Insperity, Inc.

Good morning. My name is Matthew, and I'll be your conference operator today. I would like to welcome everyone to the Insperity Fourth Quarter 2022 Earnings Conference Call. At this time, all participants have been placed on a listen-only mode, and we will open the floor for your questions and comments after the presentation. At this time, I'd like to introduce today's speakers. Joining us today are Paul Cervati, Chairman of the Board and Chief Executive Officer, and Douglas Sharpe, Executive 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.

Douglas Sharpe 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 of our fourth quarter and full year 2022 financial results. Paul will then recap the year and discuss our initiatives and outlook for 2023. I will return to provide our financial 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. Savati 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 a 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 filed today, which are available on our website. Now let's discuss our fourth quarter results in which we achieved $1.21 in adjusted EPS and $79 million of adjusted EBITDA significantly above both our expectations in Q4 of 2021, a quarter which was negatively impacted by higher COVID costs. Paid works out employee growth of 14.3% in Q4, which is slightly below the low end of our forecasted range, as we experienced a greater than expected slowdown in hiring by our client base. As for the other two growth drivers, worksite employees paid from new client sales and client retention came in near our Q4 forecasted levels. In a few minutes, Paul and I will comment further on the outcome of our recent fall sales campaign and heavy client renewal period leading to our 2023 outlook. Fourth quarter gross profit increased 41% on the 14% growth in paid worksite employees and a 24% improvement in gross profit per worksite employee. This improvement was largely driven by lower benefit costs as COVID-related costs continued to decline without a notable increase in healthcare utilization from previously deferred care. Other areas of gross profit, including pricing and contributions from our payroll tax and workers' compensation areas, also improved over Q4 of 2021. Operating expenses increased 22% over Q4 of the prior year, which was slightly above our forecast, and included continued investment in our service personnel given our high worksite employee growth, a planned increase in business performance advisors, Higher sales commissions tied to programs surrounding our Q4 sales volume and pricing, increased costs related to recruiting, travel, and training, and costs related to our ongoing implementation of Salesforce. Net interest income improved over the prior year on higher interest rates, and our Q4 effective income tax rate remained at 25%. Now, let me recap our full year 2022 results. We achieved a 38% increase in adjusted EBITDA to $352 million and a 42% increase in adjusted EPS to $5.59, significantly above both our initial budget and our recent guidance. These higher than expected earnings were driven by the significant growth in the paid worksite employees, execution of our long-term pricing strategy, and effective management of our direct cost programs while making the key investments tied to our long-term growth plans. Our full-year worksite employee growth of 18% over 2021 included an increase in worksite employees paid from new sales, driven by an improvement in the sales efficiency of our business performance advisors. Client retention also improved from 82% in the prior year to 85% in 2022. And the third driver to our growth included robust hiring by our clients during the first half of the year prior to the recent slowdown that I mentioned earlier. Gross profit per worksite employee per month are key pricing and direct cost metrics. improved from $273 in 2021 to $286 in 2022. These results were above our expectations entering the year as we executed our pricing strategy while managing to favor results in each of our direct cost areas. As mentioned earlier, a lower benefit cost trend resulted from a decline in COVID-related costs without being offset by increased utilization from previously deferred care. Effective safety and claims management combined with the recent hybrid work environment resulted in lower workers' compensation costs. Operating expenses increased 18% over 2021, consistent with our worksite employee growth as we made key investments in our long-term growth plan. In addition to an increase in our service capacity, given the recent high levels of worksite employee growth, we made targeted adjustments to compensation levels of our corporate staff, given the current labor market dynamics and the inflationary environment. Our 2022 compensation costs also included higher sales commissions and incentive compensation tied to our outperformance. We continued to invest in our technology, including the ongoing implementation of Salesforce. And lastly, we experienced an increase in travel and event costs on higher prices and higher volume when compared to the unusually low levels during the pandemic in 2021. Now, we continue to produce strong cash flow and ended the year with a solid balance sheet while investing in the business and providing strong return to our shareholders. We invested $30 million in capital expenditures in 2022 and returned $150 million to stockholders through our dividend and share repurchase programs. We repurchased a total of 770,000 shares at a cost of $73 million. We also paid out $77 million in cash dividends, which included a 16% increase in our regular dividend rate in May of 22. We ended the year with $224 million of adjusted cash, up from $163 million at the end of 2021. and continue to have $280 million available under our credit facility. 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'd like to start with comments on our excellent fourth quarter results and the dynamic we've seen in the marketplace as we entered the new year. Second, I'll discuss our record setting full year 2022 results in the context of our internal five-year plan and the key initiatives that are continuing our momentum. I'll follow this discussion with the key drivers of our outlook for continued success in 2023 and how this keeps us on track with our long-term goals. Our fourth quarter results capped off an excellent year in both growth and profitability. In addition, we executed a strong selling and retention campaign to continue growth into 2023, despite a slowdown in client hiring. New booked workforce optimization sales came in at 96% of our aggressive fall campaign forecast. The highlight was continued success in our mid-market book sales, up substantially over the prior year and exceeding the budget. Another highlight, was continued sales success in our traditional employment workforce acceleration book sales, which came in well over budget and well ahead of the same period last year. Q4 is also our heavy renewal period, with over 40% of our client base renewing around the year end. These renewals flow into the starting point for paid worksite employees in January, and this starting point is foundational for our unit growth expectations for the coming year in our recurring revenue business model. Our Q4 renewal results were strong, and our expected attrition, flowing into January and February, is expected to be slightly better than the average of the last several years. Now, this level was not as good as last year, but still solid results from a historical perspective. Another highlight of this heavy renewal period was continuing our strong pricing of our direct cost allocations and markup on our services. We were successful achieving the targets which we had set to account for the