Q2 2025 CBIZ Inc Earnings Call
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I would like I would now like to turn the conference over to Lori <unk> director of corporate Relations. Please go ahead.
Good afternoon, everyone and thank you for joining us for today's conference call to discuss <unk> second quarter and first half 2025 results as.
As a reminder, this call is being webcast and a link to the live webcast along with today's press release and Investor presentation can be found on the Investor Relations page of our website <unk> dot com and archived replay and transcript will also be made available following the call before we begin.
We would like to remind you that during the call management may discuss certain non-GAAP financial measures reconciliations of these measures can be found in the financial tables of today's press release and Investor presentation.
Today's call May also include forward looking statements regarding our business financial condition results of operations cash flows strategies and prospects forward looking statements represent only our expectations estimates and projections as of this date of this call and are not intended.
To give any assurance of future results.
<unk> forward looking statements relate to matters that have not yet occurred.
Statements are inherently subject to risks and uncertainties.
Many factors could cause future results to differ materially and <unk> assumes no obligation to update these statements except as required by law.
A more detailed description of such factors can be found in today's press release and in our financial filings with the Securities and Exchange Commission joined.
Joining us for today's call are Jerry <unk>, President and Chief Executive Officer, and Brad <unk> Chief Financial Officer.
I will now turn the call over to Jerry <unk> for his opening remarks Jerry.
Thank you Lori and good afternoon, everyone.
I am pleased to report that our second quarter results reflect the resiliency of our core recurring a central business.
Though the current economic climate continued to impact our more market sensitive areas today.
Today in addition to talking about the second quarter and first half results on.
I'll address the proactive measures, we are taking to drive revenue and control expenses in response to these market conditions.
And I will also discuss why we think the <unk> acquisition.
One of the most important and value, creating strategic decisions in our history.
I'll provide an update on integration and our continued excitement about the strength of our combined team and the opportunities ahead for accelerated growth and profitability.
Year to date organic revenue for our core services within our benefits and insurance segment, and our core accounting and tax services grew by low single digits and our National practice segment grew by 13%.
Likewise year to date, adjusted EBITDA more than doubled compared to last year, reflecting both the strength of our business model as well as the accretive nature of the <unk> acquisition.
The second quarter business climate was largely unchanged from the first quarter.
With continued uncertainty around tariffs geopolitical unrest and government funding cuts.
Our middle market clients rely on us for a central services like our accounting tax benefits and insurance and.
In all economic environments.
But they often wait for more stable conditions before investing in discretionary project based services.
The first half of 2025 has been anything but stable uncertain.
Our second quarter sentiment analysis.
With responses from nearly 4500 clients and client facing professionals substantiated these trends.
Nearly 60% expressed in a neutral outlook, citing higher operational costs mixed.
Mixed economic forecasts and challenging tariff and trade policies as top concerns.
As a result overall revenue for the nonrecurring project based portions of our business.
When excluding our SEC related practice.
Is down low single digits year over year.
Industry reports and discussions indicated that growth in these areas.
Been particularly challenging for our competitors as well this year.
For the first time in years, we're also seeing pressure on rate increases over the past several years, we've achieved net rate increase in the mid to high single digits.
For the first six months, we build clients accordingly, however.
However in Q2, we saw increased client pushback aligning with our survey data that clients are prioritizing cost controls.
Year to date, our rate increases averaged about 4%, which is two to 300 basis points below our expectations going into the year and is expected to create a headwind of about $75 million for the full year.
Given the current and anticipated economic client, we have accelerated several significant revenue and cost control initiatives.
On revenue each of our nearly 1000, managing directors has been tasked with identifying new target clients.
<unk> meetings to introduce our expanded services conducting stewardship meetings with top clients and participating in industry groups charged with pursuing top opportunities.
On the cost side, we've expedited a number of integration related decisions, including workforce integration.
With nearly 450 fewer fulltime equivalent employees in our core businesses compared to last year, we're seeing enhanced team utilization and improved compensation expenses.
Looking ahead, we expect continued steady demand for our core recurring essential businesses to provide line of sight to the lower end of our revenue guidance EBIT as nonrecurring services face ongoing headwinds.
