Insperity, Inc. Second Quarter 2018

Transcription

1 Insperity, Inc. Second Quarter 2018 Introduction Thank you. We appreciate you joining us this morning. Let me begin by outlining our plan for this morning s call. First, I m going to discuss the details behind our second quarter 2018 financial results. Paul will then comment on the key drivers behind our Q2 results and our plans for the remainder of the year. I will return to provide our financial guidance for the third quarter and an update to the full year 2018 guidance. We will then end the call with a Question & Answer session. Now, before we begin, I would like to remind you that Mr. Sarvadi or myself 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 (1) the risks and uncertainties that could cause actual results to differ materially from any forward-looking statements and (2) 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. Second Quarter 2018 Results Now, let s discuss the details behind our strong second quarter results. We once again achieved record high operating results, reporting $0.68 in Adjusted EPS, a 66% increase over Q2 of 2017, and Adjusted EBITDA of $46.6 million, an increase of 40%. These results were driven by continued double-digit worksite employee growth and effective management of gross profit and operating costs. As for some of the details: Average paid worksite employees increased 13% over Q2 of 2017 to 203,950, above the high end of our forecasted range, and accelerating off of Q1 s growth of 12%. This quarter s growth was driven by continued strong sales, a high level of client retention and an improvement in net hiring by our clients. As for our sales efforts, we have been successful in exceeding our goal in the hiring of Business Performance Advisors to drive growth in our Core client segment and have experienced increased sales activity in our MidMarket segment. Client retention during the second quarter totaled over 99%, consistent with Q2 of 2017, and we are on track to hit the recent historical highs of 85% to 86% for the full year Gross profit increased 18% over Q2 of 2017, and was driven by the 13% worksite employee growth, improved pricing and effective management of our direct costs areas. This is reflected in an increase in gross profit per worksite employee per month from $241 in Q2 of 2017 to $253 in Q2 of this year. Q2 adjusted operating expenses increased 12% over Q2 of 2017, declining on a per worksite employee per month basis from $199 in the prior year to $198 in Q2 of This is reflective of planned investments in our growth, including the hiring of Business

2 Performance Advisors and service personnel, and in technology development, while leveraging other areas of the business. Our effective tax rate in Q2 came in at our forecasted rate of 28%, and, we continue to expect a full year rate of 26%. Now, these Q2 results coming off of the strong start to the year, has resulted in significant bottom line growth through the first half of the year. This is demonstrated by a 57% increase in Adjusted EPS to $2.09 and a 36% increase in Adjusted EBITDA to $130 million. Additionally, Adjusted EBITDA per worksite employee per month, our measure of unit profitability, increased 21% from $90 in the 2017 period to $109 in the 2018 period. Balance Sheet and Cash Flows As for our balance sheet and cash flow, we ended the quarter with $110 million of adjusted cash and have $245 million available under our line of credit. For the first half of the year, we have repurchased 212,000 shares of stock at a cost of $16 million and paid $17 million in cash dividends. Now, at this time, I d like to turn the call over to Paul. Paul Sarvadi Thank you Doug. Today I will discuss three topics of importance to investors as we continue to produce exceptional financial results from our unique business model. First I will cover highlights from Q2 driving our growth acceleration and earnings outperformance. Second, I will provide some insight into our successful execution of our mid-market sales and service strategy which provides an opportunity to further optimize our business model. And third, I will describe several initiatives for the balance of 2018 designed to fuel continued strong performance in All three of our unit growth drivers, including sales, retention, and hiring in our client base contributed to our growth acceleration in Q2. Recent sales results have been very impressive in both our core and mid-market businesses. In the second quarter, a 15% increase in trained business performance advisors produced a 23% increase in total clients sold, and a 36% increase in total worksite employees sold over Q2 of This is our second quarter in a row coming in at 118% of our sales budget. The first quarter outperformance was driven primarily by core sales and the second quarter by our mid-market team including the sale of our largest client in our history with approximately 2,900 employees. Over the past year we have ramped up the year over year growth rate in the number of trained business performance advisors from approximately 13% to 15%. Sales efficiency has actually improved 12% during this ramp up period driven by a 4% gain in our core Business Performance Advisor team and the effect of our recent mid-market success.

