and 15% and adjusted EBITDA, even with the pandemic during this period.
We provide the best in class small and midsized companies with premium sophisticated HR solutions that elevate their likelihood and degree of success.
These services are provided by an incredible team of professionals here at a disparity that are dedicated to the success of every client. We expect this level of commitment to continue to produce excellent results for clients and Worksite employees communities and our shareholders at this point I'd like to pass the call back to Doug to provide a specific guidance.
Thanks, Paul now, let me provide our Q2 guidance and an update to our full year guidance and which we are refining our forecast the paid worksite employee growth and raising our 2023 earnings expectations were.
We are now forecasting 7% to 9% Worksite employee growth for the full year 2023 compared to our initial guidance of seven 5% to 10, 5% growth.
Our updated guidance still points to a high single digit worksite employee growth in a period of economic uncertainty and what appears to be some caution and negative sentiment in the marketplace.
As for Q2, we are forecasting year over year, Worksite employee growth of 7% to 8%.
We're now forecasting for year 2023, adjusted EBITDA in a range of 370 million to $410 million.
And adjusted EPS in a range of $5.62 to $6.39.
We have increased the midpoint of this updated guidance still include our Q1 outperformance and an expected improvement in profitability over the remainder of the year.
This improvement in profit profitability is based upon our recent strong pricing.
Cost trends and operating expenses generally in line with our budget and higher interest income on rising interest rates.
Our operating plan continues to include the necessary investments to meet our five year plan objectives, including the growth in BPH and service personnel and.
And the necessary marketing and technology investments.
We are now estimating our full year 2023 effective income tax rate of 26%.
As for Q2 earnings we are forecasting adjusted EBITDA in a range of $81 million to $90 million and adjusted EPS from $1 16 to $1 32.
This guidance considers our typical quarterly earnings pattern and as you may recall, 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 are typically lower in Q1 and step boat 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.
Yeah.
Certainly at this time, we will be conducting a question and answer session.
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Okay.
Your first question for today is coming from Jeff Martin at Ross M. K M.
Thanks, Good morning, Doug.
Doing well.
Yes.
I was wondering if you can provide.
Some additional detail with respect to the California market.
Yeah.
Sales impacted and in California in the Pan.
And was there any material loss to Worksite employees as a result.
Natural turmoil.
Sure. Thank you for your question I appreciate that now what we experienced in the month of March was more what I would describe it as just a shock effect of that.
Financial market banking.
Banking industry issues that came up.
And what happens in an environment like that is just the hesitation.
In making decisions and of course in our case the decision to use the P O service.
There is a significant one.
So in fact, it's more of the framework almost like a capital decision. They make so it's very natural to kind of.
Hesitation, if there's something significant that happens so we've already seen that begin to wane.
And it usually does once things have.
No.
Settled out a bit and you know in California.
And even in the New York area, where there's more technology and financial type companies, we saw that a little bit heavier.
Then we did but it did happen across the rest of the country as well so I consider it a blip a brief one and you know what.
That's why you can see in our expectations for the rest of the year, we still had a great quarter and double digit unit growth and we're still expecting high single digit growth. This year and we're really in good shape on that front.
Great and then my second question is it's a two part one is did you notice any changes in the hiring trend throughout the quarter as we progressed from January .
Yeah, even through.
Most of April now and then secondly.
Secondly.
Actually I forgot the second part of your question. So I'll just leave it at that.
Yeah. So you know we expected a significantly reduced hiring road compared to last year.
And we had seen it.
Really slow down in the third quarter and then even in the fourth quarter.
Dramatically.
And so we were expecting.
<unk>.
Around 50% of the level of the first quarter last year, and that's where we came in so if it met our expectations, but it's certainly.
You know significantly lower than last year, and that's what we expect to continue for the rest of the year.
We do a lot of research with our client base about their.
Hiring.
Expectations.
We still have about.
Little over half of the client base that expect to have more employees in there.
Oh organization as the year progresses, and it is still a small number that expect less.
Little bit bigger number than usual that expect to stay the same.
And then the other part of my question was with respect to pricing or anything.
Directly attribute to the strong pricing trends.
So we we really had a focus on that effort across the entire year last year in our new and renewing business.
This was because you know in an inflationary environment, it's really important.
To drive those numbers to the right direction, especially.
Our service organization with you know over 60% of your total cost or your own labor cost.
And when you have wage inflation likes going on than you wanted.
Hiring and retaining the best people you just need to really have a good focus on your pricing strength, we did that in that group data.
And out of the park homerun for the full year and so this is absolutely a perfect position for us to be in on the front end of.
Who knows what this turns out to be but we do know it says it will slowdown in the economy notes weekends to a degree.
And.
You know you have some.
Challenging environment out there, but for us to be at this point with you know a double digit growth in the number of Ppas strong marketing effort and having a strong pricing.
Foundation.
That's the best position for us to be and we've been through these kind of positions before.