higher inflation rates we are all seeing in the marketplace. So these key revenue drivers that we control, new sales, retention and pricing, were very solid in the fourth quarter and rolling into the new year. Now, one driver we have less control over is the net change in employment within our client base. And this factor slowed more significantly than expected in Q4. To put this in perspective, this client growth factor was stronger than typical years in 2021 and the first half of 2022, as the post-pandemic economic rebound occurred. The third quarter of last year slowed to a more normal rate, and we forecasted for this slowdown in Q4 accordingly. Now keep in mind, we enroll every new hire and process every termination. So our net client growth numbers are actual real-time net hiring results, not an estimate. In the fourth quarter, net hiring in the base was only a slight increase, which was considerably below the third quarter. This contrasted with the relatively positive hiring outlook reported in the client survey we conducted late in the third quarter. Now, this dynamic has continued through January. We've conducted an additional client survey to assess the sentiment of our client base to help plan this year. Historically, we compare actual data from client hiring and compensation, and we check for alignment with the outlook of business leaders. Most of the time, these are in sync, but not always, as in Q4. Now, the good news is our client sentiment was even more positive in the survey we conducted over the last couple weeks as clients look ahead. More than half of the clients responding to the survey expect to increase staffing levels, and more than 70% of those surveyed expect 2023 to be somewhat or significantly better than 2022. The top three HR concerns among survey respondents were building a strong culture, attracting talent, and managing health care costs. Now these issues align with the key strengths of our service offering and reflect positively on the strong demand for our services. Now in a few minutes, I'll explain how we've integrated the recent slowdown in hiring and the positive survey results into our outlook. But first, the full-year record-setting results reported today were an outstanding first year of our internal five-year plan. Our full-year results were record-setting in both growth, in the number of worksite employees and profitability in adjusted EBITDA. This demonstrated our balanced approach and highlights the strength of our business model. In addition to the significant financial outperformance of our plan, several key accomplishments in 2022 are driving our confidence going forward. Our five-year plan is driven by 10 key success factors and significant progress is happening across the board. One of these success factors is improvement in sales efficiency, which we believe could add significant operating leverage to our financial model in the future. This year, we increased sales efficiency by 9% and incorporated changes designed to further this improvement. We aligned commission incentives at all levels in the organization in order to focus on achieving quarterly goals and moving BPAs up through performance tiers. This was successful in 2022, and we've made further revisions to optimize these incentives moving into 2023. These incentives also incorporated changes to drive another key success factor in our five-year plan, ramping up our workforce acceleration sales. Our 40% increase in these sales in 2022 validate we are on track with this initiative. Workforce acceleration has the potential to further improve our sales efficiency, lower BPA turnover, and enhance our customer-for-life strategy for long-term client retention. We're still early in the ramp-up of this service, and the contribution is relatively small. However, this business also adds to gross profit without related risk included in the co-employment workforce optimization model. Our successful sales effort in 22 was also supported by a 13% increase in marketing-assisted sales, which was a new high-water mark for marketing-influenced sales for a year. These results were related to another of our key success factors, which is extending our brand awareness and affinity and capitalizing on the increased demand for our services we've seen coming out of the pandemic. Another highlight of the year was our internal hiring success in the face of a continuing tight labor market. This effort directly supports our highest priority success factor, which is continuing to attract and retain people with the heart and dedication of our current staff. This effort helped us catch up on hiring across the company to meet our growth-related service demands and bring on our targeted number of BPAs to drive future growth. This has allowed us to begin the year with over 700 BPAs, a 9% increase over last year, which is in line with our long-term plan. The last key success factor to mention today is pricing and direct cost management, considering we've been in a higher inflation environment. Our discipline and consistency in this area has paid off considerably, and we believe we're well positioned going forward. So before I pass the call back to Doug, I'd like to provide some color around the approach we're taking in our plan for 2023 and how this fits in as year two of our five-year plan. We're coming off a strong year with momentum in the primary growth drivers we control, sales and client retention. However, the recent slowdown in client hiring has modestly lowered the starting point of paid worksite employees, and that needs to be factored into this year's plan. Our recent survey of our client base implies solid hiring ahead in 2023, yet there's a level of economic uncertainty in the air that we believe justifies a level of prudence in forecasting this factor. Now, this has produced a wider range for our unit growth rate projection than we typically begin with each year. Interestingly, this wider range for growth is somewhat offset by a narrower range for gross profit than we've had over the last few years due to our strong pricing performance and expected normalization of direct costs. We're also continuing investments to achieve the objectives of our five-year plan with the goal of exceeding the strong five-year run we experienced from 2015 to 2019. Our compound annual growth rate in paid worksite employees over that period was 12.5%, and adjusted EBITDA was over 24%. Also, one of the charts in the earnings presentation we released today shows the compound annual growth rate over the most recent five years in paid worksite employees and adjusted EBITDA of 10% and 15% respectively. This is significant since it includes a negative growth year in 2020 due to the pandemic-related shutdowns. So when we add our 2023 expected performance to our recent record-setting year, we're still well ahead of our internal five-year plan in growth and profitability, and we believe we're making the right investments to continue to achieve the goals of our plan. I believe this is very important for our shareholders to understand because if we perform according to this plan, The return to shareholders could be similar or possibly even better than our previous five-year run. Our total return to shareholders over that period was a remarkable 434%. Quarterly dividends increased an average of 27% each year, and the share price increased more than five-fold. Now, we are focused company-wide on the 10 key success factors we believe will capitalize on the strong demand for our services in the marketplace and achieve the goals of our internal five-year plan, and produce compound annual growth rates that drive exceptional return to shareholders. At this point, I'd like to pass the call back to Doug to provide our specific guidance.