3 Increasing efficiency while growing the sales team at this rate is quite a credit to our sales leadership, training and the entire sales organization. Our successful marketing programs continued to support these strong sales results. In Q2, unique visitors to our Insperity.com site were up 21%, social media followers up 32%, and leads provided to our business performance advisors were up 42% over the same period last year. In addition to this tremendous success in our co-employment business, our business performance advisor channel made great strides validating our new traditional employment bundle, which we recently rebranded Workforce Acceleration. This quarter sales of this new comprehensive service offering increased 38% at a price point 61% higher than the previous Workforce Administration version. Our client retention was also a highlight in Q2 continuing at historical highs with attrition averaging only 0.63% per month. These results demonstrate the value our service team is delivering through the breadth, depth, and level of care that differentiates Insperity in the marketplace. We also saw strong evidence of increased economic activity driving substantial momentum in the labor market. In the recent quarter, all three of our key compensation indicators were very strong. Average compensation for employees in our client base paid in Q2 over the same period one year ago was up 4.4%. Overtime pay as a percentage of regular pay exceeded 12%, and commissions paid to worksite employees of our clients increased 14% over the same period last year. These numbers indicate strong sales and a strong demand for employees in the small to medium size business marketplace. The demand for employees is strong but the supply is limited so the competition among employers is substantial. In a market dynamic like this we have historically experienced strong demand for our services since our infrastructure for benefits and HR support provides a competitive advantage in attracting and keeping employees. So with all three growth drivers contributing, our unit growth was above the high end of our range for Q2. The pipeline from both core and mid-market sales is very strong, and we are poised for significant unit growth acceleration to a range of 14.5% to 15.5% over the balance of the year. In addition to the positive volume variance this quarter, our earnings outperformance was driven by higher gross profit and lower operating expenses than budgeted. We continue to see benefit at the gross profit line from effective pricing and management of direct costs. Our safety services group has had a particularly strong year so far helping to drive lower relative frequency and severity of claims in our Workers Compensation program. We also continued to see effective operating expense management coming in under our budget in spite of significant investments we are making in growing the Business

4 Performance Advisors, adding service personnel and extending our technology leadership. The second topic I want to discuss today is our mid-market strategy selling and serving clients with 150 employees up to several thousand employees. This segment is very important because success with these clients doubles our addressable market and adds a premium to our growth rate. For many years we had a success penalty as we helped small clients grow into this segment, however many ultimately terminated the relationship with Insperity taking HR back in house. This was a drag on our growth rate and we needed more Business Performance Advisors to sell a larger number of small accounts to replace them. Over the past five years we developed a highly customized mid-market sales and service model to turn this segment into a profitable driver to our growth. The objective was to improve the service model to drive retention and develop a capability to attract and sell these larger accounts. Both of these mid-market objectives have been accomplished as we have achieved a comparable retention rate to our core business and developed a sales methodology to sell these accounts. The next step is to consistently maintain a strong pipeline and improve closing rates to achieve consistent predictable growth in this segment. The reason this next step is so important is the potential to improve sales efficiency and lower cost of client acquisition in our business model. Historically, our unit growth rate in paid worksite employees follows the growth rate in business performance advisors within approximately 12 to 18 months. If we continue our progress in mid-market, it would be possible to achieve a higher unit growth rate without growing the number of business performance providers as fast. We are seeing just a glimpse of that possibility with our recent mid-market success has allowed us to reach the 15% unit growth rate within just a few months of reaching that rate in number of business performance advisors. Ideally, a growth rate in business performance advisors in a range of 13% to 15% would drive a growth rate in paid worksite employees of 15% to 17% with larger account sales providing the 2% premium to our growth rate. The potential for faster growth at lower cost is a worthy pursuit and we are pleased with our progress in this area. The addition of our largest account recently is also a milestone that bodes well for the future. Our software with a service platform combined with our unique ability to customize our service relationship with these larger accounts provides a significant competitive advantage for Insperity in this segment. These large accounts come with a complexity that requires significant collaboration and coordination across our entire organization in order to sell, enroll and serve a client this size. Our team did an outstanding job and demonstrated an important capability we can leverage into a substantial future growth opportunity.