We believe our revenue and cost initiatives will partially offset these pressures and support the achievement of our adjusted EBITDA and EPS guidance.
Let me reiterate the strategic rationale for the Markham transaction.
We're even more excited about the strength of the team that joined us the client fit and the opportunities for growth and profitability. Neither firm could have achieved on their own.
Mark <unk> business closely resembles CEVA is legacy core and accounting and tax business. They serve middle market clients maintain deep client relationships achieve high retention rates and generate strong cash flow.
They also share our successful track record of organic and inorganic growth and bring operational excellence and complementary capabilities and technology industry practices and offshored.
Mark have also strengthened our presence in key U S markets like New York, where we are now the largest accounting service provider outside the big four as well as in new England, and mid Atlantic, South, Florida, and Southern California.
The acquisition expanded our client base and opened new cross serving opportunities to deliver an even broader array of services and depth of expertise to our combined clients.
Our increased size and scale as the largest professional service adviser of are kind to middle market clients, including as the nation's seventh largest accounting firm.
Strengthens our position as an employer of choice for exceptional talent.
Allows us to pursue larger and more complex client engagements enhancing our ability to reach total addressable market that extends to roughly 200000 middle market U S businesses that collectively generate over 10 trillion in annual revenue and employ approximately 48 million people.
And it supports substantial investments in critical areas, including AI and other advanced technologies offshoring automation and branding.
All while leveraging our collective infrastructure to expand margins and enhanced profitability.
And integration as previously shared we delayed client facing changes during busy season.
Stead, focusing on back office opportunities.
That work is now in full swing and on schedule early results are positive.
And when we have faced challenges we've acted quickly with our primary focus being supporting our team and our clients with that I'll turn it over to Brad for some details.
Thank you Jerry and good afternoon, everyone.
With two full quarters of the Markham acquisition now reflected in our results, we're seeing the benefits of being stronger together.
Our results reflect the benefits of greater scale, the resiliency of our business model and the advantage of our unique breadth and depth of services all of which is delivered by our exceptionally talented team.
On a consolidated basis second quarter revenue was $684 million and first half revenue was $1 5, billion% to 63% and 66% increase respectively.
Largely driven by the acquisition.
For the quarter, adjusted EBITDA increased by 128% or $66 million and more than doubled to $356 million in the first half.
Adjusted EBITDA margin was 17% in the quarter and 23% year to date in.
An increase of nearly 500 basis points versus last year.
Lower incentive compensation expense in the quarter and year to date contributed to approximately 403 hundred basis points of margin improvement respectively.
In addition in the face of uncertainty we remain disciplined managing other discretionary spending.
So normalizing for lower incentive compensation and discretionary expense items. We believe margin expansion was fairly consistent with our historical performance as we begin to realize the benefits of greater scale and the accretive attributes of the acquisition.
Our annual target of 20 to 50 basis points of margin improvement remains intact.
Second quarter adjusted diluted earnings per share increased by 64% to <unk> 95 per share.
And first half adjusted diluted earnings per share increased by 47% to $3 26 per share.
Second quarter interest expense was higher by $22 million compared to last year and $43 million higher year to date, driven by higher outstanding debt associated with the acquisition.
Second quarter tax expense was $7 million higher than last year, primarily due to the $30 million increase in pretax income.
Our effective tax rate for the second quarter was lower by approximately 240 basis points compared to last year due to lower non deductible expenses and lower state income tax expense.
First half tax expense was $30 million higher than last year due to an increase of approximately $100 million in pre tax income.
Our first half effective tax rate was approximately 170 basis points higher primarily due to lower tax benefits related to stock based compensation.
Turning to our financial services segment second quarter revenue was $570 million up $261 million or approximately 84%.
Financial services adjusted EBITDA more than doubled to 111 million a margin of 20% 250 basis points higher than last year.
As expected revenue growth was primarily driven by the acquisition.
And as Gerry highlighted we continue to see meaningful growth in the financial services core accounting and tax service lines, which served to mitigate headwinds in our FCC business.
And the relatively flat performance in our advisory business.
In addition year to date the financial services segment has realized rate increases in the mid single digits, which is approximately 200 to 300 basis points lower than what we expected coming into the year and also approximately two to 300 basis points lower than what we've realized over the past several years.