Thanks, Paul. As I'm sure you're aware by now, our worksite employee growth in 2022 was very strong and was significantly above our typical long-term targets. We are now entering a year with some economic uncertainty and a recent slowdown in the level of hiring by our clients. Therefore, we are beginning the year forecasting 2023's worksite employee growth in a wider range than normal, with the midpoint in the highest single digits rather than our typical target of double-digit growth. Our outperformance in 2022 was even stronger at the earnings line. While this will create challenges with the comparisons, our 2023 earnings outlook remains strong, particularly given the current macro environment. Now let me provide some details behind our 2023 guidance. Beginning with the results of our recent sales campaign and heavy client renewal period and the possibility of less hiring by our clients, we are forecasting 10% to 11% worksite employee growth for Q1 of 2023. Subsequent to Q1, our growth is projected to be driven by an anticipated increase in the number of business performance advisors and their sales efficiency. We expect client retention to remain strong, although at a slightly lower level than last year. And when combined with the possibility of less hiring by our clients over the balance of the year, we have forecasted a range of 7.5% to 10.5% growth for the full year. As for gross profit, we expect a strong performance last year to continue in 2023, although we are taking what we believe is conservative approach to budgeting compared to our 2022 performance. We currently expect our direct cost programs to return to a more normalized environment in 2023 with less uncertainty in the benefits and payroll tax areas. In addiction, we expect a benefit from growth-based administrative cost reductions in our United Healthcare contract in 2023. So, we are more comfortable with a tighter range of expectations in this area than the past couple of years. Now, as far as our operating costs, we remain focused on the long-term initiatives in our internal five-year plan. Our 2023 operating costs include the impact of successfully hiring sales, service, and support personnel in the second half of last year. We plan to continue to grow the number of BPAs, and we believe our Restructured Sales Commission program will drive further improvements in sales efficiency over the long term. We also intend to continue investment in our marketing and technology to meet our plan objectives. As for our interest income and expense, our 2023 budget assumes the current interest rates and a run rate consistent with Q4 of 2022. Recent rate increases have had a positive impact on our adjusted EBITDA, given the interest income we earn on our cash and investments, including the funds in our workers' compensation program. This is a component of our business model that has been depressed over a considerable period during the extended low rate interest rate environment. We are estimating a tax rate of 25% for Q1 and 26.5% for the full year 2023. So let's now talk about the full year earnings expectations, which have a couple of comparison issues. We are forecasting 2023 adjusted EBITDA in a range of $353 million to $409 million, ranging from relatively flat to a 16% increase over 2022. We are forecasting full-year adjusted EPS in a range of $5.24 to $6.30, ranging from a decrease of 6% to an increase of 13% compared to 2022. Now, the disparity between the forecasted adjusted EBITDA and adjusted EPS year-over-year growth rates is primarily driven by increased interest depreciation and amortization expense, which are excluded from adjusted EBITDA. As for Q1, we are forecasting adjusted EBITDA in a range of $143 million to $153 million an increase of 21% to 29% over the prior year's quarter. We are forecasting adjusted EPS in a range of $2.40 to $2.60. The Q1 forecasted year-over-year earnings growth rates are higher than the full year 2023 rates due to quarterly comparisons to the prior year. Earnings in Q1 of the prior year were negatively impacted by higher benefit costs associated with COVID. These COVID-related costs declined over the balance of 2022, particularly in the latter half of the year. Secondly, interest income started out low in Q1 of 2022 and increased over the course of last year. As a result, comparisons are more favorable in the first half of the year and more challenging in the second half. Now, at this time, I'd like to open up the call for questions.