5 We are using the momentum from this effort to establish an enterprise service model within our mid-market organization. This team will serve our largest accounts with over 1,000 employees and continue to develop this service model to capitalize on this market opportunity. The last topic for today is to provide some color on initiatives we have in place for the balance of the year to set up a strong Our goal is to continue double digit growth and profitability extending the impressive run we have had over the last several years. We intend to continue to invest in the growth of our sales organization. We expect to add Business Performance Advisors over the balance of the year to position us to achieve our targeted 13% to 15% growth rate in this metric for next year. We also expect to invest in mid-market service personnel due to the recent results we have had and our confidence level in the future growth of this segment. Another aspect of our plan for the balance of the year is to encourage our Business Performance Advisor channel to incorporate two additional priorities during the fall campaign in addition to the expectation of achieving sales targets. First, we intend to incentivize Business Performance Advisors to increase the volume of Workforce Acceleration sales. Workforce Acceleration, our comprehensive traditional employment solution is now fully ready for roll out. In the second quarter we completed an agreement with MYLO a division of Lockton Companies to provide the brokered benefits and business insurance for this offering. Through Lockton, we are bringing a high level of expertise and quality insurance solutions generally unavailable to this target customer base. This is consistent with our goal to provide the leading traditional employment HR bundled solution in the marketplace. The second new priority for the balance of the year is an added emphasis on pricing. Our success in the management of our benefits programs has created the opportunity for no substantive plan design changes for This factor in combination with our ongoing releases of exciting technology enhancements opens the door for pricing strength in new and renewing accounts. In summary, we are really hitting on all cylinders and our business model is performing very well. We are in a great position for growth acceleration over the balance of the year and we have the right initiatives in place to continue double digit growth into 2019 Our guidance implies 2018 will be our fourth year in a row with Adjusted EBITDA increasing more than 25%. Our adjusted EBITDA has more than doubled over that period, and our Adjusted EPS has more than tripled. Our efforts to improve our dynamic and unique business model to create more ways to achieve growth and profitability targets has proven to be quite successful. At this time, I would like to pass the call back to Doug.

6 Doug Sharp Second Quarter and Full Year Guidance Thanks, Paul. Now, before we open up the call for questions, I d like to provide our financial guidance for the third quarter, and an update to our full year 2018 forecast, which includes top and bottom line growth significantly above our initial budget. As Paul just mentioned, we have raised our forecast of full year growth of average paid worksite employees to a range of 13.5% to 14.5%. This is up from our initial guidance of 11.5% to 13.5% due to the strong growth during the first half of 2018 and our continuing sales momentum. We are forecasting Q3 worksite employee growth to accelerate to a range of 14.5% to 15.5% based (1) on the number and sales efficiency of our trained Business Performance Advisors and (2) continued success in our midmarket area. We are increasing our earnings guidance based upon the outperformance through the first half of 2018 and an improvement in our outlook over the remainder of the year driven by the higher worksite employee growth rate. Our guidance also considers incremental costs associated with our Business Performance Advisor growth over the remainder of 2018 as we position ourselves for continued double-digit worksite employee growth in Forecasted operating costs also include additional MidMarket service personnel tied to recent growth in this area of our business and higher sales commissions on more paid worksite employees. As for timing, these incremental investments are expected to have more of an impact on the fourth quarter than Q3. Also, with respect to the implied Q earnings guidance, keep in mind (1) that our gross profit per worksite employee typically declines from Q3 to Q4 as healthcare deductibles are met by our plan participants and (2) the forecasted Q4 year over year earnings growth is impacted by the comparison to the 2017 period in which we experienced favorable healthcare and workers compensation claims. So, we are now forecasting full year 2018 Adjusted EBITDA in a range of $225 million to $229 million, an increase of 27% to 29% over 2017, and up approximately $27 million over our budget. As for Q3, we are forecasting adjusted EBITDA of $53 million to $56 million, an increase of 23% to 30% over Q3 of We are now forecasting full year 2018 adjusted EPS of $3.49 to $3.53, a 42% to 44% increase over Q3 adjusted EPS is projected in a range of $0.80 to $0.84, an increase of 40% to 47% over Q3 of the prior year. In conclusion, we are encouraged by the strong top and bottom line growth trends in our business and our position for continued growth as we plan for 2019.