Our benefits and insurance, our BNS segment delivered revenue of $102 million in the second quarter up nearly $5 million or approximately 5% compared to last year.
P&I adjusted EBITDA was $20 million up $3 million or 21%.
C&I adjusted EBITDA margin for the quarter was 20% up 260 basis points compared to last year.
The revenue and profitability improvements in DNI were driven by nearly all service lines and the team is engaging aggressively to pursue a strong pipeline of cross serving opportunities, including those related to the acquisition.
Turning to capital allocation and the balance sheet.
Our longer term capital allocation priorities remain unchanged.
We will prioritize allocating free cash flow to fund high return organic and inorganic growth investments, while opportunistically returning capital to shareholders.
However, as we've discussed our near term priority remains focused on Delevering to two five times or below on a 2026 extra rate basis.
In addition over the near term, we will maintain a financially disciplined and prudent approach to minimizing the impact of the acquisition related shares.
And as an acquirer of choice, we will continue to pursue appropriate strategic opportunities.
Therefore, our path to Delevering may not be linear.
However, the strength of our business model and our ability to generate meaningful free cash flow provide us confidence, we can invest and achieve our target leverage simultaneously.
Our net debt ended the quarter at approximately $1 6 billion, representing three seven times leverage or two tenths lower than the end of the first quarter.
We ended the quarter with approximately $400 million of available liquidity under the revolver.
In the second quarter, we repurchased approximately 1 million shares at a value of approximately $71 million.
As I mentioned on our first quarter call on May 1st nearly $4 4 million shares became eligible for sale by our legacy Mark and partners and we retain a contractual first right to purchase these shares.
Therefore, our second quarter repurchase activity reflects decisions, we exercised under the contractual rate and also reflects our commitment to the prudent financially disciplined principles I mentioned earlier.
Normalizing for the $71 million in share repurchases, our leverage would have ended approximately at approximately three five times, which was slightly better than our expectations.
Turning to guidance, we are maintaining our revenue and earnings guidance.
As Jerry discussed we now expect the market conditions experienced in the first half to persist for the remainder of the year.
And therefore anticipate our revenue for the year to be at the low end of our guidance of $2 eight to $2 95 billion.
This compares to 2024 pro forma revenue of $2 79 billion reported in our 2024 10-K.
Which for our internal purposes, we adjust downward by approximately $75 million for the items that we have previously described as known items, which include acquisition related client conflicts.
Declines in the SEC related business.
<unk> related revenue and the impact of business divestitures.
Our guidance and modeling support is included on page 21, our investor presentation.
Please note on page nine we have updated our estimated recurring and nonrecurring revenue mix to now include our SEC practice and nonrecurring given its market dependent attributes.
We now estimate a recurring and nonrecurring mix of 72% and 28% respectively.
Finally on page 20, we have included some new analysis summarizing the value of the cash tax benefit associated with the acquisition related goodwill amortization.
With that I'll turn the call over to the operator for questions.
We will now begin the question and answer session to ask a question you May Press Star then one on your Touchtone phone. If you are using a speakerphone. Please pick up your handset before pressing the keys.
Any time your question has been addressed and you would like to withdraw it. Please.
At this time, we will pass momentarily to assemble our roster.
Okay.
Our first question comes from Andrew Nicholas of William Blair.
Please go ahead.
Hey, good afternoon, Thanks for taking my question.
I just wanted to talk on the advisory business, obviously, that's part of.
The reason for.
The guide down last quarter, it sounded like things haven't really changed a whole lot, but if you could speak a little bit more to kind of what you saw throughout the quarter did it may and June look any better than April and then tied to that.
When you talk about being at the low end of guidance.
Is the assumption.
Embedded in there that there is no improvement from here I just wanted to make sure that that's clear.
Yes, Andrew.
Thank you Jerry.
Let me ask answer the second part of that question first which is the guidance for the rest of the year.
Suggest that.
The second half will look much like the first half and Youre right. The first half.
While we're very pleased with relatively flat performance within that business kind of coming off of high watermarks in 'twenty four and in the years before that so we're really happy to be able to maintain that in this environment.