And.
This is <unk>.
Down the middle of the fairway of where we want to be when you're facing a lot of time periods like this.
So we can support our clients well and continue to grow the business and.
Continue to improve our profitability.
Your next question for today is coming from Tobey Sommer at Truest Securities.
Yes.
Thank you good morning.
I was wondering if you could talk to us about the sales force productivity measures how those are trending in.
How you think about pulling the levers of.
Increasing.
Uh huh.
Sales force as well as indoor marketing over the course of the year.
Yeah. Thank you Tobey so yeah. When you when you grow your sales staff faster you have some.
Drag on some of the metrics you all your sales efficiency et cetera.
But those are all in line with where our expectations have been with the exception of that brief.
Brief pause and closing at the end of the quarter. So like I said I feel like that's a blip.
And everything we're doing on that front.
We believe are the right things to drive those metrics right direction over the long term.
So the focus now is of course on activity levels, because one of the things we've learned throughout our history.
Is when you go through a tougher period, where there is some hesitancy.
Hesitancy in the mindset of the small to medium sized business community you just say more opportunities so.
We've had very successful marketing efforts that we're replicating.
Mentioned the spring campaign that we just initiated the beginning of this.
This month.
And so we're going to invest heavily.
In our marketing effort to drive those opportunities of course, we have other ways, we do that through our partnership relationships through our loyalty program, we're doing a lot of other things too.
Really focus on driving activity more opportunities and.
That will we expect in this kind of environment. Some of your metrics are lower.
Because of the economic environment and that's what we're.
We're expecting in April to drive the growth in that environment now the good news is all of those opportunities turn into excellent training and experience for the <unk>.
Sales organization.
And the other region, we do it this way is because when we've seen these periods before not only do we go down less than others, because we keep growing.
But we also come out much sooner are much faster because of the.
You know the double emphasis of growing the sales team and growing the number of opportunities.
That is just a great way to go through a period like this so.
You know, we don't like that the economies in a tougher position, but you know I get excited about it because we know what to do in this kind of situation and gives us an opportunity to really.
So our strength.
Thanks.
I wanted to ask a question about workforce acceleration you've seen really good growth there over the last.
Two or three years.
Is there a point at which it would make sense to us.
<unk> make any changes to way you that you either manage that or the the way you report it to us externally.
Yeah, I believe we will be making some changes once we get that up to.
A level.
And have enough time period, where you.
The metrics you know have some consistency and so we can measure them.
Correctly right now we're in that stage of getting more adoption of this in the sales process across the entire organization. That's the steps that are really are taking place now.
And we're really on a great track there.
We see this as like a silver bullet for us in the business model.
At the correct point will be.
Discussing it differently.
Well it won't be managing a lot differently, because I think we're managing it in a way that makes sense to drive the results we want.
But there will probably be more reporting of information.
That I know will be it will be good for everybody to have more understanding.
If I could ask one last one in terms of the health care.
Benefit cost center.
We've heard from public Hospital company Who's talking about more activity levels more patient volume and some of the managed care companies talking about higher medical loss ratios. How does how does it trend so far year to date, what's your expectation for the balance of the year.
Yeah. So you know in the first quarter honestly, we take those factors into account you know going into the year and where we work with Unitedhealth care and we give some of that same information out as they have for the first quarter.
The benefit cost side of things was just a little bit of hair above our expectations, but as we mentioned on the call and our prepared remarks, the pricing came in stronger so in total that program in the first quarter.
Ran as expected.
And I would say you know as we look over the remainder of the year, obviously things can change, but as we see it now are we sort of stuck with that over the remainder of the year, what our expectations are so we've.
Bumped up the benefit cost trend, just a bed, but really the pricing coming in a little bit favorable relative to our expectations has helped to offset that.
And just following up on that.
The Workers' comp program continues to.
<unk> managed to our expectations and.
Yeah, it's still getting nice contribution about are out of our workers comp section program.
Your next question for today is coming from Mark Mark on at Baird.
Good morning. This is Andre Childress on for Mark So you've spoken quite a bit about some of your marketing initiatives as well as the spring brand awareness campaign could you give a little more color on some of the initiatives that you're actually taking and maybe some early trends from that awareness campaign.
It's a little early for that because you know that just started of course at the beginning of this this month, but I can tell you that it's the.
The whole plan reflects.
The successful programs, we had in the spring of last year. The first time, we did that.
There is specific.
Media and marketing campaigns in every every market of ours across the country. So.
So and then we repeated that in the fall got excellent results from that so what I mean by that is it's very localized even you know radio ads are.
<unk> done by local celebrities and voices so that we.
It shows us being really involved in the local community.
And in the plans are different based on whether you know billboards work in one environment don't work in another environment et cetera. So there's a lot of work.
In each marketplace coordination with our team in each of those market place. So they understand what we're doing why we're doing it.
And that has proven to be very successful.
We expect to have great results in that.