Certainly. At this time, we'll be conducting a question and answer session. If you have any questions or comments, please press star 1 on your phone at this time. We do ask that while posing your question, please pick up your handset if you're listening on speakerphone to provide optimum sound quality. We do ask that all participants please limit to three questions per person. Once again, if you have any questions or comments, please press star 1 on your phone. Your first question is coming from Andrew Nicholas from William Blair. Your line is live.

Hi, guys. Good morning. This is Daniel Maxwell on for Andrew. Just to get started, I'm wondering what is assumed in guidance in terms of gross profit per worksite employee per month and then any puts and takes relative to the 286 number you did in the fall year 2022?

Yeah, I think as you're aware, we don't give that as a key metric in our guidance. We reported a 286 last year. Obviously, that's a high mark for us. And it really contemplated the pricing strategy, long-term pricing strategy that we put in place from the outset of the pandemic through where we are today. And we've slightly exceeded those targets through that particular time period. and as you expect there were fluctuations in benefit costs during the pandemic post pandemic uh but we're exiting uh we exited 2022 in very good shape you know relative to our pricing and uh and our benefit cost trend um you know we also obviously experienced some benefit from the remote work environment our workers comp and we manage the payroll taxes accordingly so All that said, 286, if you look at our history, is a high watermark for gross profit per employee. You know, we're not going to go into a year. We go through our regular typical process of budgeting gross profit going into a year with the with the intent of managing to the upside in each of the direct cost program areas. So you wouldn't expect us to go into 2023 budgeting at that same level. Now, what we did mention in my prepared remarks was We do expect to realize administrative cost savings in our UnitedHealthcare plan relative to the significant growth that we've experienced and that we're continuing to forecast. So, you know, that would be some upside in that particular area versus, you know, in previous years. So it gives you a little bit of a flavor there.