As you continue to see across the middle market clients are really kind of sitting on the sideline.
And many times in many instances just waiting for more stability before they move forward with anything that's discretionary so all the headlines say that our competitors continue to experience that anecdotally when we speak with them and that's what we're seeing too but all in all pleased again that we're able to may.
<unk> maintained at least the level of performance that we've seen.
Over the past couple of years, it's just been hard to grow on top of that in this environment.
Got it thank you Andrew.
Just to add to that I think you might recall when we discuss Q1 results and we updated the guidance.
We I think we spoke of as somewhat unknown things are unknown items that occurred or that came our way in Q1 that we really fully didn't expect and we quantified that or is around $20 million.
And I believe by kind of reflected that the low end of the guidance at that point in time in part was established assuming that that Q1 run rate of $21 million would persist for the rest of the year. So that just supports what Jerry says it's reflected in our in our in our remarks.
Got it thank you.
Next question.
And the pricing commentary.
I guess multipart question again, if you don't mind I guess is there.
Particular part of the business, where that pushback on pricing is more pronounced do you have any sense of.
Our opinion as to how much of that is cyclical versus maybe having reached some sort of structural limit.
And lastly.
Does it change your optimism or maybe you could speak to your optimism on potential pricing improvement in the marketing business yes.
Yes. Those are those are all great questions. So let me let me address the structural change first.
I don't think we've reached the limits of what we're going to be able to do in pricing I think what we've experienced year to date is really market driven.
As I stated in the comments.
We were really pleased over the past several years to really be able to see kind of high single digit.
Rate increases year over year over year, and we continue to push for all of those things. We went into this year expecting that we'd see similar pricing.
It wasn't until we set those bills in and started to receive kind of comments back and push back from our clients that we.
That we made the realization adjustments, but even at a 4% price increase or kind of mid single digits low to mid single digits. In this environment. We're pleased that we're able to get that and again, it's a testament to the value that we bring to the client relationship. So so that's what we're seeing I think when the market improves.
We will be able to resume the same levels of pricing that we've historically seen.
The other opportunity and the one that you raised is that our pricing discipline and the tools that we have.
The reporting we have the training that we put around it really is not reflected in the mark of numbers and so we're just beginning that today now with that said historically, they've just been intuitively good at it.
They are pricing has historically reflected very similar trends to ours as far as we can see but we think that there'll be even able to do even better when we bring the reporting the tools and training the methodology to it. So so I think very bullish looking forward what we're seeing in the first six months is just a reflection of market conditions.
Makes sense. Thank you and then maybe last question for me is just.
It sounds like Youre pulling back on some spending to manage the bottom line, which drives the great part of the model just wondering how much of that could be attributed to marketing synergies.
Or are those $25 million plus or more still mostly a 'twenty six 'twenty seven event. Thank you.
Yes, Andrew I'll take that question. So I think I'll say a couple of things.
I'll just reiterate what I said in my remarks, the if you look at our margin our EBITDA margins that we reported.
I commented on the fact that about 400 to call. It 400 for year to date and about 300 basis points in the quarter.
That more year over year margin improvement is driven by.
<unk>.
The management of incentive compensation as well as other discretionary items most of that is incentive compensation to just to give you a little bit more insight into that.
The discretionary items as we're bringing these organizations together it becomes a little bit more difficult.
Kind of narrow in on where.
Where we're going to land with those ultimately, but Jerry did mentioned, where we're operating with nearly 450 folks on a combined basis lower year over year.
So as a result of that the non personnel related costs that come with that we expect to be able to continue to capture the benefits of that when the synergy part of your question.
I will just say, we're not in a position where we're ready to update our outlook on synergies, but we are getting more and more line of sight to not only the 25, but really clearly surpassing that and when the time's right. We look forward to providing.
You and the others in our investment community an update on that but we're very confident in terms of where we're at with the 'twenty five and we're realizing those sooner than 2026 at this point, so that's helping us mitigate some of the headwinds we're seeing in our business as well.
Great. Thank you very much.
Thanks, Andrew.
The next question comes from Christopher Moore of CJS Securities. Please go ahead.
Hey, good afternoon, guys. Thanks for taking a couple.
