Insperity, Inc.

Good evening, my name is Cindy and I'll be your conference operator today. I would like to welcome everyone to this priority quarter for earnings call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, please press store addenda number one on your telephone keypad. If you would like to withdraw your question, press the pound key. At this time, I would like to introduce today's speakers. Joining us are Paul Sarpati, Chairman of the Board and Chief Executive Officer, and Douglas Sharpe, Senior Vice President of Finance, Chief Financial Officer and Treasurer. At this time, I'd like to turn the call over to Douglas Sharpe. Mr. Sharpe, please go ahead.

Thank you. We appreciate you joining us. Let me begin by outlining our plan for this evening's call. First, Paul will recap the 2020 year and discuss the major initiatives of our 2021 plan. Then I will discuss the details of our fourth quarter and full year 2020 financial results and provide our financial guidance for the first quarter and full year 2021. We will then end the call with a question and answer session. Now before we begin, I would like to remind you that Mr. Cervati or I may make forward-looking statements during today's call which are subject to risks, uncertainties, and assumptions. In addition, some of our discussion may include non-GAAP financial measures. For more detailed discussion of the risks and uncertainties that could cause actual results that 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 file today, which are available on our website. At this point, I'll turn the call over to Paul.

Thank you, Doug, and thank you all for joining our call. My comments today will address three areas of interest for Insperity stockholders. First, I will discuss our strong Q4 and full year 2020 results, highlighting our success throughout the pandemic. Second, I will address our year-end transition into 2021 and the trends driving our game plan for this year. I'll finish my remarks with comments about the longer term and our efforts to begin a new five-year run of unit and earnings growth for Insperity. Our financial results for 2020 were quite impressive, with less than a 1% decline in worksite employees and a year-over-year increase of 15% in adjusted EBITDA especially in light of the significant challenges faced throughout the year. Ultimately, the financial impact of shutdown-related layoffs in our client base was more than offset by lower direct costs due to behavioral changes in response to the pandemic. These results continue to demonstrate the resiliency of our small business client base, the value of our HR services, and the strength of our business model in client selection and risk management. The highlight for the year was the way our Insperity employees immediately responded to challenges and delivered vital support to clients, worksite employees, and their families. The dedicated service and personal touch from our people caring for clients dramatically reinforced our tagline, HR that makes a difference. Another highlight was our success transitioning to remote selling and increasing our capabilities throughout the year. For both the full year and the fourth quarter, we achieved 81% of our pre-COVID budget in booked sales. We believe this is excellent considering how the budget increases each quarter throughout the year, especially in Q4 where we typically budget over 35% of our annual booked sales. Another exceptional point in looking back at 2020 is the pricing strength that continued throughout the year. This is particularly important in keeping up with long-term trends and direct costs going forward. It's also important to point out we were able to continue our technology development roadmaps for future improvements while also completing many projects made necessary by legislative and regulatory changes. Overall, I'm very pleased with our accomplishments in 2020. and the agility we displayed as an organization. These efforts positioned the company for a successful year-end transition going into 2021 and a solid plan for the new year. Our year-end transition refers to the seasonal churn in our client base between the large number of new accounts added from the fall selling campaign and client attrition in January and February from the concentration of renewals that occur at this time of year. This is especially important since the transition sets the starting point in paid worksite employees for the new year in our recurring revenue business model. The bottom line to this year-end transition is we had an excellent year in paid worksite employees from fall campaign bookings and retention of all accounts in all segments with one notable exception that I'll discuss in a minute. The paid worksite employees added in January from previously booked new accounts was down only 6% from 2020, which is excellent considering last year was pre-COVID. When you add in accounts scheduled for first payroll in February, we expect to be down only 2% in worksite employees from new accounts for the full year end transition period compared to last year. Our year end retention was equally impressive under these conditions as paid worksite employees subtracted from terminating accounts was even with last year among our smallest accounts and improved by double digits in our core emerging growth and mid-market segments. This validates the value we delivered last year and bodes very well for our growth going forward. The one exception in this year-end transition is the unexpected loss of our largest account we've ever had in our enterprise segment that paid 6,800 Worksite employees in December. We expected this account to renew for 2021. However, we were notified in mid-November they were taking the HR function back in-house. This account was a U.S. subsidiary of a large international firm that started with us with only 60 employees six years ago. We served this company very well and delivered the platform that supported their exceptional growth from an average of 240 employees in 2015 to 4,800 in 2020. This account is actually a great success story for Insperity, which we expect to use in future marketing efforts. We also learned a tremendous amount we can leverage in the future regarding serving fast-growing enterprise customers. Also, it's important to note the gross profit contribution per worksite employee in our pricing model goes down as the account size goes up. So even though this account represented about 2% of our worksite employees in 2020, it represented only 1% of our gross profit contribution. This account grew into a one of a kind for us as