So we believe we will based on.
And how it's worked before.
Great and switching over to demand in this environment are you seeing a greater preference for workforce acceleration over optimization.
And how are you thinking about that for the remainder of the year.
You know, we're evaluating all of that but I really don't see that you know its interesting that when the when a client or a prospect.
Is ready.
Ready to move to that level, there's there's nothing to stop them so presenting both.
He is an appropriate approach and then.
What where they are as a company and whether the timing is right to go to the full model or taken initial step into workforce acceleration, that's kind of a parent on a client by client basis and the good news is over the long haul those.
Come into workforce acceleration, many move up then into workforce.
You should expect to see more of that as the years go on and then we also have a place for clients too.
Dropped back to if there is a need or situation their environment to do that so.
We don't see it as one competing with the other actually both of them.
Kind of support as a way to support the client based on what their needs are at the time, so and in this environment.
Demand for.
Making sure they're they're dealing with the HR.
Issues properly.
No really effect.
It becomes a.
Very important.
Element of what they're doing to keep their business on track through a difficult period. So you know.
I see the demand continued to be strong.
And people.
People understanding what they need to do to keep their business going through a tough period.
Now I'd like to also clarify you may know this but the worksite employee guidance that we gave a specific to the PEO, Okay and then.
Workforce acceleration.
Probably get out of that product is incremental to our total growth.
Gross profit okay. So.
Some people report a little bit differently, but our worksite employees is definitely specific to the PEO offering.
Yes, that's a good point Jive, yet what we mean is that.
Nearly 60000 or so.
Employees that are at clients on the workforce acceleration program are not in our.
Over 300000.
Worksite employees in the PEO model.
Great. Thank you for the color and just last one for me. So you repurchased 289000 shares in the first quarter could you provide an update on your thoughts on capital allocation at this point.
We wouldn't really are kind of the same mindset.
No we.
We like to take advantage of market opportunity to.
To continue to.
Move the dividend the right direction, we have a target for us.
You know, what the payout ratio should be et cetera, and what kind of dividend.
Yield we like to have for our shareholders.
And then we also.
Have a policy of buying back at least enough shares to offset any potential dilution from.
Incentives are our teams.
But in addition to that if you look at our history, we've bought back a lot more shares from that and that this is all about the fact that this is a.
This is a cash flow machine and so doing the right things with your cash that's important.
We still I would say that the return to shareholders is the highest.
Priority the amount of capital we need to invest.
Is modest.
This model. So we don't expect a lot of increases on that side.
And that gives us.
Continued expectation have plenty of cash available to do.
Yeah.
Your next question for today is coming from Andrew Nicholas at William Blair.
Hi, Good morning, Thanks for taking my questions I wanted to start with one on Worksite employee growth guidance. It does look like it's a touch lower within your previous range is that primarily a function of.
Being a bit on the lower end in Q1. It seems like you know retention was as you expected existing client hiring was as you expected just trying to figure out if there are any other kind of incremental headwinds that you're baking in there or if it's solely a function of the lower Q1 start.
Yes, the lower Q1 numbers the biggest issue I think we were just on the low end of our range.
But the and then we.
We are also just weighing in.
Some of the effects.
On the sales side, but it just it's just a minor.
When you look at it over the full year.
We're still.
Within the range, we're down from I guess, we had a wider range this year because of that.
Of the uncertainty out there we had a seven five to 10, 5% range and now we're set.
Seven to nine so the midpoint goes down from nine to eight the bulk of that is due to the first quarter being at the low end of the range because it's all about timing of when people come on.
Into the model and so when you have a little hesitation that pushes it out a little bit.
You've got to factor all of that.
It makes sense, yeah, I realize it's in big picture pretty pretty small change just wanted to make sure.
And then for my follow up on the operating expense side, you've talked quite a bit about the BPA growth then and staffing up on the support side or are you in a good spot on the latter part or in terms of service personnel and staffing or do you still need to do some some catch up hiring given.
Given the strong growth over the past several years.
Well, we had a really strong.
Last half of last year on that front and we're able to.
Catch up significantly.
The first quarter. This year, we were digesting a lot of.
New.
Great people that have joined our organization.
Had just a hair or a pause there for a month or two and now are back onto it.
What I would call just the routine.
The level of increased managing against our growth expectations. So we're we're in a good solid position on both.
The BPA front.
As like we said, 11% growth year to date will kind of be at that level I think for the year and then also the the service and support staff.
Where we're much better shaped out over a year ago on that front.
The solid position, we don't see any dramatic operating expense changes based on any of that.
That's helpful. Thank you.
Okay.
We have reached the end of the question and answer session and I will now turn the call over to Mr. Sovaldi for closing remarks.
Once again like to thank everyone for participating on the call today, we look forward to.
Updating you again next quarter. Thank you very much.
Yeah.
This concludes today's conference and you may disconnect. Your lines at this time. Thank you for your participation.