So maybe maybe we could talk about the integration costs I know you're targeting $75 million.
For the year.
I think first half was $34 eight or something like that just trying to understand.
The bigger buckets or are certain pieces of this done already or just.
Any more granularity you could give in.
Those costs would be helpful.
Yes so.
Well I would say, Chris just to say what you said, we still have in our in our outlook are in our guidance reflected the $75 million on a full year basis. So.
We remain remain confident that there will be at that or below.
In terms of a year to date the nature of most of what you are what we are reflecting in integration expenses fully twofold. There is really the bringing together of the organization and kind of the the.
People related costs that come with that and then the second piece was largely be advisor related costs that we experienced largely more on the first part of the year in the first quarter of the year.
So thats really the two broader buckets of what what's what's coming through there.
Yeah.
Got it and are there.
Additional integration costs likely for 2016.
Yes, there will be we will continue to expect further integration costs next year, we will give you when the time's right as we rollout guidance for 2026 will give you an update on that but at this point in time, we would estimate them to be about the same levels as what we're experiencing this year onwards, the 75.
I can give you more context on that as we're ready to kind of cross that bridge, but that's that's our guidance and I think that's pretty consistent with what we laid out when we publish the proxy and announced the transaction.
Got it I appreciate that.
Yeah.
In terms of just.
A little granularity on free cash flow for 25 can you give a sense as to I know <unk> welcome.
Talking about trying to get to two five times leverage by the end of 2006.
Not sure if it's <unk>.
Pretty smooth between $25 26, if its back half loaded.
Any thoughts on free cash flow.
Yes, I mean, Chris as you know our business model, we have a pretty notable.
Use of working capital, particularly in the first quarter and the first really the first four months of the year.
Two drivers of that one we ended up paying incentive compensation in the first quarter that can be pretty lumpy in most years. So there's that and then as we get into the busy season, obviously, we're accumulating.
Pretty significant work in process and accounts receivable and then we collect on that really the balance of the year, we have a little bit of a second busy season call. It in Q3.
But that really isn't as notables what we experienced in Q1, so I would say overall the profile of our cash flows that you've seen and been accustomed to under legacy <unk> would be similar going forward.
Obviously, you need would you.
Have you have updated for the higher levels of interest expense and then the update in terms of our effective tax rate and what we expect there as well as cash taxes. So.
Those will be the updates versus our historical.
Got it maybe.
Maybe just the last one from me more qualitative you closed the <unk> deal I don't know eight or nine months ago.
Biggest surprises positive or negative at this point.
Yes, Chris it's funny, we talk a lot about this internally I would say without question. The most pleasant surprise. We have is the quality of the team just exceptionally talented people exceptionally talented leadership great.
Great clients.
Great collaboration really you bring two organizations together and you never know how well those.
Those teams are going to fit together, but to a person.
We form these industry groups, we brought people from both organizations together to lead them and to take them forward and all of that.
It has been really much better than expected.
We always have bumps.
Along the way.
Some friction in some of our processes.
And how they translate into into client.
<unk> our team member experiences we've been quick to identify those in and get on those and knock those things down.
I think that's also been very positive and very well received by the team. So all in all very good but listen.
We're not taking anything for granted we're out in these markets all the time, making sure that we understand how this translating into the team member experience and the client experience. We're really pleased to date, but we're going to stay on.
I appreciate it I'll leave it there guys. Thank you.
Thanks, Chris.
Once again, if you have a question. Please press Star then one.
Our next question comes from Marc Riddick of Sidoti.
Go ahead.
Hey, good evening, Hey, Mark.
I Wonder if you could talk a little bit about another another quarter and now on the on the <unk>.
I was wondering if you talk a little bit about.
Additional learnings or maybe some things that you may have picked up as far as client feedback on the transaction and maybe what youre hearing from them that might be.
Separate from the macro situation, but maybe you can sort of give a bit of an update as to what your what youre learning from them and what their feedback on the transaction has been.
Yes, let me start here Mark as we said.
We really did very little too.
To really impact client as best we could a client.
Client experience kind of through the busy season, we wanted that.
Our team.
Be unencumbered, we wanted our clients to have an exceptional experience.
