Insperity, Inc.

Good morning. My name is Holly and I will be your conference operator today. I would like to welcome everyone to the Insperity First Quarter 2023 Earnings Conference Call. All participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. Please note this conference is being recorded. At this time, I would like to introduce today's speakers. Joining us are Paul 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.

Thank you. We appreciate you joining us. Let me begin by outlining our plan for this morning's call. First, I'm going to discuss the details behind our first quarter 2023 financial results. Paul will then comment on our recent accomplishments and our plan over the remainder of the year. I will return to provide our financial guidance for the second quarter and an update to the full year guidance. We will then end the call with a question and answer session. Now, before we begin, I would like to remind you that Mr. Sarvati 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 discussions 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 on our website. Now let's discuss our first quarter results in which we reported earnings above our expectations. We achieved a 29% increase in adjusted EBITDA over Q1 of 2022 to $152 million and a 34% increase in adjusted earnings per share to $2.67. These results reflect double-digit worksite employee growth, strong pricing, operating costs in line with our forecast. As for our growth metric, the average number of paid worksite employees increased by 10% over Q1 of 2022, which was within our guidance. This growth reflects a successful year-end transition associated with our recent sales campaign and heavy client renewal periods. Both worksite employees paid from new client sales and client retention were near our forecasted levels. As expected, net hiring by our clients slowed and was about 50% of the Q1 2022 level. Gross profit increased by 16% over Q1 of the prior year on the 10% worksite employee growth and strong pricing through the year-end transition, which was a key objective given the current inflationary environment. The first quarter contribution from our direct cost programs, including benefits and workers' compensation, were in line with our expectations. As forecasted, Q1 operating expenses increased 13% and included an 11% increase in the average number of hired business performance advisors as we plan for our future growth. The operating expense increase also included additional service and support personnel necessary to maintain our premium service level in a period of continued growth. We also continue to invest in our technology, including the ongoing implementation of Salesforce. Net interest income increased $4 million over Q1 of 2022 on higher interest rates and invested balances. And first quarter's effective tax rate was 23.5%, which is lower than our expected full-year rate due to the tax benefit associated with the vesting of employees' stock awards during Q1. Our financial position and liquidity remain strong as we continue to invest in our growth while providing returns to our shareholders. During the quarter, we repurchased 289,000 shares of stock at a cost of $35 million and and paid out $20 million in cash dividends. We ended Q1 with $231 million of adjusted cash and $370 million of debt. Now, at this time, I'd like to turn the call over to Paul. Thank you, Doug, and thank you all for joining our call.

Today, I'll provide some detail regarding our excellent results in the first quarter and the challenges we observed in the small to medium-sized business community. I'll also comment on the plans for the balance of the year to continue to capitalize on our market opportunity, and I'll finish with some perspective regarding how this year fits into our current five-year plan. One key factor to our first quarter every year is a successful completion of our heaviest selling and retention period to achieve a solid starting point for the year and paid worksite employees. This year results were strong on both fronts, and when combined with some hiring within the client base over the quarter, led us to achieve double-digit growth. The other important factor in every first quarter is the pricing reflected once the year-end transition is completed. This was also a strong highlight in the quarter. We believe the combination of these two key factors puts us in position for a solid year in both growth and profitability, despite the current economic climate. These were strong results against a backdrop of a changing dynamic in the marketplace due to persistent inflation, rising borrowing costs, a weakening economy, and elevated uncertainty in the small to medium-sized business community. In Q1, new booked workforce optimization sales reflected this dynamic coming in below our budget. A degree of hesitation in the decision-making process was reflected across the country and to a greater degree in California, coinciding with the turmoil in the financial system sparked by the collapse of Silicon Valley Bank and Signature Bank. This was also reflected in the recently reported National Federation of Independent Businesses Optimism Index decline in March. These survey results were in alignment with our internal client survey. The most significant change in our client-based outlook was the expected impact of the economic climate. One quarter ago, those expecting a negative impact was less than 10%, and it's now over 20%. Those expecting a positive impact from the economic climate dropped from 65% to 55%. Our internal data we monitor in our client base also reflects some slowdown in the economy. Both the average increase in pay year over year dropped below 4% in overtime pay as a percentage of total payroll, dropped below a 10% threshold for the first time in a couple years. The commissions we paid to worksite employees of our clients, which reflects the recent strength of the sales pipeline in our client companies, was down to mid-single digits for the second quarter in a row compared to strong double digits seen in prior quarters. Now, none of these developments we're seeing in our client base and the overall small to medium-sized business marketplace are unfamiliar to us over our 37 years of experience. We understand what our clients and prospects are experiencing and how their needs for sophisticated HR solutions change in this environment. We also know what tweaks to make in our sales, service, and support organizations that have worked before to meet these types of challenges and continue solid growth and profitability performance. The most important factor to drive growth in this environment is the number of sales opportunities we generate. The two most important drivers for this factor are the number of business performance advisors and the number of discovery calls. We believe we are in excellent shape on the most critical long-term growth driver for the company, the number of business performance advisors. As Doug mentioned, currently we've ramped up to more than 700 BPAs, an 11% increase in this key metric over last year. Now our focus is on driving the activity numbers up across the board in discovery calls and opportunities to bid our services. Our marketing efforts are an important driver of these opportunities and we're off to an excellent start this year with marketing leads up 13%, discovery calls up 11% in Q1 year over year. We also launched our Spring Brand Awareness Campaign early this month which continues into mid-June. This includes market-specific media plans designed to continue this momentum in all our markets across the country. The combination of our growth in the number of BPAs, our marketing plans, and our sales management focus on activity levels gives us confidence in our growth plan for the balance of the year and beyond. We also believe we're in excellent position for solid profitability for the year, as you will see as Doug provides specific guidance in a few minutes. Our strong pricing is the key driver of our raised guidance in the near term, and our progress in our workforce acceleration offering is contributing to our long-term outlook. New booked workforce acceleration sales were up 36% year-over-year in Q1, reflecting the increased focus of our sales organization on this offering. Recent adjustments to our sales compensation and recognition programs have successfully enhanced this effort. Our workforce acceleration offering has significant long-term potential to enhance our business model by leveraging our current sales process that allows us to see nearly 40,000 business owners face-to-face each year. Workforce acceleration has the potential to further improve our sales efficiency, lower BPA turnover, and enhance our customer for life strategy for client retention. So as we look at this year in the context of our five-year plan, We remain on track to meet and exceed our year two targets on our two key metrics, paid worksite employees and adjusted EBITDA. Even in a challenging economic environment, we have the potential for high single-digit growth in worksite employees and double-digit growth in adjusted EBITDA this year. A look back at our 10-year history, compound annual growth rates on these key metrics demonstrates the strength of our business model with rates of 10% in worksite employee growth and 15% in adjusted EBITDA, even with the pandemic during this period. We provide the best-in-class small and mid-sized companies with premium, sophisticated HR solutions that elevate their likelihood and degree of success. These services are provided by an incredible team of professionals here at Insperity that are dedicated to the success of every client. We expect this level of commitment to continue to produce excellent results for clients worksite employees, communities, and our shareholders. At this point, I'd like to pass the call back to Doug to provide our specific guidance.