our remaining enterprise accounts represent less than 3% of our worksite employee base with no account exceeding 2000 employees today. So our growth plan for 2021 includes a lower starting point in paid worksite employees for Q1, followed by growth acceleration over the balance of the year, driven by the current trends in sales retention and growth in our client base. We expect to build on the sales momentum from the fall campaign and our recent virtual sales convention. We are beginning this year with some very positive underlying trends in our sales effort as we extend best practices in remote selling across the business performance advisor team. First, even though the number of proposals for our flagship workforce optimization solution in the fourth quarter was down 13% from the same period in the prior year, the number of accounts sold was up 2% due to a 17% improvement in our closing rate. Secondly, as we enter the new year, we reset our BPAs into performance tiers that they achieved through their production in the prior year. We build the overall budget for the new year off these individual production levels to set expectations for the year ahead. Over the past year, we had significant movement up through the tiers, demonstrating the success of our long-term plan of growing and training the BPA sales team. This has been occurring to some degree in recent years. However, the impact is expected to be larger this year, as fewer of these BPAs with improving performance are flowing into management roles. As a result, we expect a sales efficiency gain this year just from the higher percentage of BPAs that are in the higher tiers. This maturity of our sales organization allows for sales growth and momentum without hiring as many new BPAs. We also are continuing to hold most of our meetings with prospects remotely through Zoom meetings. We expect as the pandemic moderates, our sales opportunities will increase and mixing in face-to-face meetings may have a positive effect on sales efficiency. Relative to our outlook for our two other growth drivers, we expect to continue to drive high levels of client retention over the balance of the year. However, the full year number will be weighed down by the large account that recently terminated. We expect growth in the client base to be on par with the underlying trends we experienced in the last half of last year in new hires and regular terminations. This analysis excludes COVID-related furloughs and those employees that later returned to work. This level of growth in the client base implied for 2021 would be an improvement from last year, however, still the lowest we've experienced in recent prior years. Our plan for profitability for this year factors in some pressure at the gross profit line from normalization of healthcare claims, an uptick in unemployment cost, and following our normal practice in estimating workers' compensation expense, where we start the year with a conservative estimate, and hopefully we'll earn some upside from our efforts in safety and claims settlement over the course of the year. We are comfortable that our strong pricing over the last 18 months or so has effectively met our targets for matching price and cost in these programs. We expect to earn an appropriate fee within our historical range for managing these programs. Our priorities for our operating plan for 2021 are focused on initiatives needed to regain our growth momentum post-COVID. Our goal is to lay the groundwork over the balance of this year for consistent, predictable, double-digit unit and earnings growth like we experienced from 2015 to 2019. We expect to continue to invest in growing the BPA team, however, mostly in the last half of the year as we benefit from the tier movement in the first half. We are continuing to refine our marketing efforts to targeted prospects to drive lead generation of accounts more likely to be a good fit for Insperity. We made good progress on this front, increasing our digital spend in the fourth quarter and increasing the percentage of booked accounts coming from our marketing programs to 55%. We expect to continue to invest in technology developments, to support our client base and implement Salesforce to improve our already best-in-class sales and service results. Salesforce is a significant and important investment for the company, which we believe will provide an enhanced platform to support our continuous improvement and service excellence standards. Ultimately, we expect to capture more data and more information more easily, providing the opportunity to leverage and optimize the use of our data to the benefit of our clients. Applying the Salesforce analytics and AI against our data on a consolidated platform will give us the best view we've ever had across all products, prospects, and customers. One final observation important to note is the step up in interactions with our clients initially caused by the pandemic. Our total inquiries per week from our clients more than doubled last April, and has not receded to previous levels. I believe this new level of ongoing interaction and support of our clients is one of the primary reasons for the double-digit improvement in retention we are experiencing across most of our client segments. Our clients are relying more heavily on our services and experiencing HR that makes a difference from our unique premium service models. In addition, we are beginning this year with 8% more clients than we had a year ago, while our average account size is down by about 1.5 worksite employees, largely due to the pandemic. In our view, it's evident demand for our service is substantial, and the small business community is positioned for a rebound. In summary, I believe we're in an excellent position for 2021 to set the stage for growth acceleration this year and for sustained growth in the long term. This reminds me of 2014 when we were putting the finishing touches on our refined sales motion with our BPAs and improving our mid-market sales and service models to improve retention. Those refinements led to a strong five-year run beginning in 2015, nearly doubling the size of the company, tripling the adjusted EBITDA, and increasing the valuation of the company five-fold. I'm certainly not promising a repeat of those impressive results or guiding to those growth levels. However, I do believe we are in a position to take our learnings and improvements from this challenging past year and set up another impressive run of unit and earnings growth for Insperity. At this point, I'd like to pass the call back to Doug. Thanks, Paul.