So we really tried as best we can not to do anything that would really impact the client relationship. We're just early stages now.
If you figure you start on that May one we're pretty early stages.
But all in all I think we're off to a really good start.
I think you could look at our business in the advisory side and say all is going very well the Tac side augurs very well on the test side.
That was kind of the reference I had before we took a couple of steps that.
Early on just well intended but some of the processes. We had in place caused some kind of friction in the client intake and client acceptance procedure methodology things with.
We've course corrected all of that in fact, we've completely restructured.
Along with our partners on the Cvs CPA side.
The way that we operate that business.
And our focus on really the experience the team member experience and the client experience. So I think we're in really good shape, there, but you'll learn a lot along the way and we continue to we continue to adjust as we hear those things environments.
Great and then I was wondering if we could shift a little bit.
The commentary around the <unk>.
Discretionary.
So then trends and sort of what folks are.
Holding background around the headlines and the like I was wondering if you could talk a little bit about maybe some of the pockets there that are most notable.
I would imagine some of the.
M&A related type discretionary where it might be part of that but maybe you could share some of the.
Maybe what youre seeing there that's maybe most notable yes, I am going to put it into two kind of two distinct buckets right. Let's talk about the work that youre talking about which is M&A related as you know.
The profile of <unk> is really today is no different than it was historically and that we have a.
Very high value.
Outstanding Service line with our with anything that's M&A related or task work and all the related work around that Mark brought a similar practice into us so very complementary that way.
But the reality is that when there is.
A lot of activity in that space, we do more and when the market is as we've seen it over the prior six months Theres just less activity there.
Our team has done an outstanding job of creating work what we're seeing and that work is that the transaction sizes are smaller, but there is more volume of them right. So.
So that's really what we're seeing like I said in my comments.
We're really pleased to be.
Holding.
At the at the size and with the baseline that we came into 2025, but it's really hard to grow on top of that exceptional kind of baseline in this environment with these market conditions. So pleased with what we're doing and listened well positioned so that when the market begins to improve.
Got the team and we've got we've got the service lines to be able to continue to grow beyond this but pleased with what we're seeing so far but not seeing as much growth as a result of market conditions.
I said two buckets the other bucket is really.
The FCC of tests related practice that debt that mark brought to us.
That's an outstanding value proposition to <unk> into our clients into the market.
But that too is also very market.
Condition related right. So when market conditions are favorable.
They are one of the goto firms for that type of work, but it is more transactional than we expected it to be and we just haven't seen a lot of ipos. We haven't seen a lot of debt issuances, we haven't seen a lot of the type of work that we do to support our clients that are in need of those things and again market conditions. So.
A great practice, one that we're committed to one that we think brings high value to the market high value to our clients.
But compared to certainly its peak.
Was kind of mid 2023.
That business is down pretty substantially.
Thank you very much.
This concludes our question and answer session I would like to turn the conference back over to Mr. Jerry Crisco for any closing remarks.
I want to wrap up today with a couple of key takeaways. Despite the unfavorable market conditions through the first six months that have impacted portions of our business. We're very pleased to continue to deliver strong earnings in the second quarter and year to date, which is a testament to the strength of our business model.
As we continue to demonstrate with a high proportion of central recurring services.
Client retention rates strong cash flow and disciplined cost controls.
We remain well positioned for continued growth and success in all business climates.
Further the revenue initiatives discussed earlier, along with the benefits of the recently passed tax legislation.
Are expected to generate increased demand for our services through the remainder of 2025 and beyond.
Also notable is that tomorrow marks the first year anniversary of the announcement of the markup transaction.
This has been a monumental time for our business our clients, our industry and especially our team members the.
The <unk> acquisition is one of the most important and value creating strategic decisions in our history.
And positions us for even long term longer term to deliver topline growth margin improvement and even greater stakeholder values than we could have achieved without that transaction.
In closing I want to recognize the tremendous effort commitment and resilience of our entire team everything that we've accomplished in such a very short period of time is made possible because of our people and their dedication and commitment to our clients. So I offer a special thank you to each one of you who may be listening on the call today.
And as I always do I want to thank our shareholders and analysts for joining the call and for your continued support with that said I'll conclude the call.
Thank you for joining us.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.