Hopefully that will help you some.

Yeah, that's helpful. And then as a follow up, is there anything unique to call out from from a health care activity or claims perspective? And in 2023, are you assuming any pent up demand flushing through or is 2023 kind of looking like a more quote unquote normal year?

No, I think we're looking at. 2023 is more of a normal year as it relates to benefit and benefit utilization. Obviously, we went through 2022 with declining COVID costs, but we didn't see a notable increase in utilization from care that was previously deferred when the pandemic was at its height. All that seems to have settled down through the latter half of 2022. So we do think, barring any significant new variants, that we're entering 2023 in a more normalized environment, both from a benefit perspective, but also, you know, from the unemployment tax area, where that was also had a little bit of volatility in it relative to the pandemic and its impact on unemployment and on state unemployment tax rates.

Great, thanks.

And then maybe if I can just squeeze one more in on pricing. Are you seeing any noticeable change in the aggressiveness of competitors when it comes to price? And if so, Is that something that's had any impact on new business generation or competitive win rates to this point?

No, we really haven't seen any of that. Our pricing strategy is really specific and relative to every client's specific information throughout their organization. And then how we're trending things for going forward and building in increases is is based on all the underlying trends that we're seeing. Plus, like I mentioned, one of our key success factors in our five-year plan was to also build in a reasonable level to deal with inflation that's going on in the marketplace. Obviously, wage inflation is significant, and 60% of our operating costs are in personnel costs as a service company. So we've been really... Our team's done a really great job at meeting those targets, and so we're in good shape on that front, and it really hasn't affected us on the competitive landscape.

Great. Thanks a lot, guys.

Thank you. Your next question is coming from Toby Sommer from Truist Securities.

Thanks. I was wondering if you could give us some color on trends in the workforce acceleration area, sort of any kind of color about growth, et cetera. And where do you want to go in terms of the transition and the ability to shift customers from optimization to acceleration and back and forth? And how long might it take to get to sort of an end state where that's a relatively smooth and sort of automated process?

That's a very good question, Toby, and we're Really all over that front, I mentioned that last year we had a 40% increase in our workforce acceleration growth. We also, over this year, made some of these incentive changes, commission changes in our organization that really have aligned everybody in the organization with this other key success factor that we believe, which is really growing this workforce acceleration business because of the benefits that I've listed in my prepared remarks. So we see that where this is going for us Now that we've synced things up, I wanted to be really careful about that because we wanted to make sure that we weren't pulling away any from our workforce optimization sales through how we went about this. And we have done a beautiful job of that, but now we're ready to really see that all synced up, see that continue to grow faster. And, you know, we believe that there's be a significant effort now. We've already had customers go both directions. From WX to WO, from WO to WX, we had more this past year than we did the year before that. But what our effort will be going forward is to now make sure our customer base knows about these options earlier. So we don't have to have this discussion after a customer's thought about making a move or maybe like toward our year-end transition, the numbers that we have in attrition every year. We want to see if we can address that. So we're going to go after that more aggressively this year on how we do that. And your question about how long you think it will take, I think we'll get a lot better this year. But it will take a couple of years before we really see that really happen. So hopefully that helps you.

It does. Thank you. You talked about BPAs and some pretty good high single-digit growth. Could you refresh us and put that into context relative to the last couple of years where you were able to hit pretty good rates of WSE growth? with more flattish BPAs by optimizing marketing and some other things. Maybe just give us some color on the go-forward strategy and the interplay between BPA growth and WSAE target growth.

Absolutely. You know, in our big-picture plan, in our five-year plan, what is a key differentiator from previous years is that we – believe that this sales efficiency improvement allows us to grow our units, our worksite employee growth, at a rate faster than our growth in BPAs. Historically, you know, over the 37 years I've been at this, most of the time it was, you know, when we grew the BPAs at, you know, 12%, within 18 months you'd be growing worksite employees at 12%. That's kind of the way things work. But we believe we're really at a different, the biggest difference in this five-year plan is we're very confident about sales efficiency improvement. We're confident about the demand in the marketplace. We're doing things in a way that are, you know, optimizing. You also have the You know, big change in being able to do discovery calls on Zoom calls instead of, you know, so the whole how people use their time. There's so many things that can contribute towards sales efficiency. So in our five-year plan, we talked about, hey, you know, we believe now we can actually look at a program where we're growing the BPAs in the, you know, high single digits and growing the worksite employees in, you know, double digits. you know, between that 10 to 15% range. So that's the objective and that's what we're, you know, targeting. And the beauty of that is how that adds to our operating leverage. You know, we've had excellent operating leverage in our business on the service side because we haven't had to grow the service organization as fast as the unit growth. We also have, obviously, our other areas in the business, G&A, other areas that don't have to grow as fast as the number of clients, et cetera. But we've always had to grow the business performance advisors and invest ahead of the growth. And this is going to change the calculation and allow more to drop to the bottom line, provided we're successful at this.

Perfect. My last question is, could you remind us what – normative historical fee and healthcare benefit expense growth is and juxtapose that with what you're seeing we're able to achieve for this year?

Well, I think if you look, you know, one of the slides we put out there on the benefit cost trend, you looked at it over a five-year period, and looks at a CAGR of less than 3.5% on our benefit cost per employee. So that's sort of the cost side of the picture over the past three years, which included the pandemic. If you remember, going into the pandemic, we made the decision to price to stick with our long-term pricing strategy and not swing it back and forth from year to year, but with the intent of matching price and cost. If we fell behind a little in one year, I think maybe in 2021, we added a percentage or two on the pricing side. to accommodate that. But at the end, you know, we're exiting. We feel very comfortable with the exit that we are properly matching price and cost going forward.

Thank you.

Your next question is coming from Mark Marcon from Robert Baird and Company. Your line is live.

Good morning. Paul and Doug, great results here for the full year. I'm wondering, can you talk a little bit about the, you know, just the benefit cost increase that you ended up seeing this quarter? And in terms of enrollments, you know, when we listen to ADP or paychecks, they basically ended up saying that, you know, fewer of their clients were signing up for the full benefit package on a go-forward basis. Are you seeing anything similar to that, just in terms of the number of eligible WSEs taking on health benefits on a go-forward basis?

No, Mark. We really haven't seen any of that. And I'll tell you, the reason I would suggest that that wouldn't be happening in our case is our target customer base. Of course, we call the best small and medium-sized businesses in the country, and they're a lot of times fast-growing, and a lot of times, you know, just they're really after, you know, an environment that really, they're people-centric in how they think about their business. And so benefits is really important there, and they want to make sure employers are able to do it. So we've always had, kind of in the industry, the highest percentage participation rate and highest kind of percentage rates of what customers are contributing toward the cost. So we don't really see that. Now, we do have sometimes mixed changes that affect the overall numbers that you see, because sometimes mid-market customers or customers that have more part-timers, of course, those people aren't eligible for the coverage. So we have some moving around on that number to some degree, but it's not reflecting any change in what people are signing up for.

Great. And the benefit cost expectation for this year and what it was actually in the fourth quarter in terms of year-over-year increase?

So for this year, every year when we look ahead, we trend every component of the cost, and we compare, obviously, to our pricing. Good news, we feel super strong about how effective we were on the pricing front. When we look at trends going forward, you have years that offset certain parts of the trend. In the marketplace, you're seeing 7% to 8% trend in costs, And then we have things that offset, and that's why you look at our history, as Doug just mentioned, 3.5%. You know, this year we would expect more like 4% to 5% because you've got demographic changes, things of that nature that play in. This particular year we don't have – we did introduce a couple new benefit plans that will lower costs when people choose those new options. but we didn't make any plan design changes that would offset the cost this particular year. And we knew that, of course, last year, and that's why our pricing was done in a way to make sure that that all matched up. So that's kind of what we're looking at for this year. Hope that helps you.

It does. Thank you. And then you mentioned I didn't catch the retention for the full year, so I'm wondering what that is. And then also, you know, in terms of the slower hiring among the client base, You know, to what extent did you see variances? Were there any, you know, clients that were actually reducing headcount? Or are there any regional differences or industry vertical differences that are discernible?

Thank you for the question. So, you know, our retention last year was exceptional. It actually went up from 82% in the prior year in 2021 to 85% last year. And of course, that's benefited by a really strong year-end transition last year where we had kind of record low attrition. This year was a little bit higher than that, but even better than our average of the last few years. So we expect a good year on the retention front for this year. But the issue about net hiring in the client base, it's interesting. We obviously have dug in very deeply on this and then did our survey to try to understand what's happening out there with our customer base specifically. And I will say that in the fourth quarter, the slight increase in net hiring really was an issue kind of across the board. It wasn't like we could pinpoint one area, one group. Previous in the year, we did have you know, customers by industry category, the mortgage business, some other companies that were hitting more obstacles and lowering staff. But in the fourth quarter, it was more kind of across the board. Now, some of that, you know, is a seasonality effect. You don't have as much hiring typically in the holiday season. But, you know, as we look forward to You know, we see the optimism there. And as far as, you know, customers expecting staff reductions, it's interesting because, you know, 54% are expecting to add employees and then only 4% expected staff reductions. So, you know, that's the sentiment and their plan. You know, we're in a situation, we thought it was prudent for us to weigh what happened last quarter with that optimism and with the potential for a tougher economic environment. And so we're just being prudent to start the year, and we think that's the right thing to do.

That's really helpful. Thanks a lot, and congrats again on a great year.

Thank you. Thank you. Your next question is coming from Jeff Martin from Roth Capital Partners. Your line is live.

Thanks. Good morning, fellas. Paul, I wanted to get a sense of the renewals. January is a big month for renewals, but also there's some into February. Can you characterize renewals on a traditional workforce optimization versus workforce acceleration, and then also on the mid-market? I wanted to dig in a little deeper in terms of where you're seeing the biggest growth potential in the business? Is it mid-market? Is it workforce acceleration or the traditional offering?

Yeah, that's a great question. We always talk internally about a three-pronged growth effort. So it is our core workforce optimization, sales and retention, our mid-market efforts, and then also our workforce acceleration efforts. And we, man, we had all three gen in beautifully last year. We have optimized it, like I mentioned, about the commission to make all that work together. We've really tweaked it to where we believe we really have a great focus on the quarterly production with quarterly bonuses people earn for hitting their objectives on both sides, on all three of those, actually, whether it's mid-market, core or workforce acceleration. So we're really excited about where that's going. And, you know, we think we're in great shape on that front.

Great. And then other question was in terms of lead flow, you know, maybe segment how you're, you know, how strategically you're doing things differently now versus several years ago. I know digital marketing has been a key component and conversion of those leads. Maybe give us some color on the sales and marketing initiatives.

Yeah, what we've done, the marketing effort's really been effective because we've continued to localize what we're doing. So, you know, different markets, you're able to reach our target customer base with different approaches. And that takes a lot of work to go market by market and figure it out and work with our local folks. But when you have a good... overarching marketing program, you know, including the digital and, you know, everything from, you know, radio or TV to billboards or, you know, different markets have different ways that it works best to hit our target market. So having localized campaigns has really helped a lot, having them multiple times within a year, you know, timing it right to boost activity. And then coupling that with our two other things that have really made a huge difference, and that is our partnering programs that we have with different folks who refer people to us. And, you know, that's been very effective. And what we call our loyalty events. Even through the COVID period, we did them, you know, online and all kinds of people got very creative. This past year, you know, everybody wanted to see each other again, get back in person, so we did a lot of that. That's been very effective. So, you know, we have a marketing effort hit its all-time high in how it supported the organization, and, you know, we intend to continue to do that.

Great.

Thanks for your time.

Thank you. That concludes our Q&A session. I will now hand the conference back to Paul Sarbati for closing remarks. Please go ahead.

Once again, we want to thank everybody for participating with us today. We're excited about having, you know, a record year last year and very excited about this year, too, in our five-year plan and the return to shareholders we intend to produce. So thank you for participating, and we look forward to discussing these things with you more.

Thank you. This concludes today's event. You may disconnect at this time and have a wonderful day. Thank you for your participation.