Insperity, Inc.

Good morning. My name is Jenny and I will be your conference operator today. I would like to welcome everyone to the InSperity first quarter 2024 earnings conference call. At this time, all participants are in a listen-only mode and the floor will be open for questions after the presentation. If anyone should require operator assistance during the conference, please press star zero on your phone keypad. Please note this conference is being recorded. At this time, I would like to introduce today's speakers. Joining us are Paul Sarvody, 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 2024 financial results. Paul will then comment on our recent accomplishments, including the progress we have made in implementing our Workday strategic partnership solution. 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 I begin, I would like to remind you that Mr. Salvati 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 filed today, which are available on our website. Now let's discuss our first quarter results in which we reported earnings above the high end of our guidance. We reported Q1 adjusted EBITDA of $142 million and adjusted earnings per share of $2.27. These results reflect the average number of paid worksite employees within the range of our forecast continued strong pricing, lower than expected benefit costs, and operating expenses in line with our budget. As for our growth metric, the average number of paid worksite employees in Q1 was approximately 304,000, a decline of less than 1% when compared to Q1 of 2023. As you may recall from our prior earnings call, this slight decline was expected due to net layoffs in our client base, over the second half of 2023 into January of 2024, and the loss of a handful of large accounts during our year-end transition. Additionally, we experienced a 42% decline in net hiring in our client base in Q1 of 2024 when compared to the first quarter of 23. Worksite employees paid from sales was at a similar level compared to Q1 of 2023, and when combined with client retention, came in at forecasted levels. Gross profit increased by 4% over Q1 of 2023, a strong pricing through our year-end transition of new and renewing accounts, combined with a lower than expected benefit cost trend. This lower Q1 benefit cost was associated with a favorable adjustment to our reserves at the end of 2023, based primarily on subsequent claims runoff through the end of February of 2024. Regarding the last month of Q1, we believe the timing of claim payments under our plan in March were affected by the industry-wide impact of the cybersecurity breach that changed healthcare. Upon a detailed review of our claims data and discussions with our insurance carrier, we believe we have appropriately reserved additional amounts for Q1 2024 claims incurred but not yet reported due to the impact of this breach. And the combination of our other direct cost areas, including workers' compensation and payroll taxes, were generally in line with our forecast. Q1 operating expenses were also managed to budget of levels increasing 12% over Q1 of 2023. Operating expenses reflected our continued investment in our growth and our service and technology offerings, including approximately $5 million of costs related to the initial phase of implementation of our Workday strategic partnership. First quarter's effective tax rate came in at 29%, which was higher than our Q1 of 2023's rate of 23%, and our forecasted rate of 26%. This was primarily due to changes in our stock price that resulted in less tax benefit on employee stock awards vesting at the end of February. Now, we believe that our financial position and liquidity remains strong as we continue to invest in our long-term growth plans while providing returns to our shareholders. During the quarter, we repurchased 233,000 shares of stock at a cost of $23 million and paid out $21 million in cash dividends. We ended Q1 with $206 million of adjusted cash, an increase of $35 million over the December 31, 2023 balance. And we 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'll begin with comments on our solid first quarter performance, including initiatives supporting our plans for future growth. Second, I'll provide insights from our view into the economic climate and the reactions within the small and mid-sized business community. Third, I'll provide an update on the initiation of our new strategic partnership with Workday and provide a glimpse into our upcoming Investor Day. Overall, we had an excellent quarter, exceeding the high end of our adjusted EBITDA range against the backdrop of an economic slowdown. Our fundamentals are solid and we expect our plan for the balance of the year will help mitigate the effects of the economic climate on our target small to medium sized business clients. New book sales for workforce optimization solution were strong in the first quarter. We experienced a double digit increase over the same period last year, reflecting the growth of our BPA team and an improvement in closing rates driving sales efficiency. This improvement reflects the experience gained over the last year by business performance advisors and effective incentives from prospective clients and the sales team. Booked sales by our mid-market business performance consultants was the highlight of the quarter. They continued their excellent performance since the last half of last year, exceeding budget. Sales of our larger accounts have become more consistent over the last year. The steady flow from BPAs funneling qualified leads into this process and our growing number of BPCs is the reason for this improvement. This is well-timed for our new Workday strategic partnership I will discuss in a few minutes. We also had a strong quarter in our traditional employment workforce acceleration business as our WX employee count on this service increased 21% over the same period last year. including a notable improvement in client retention. Total client retention in our workforce optimization business for the first quarter was in line with last year, except for the large accounts we discussed last quarter. We also achieved an important marketing objective, exceeding our lead generation goal for the quarter. However, conversion of these leads into discovery call appointments was just under 90% of target. Reaching sales activity objectives remains challenging in this environment. We have several initiatives to drive sales activity, including the launch of our account-based experience marketing and sales strategy. This approach, made possible by our investment in Salesforce, provides insights from advanced technologies to leverage the ideal client profile and buyer intent signals to improve BPA effectiveness. This is a more strategic approach in sales research, planning, and execution focused on high-value accounts, and building relationships with key decision makers. All BPAs will begin with assigned target accounts this quarter, which we believe can lead to more BPA time in front of qualified prospects. We have additional initiatives underway, leveraging our investment in Salesforce and AI-enabled technology to drive efficiencies, speed, quality, and insights for our teams as they serve our clients and operate and grow the business. The move to our enterprise-wide Salesforce platform, as well as our implementation of modern data engineering and analytics technologies, are well underway, allowing us to put in place a data strategy that we believe will accelerate predictive analytics, AI, and other emerging capabilities. Now let me provide some insight regarding the economic climate our clients are facing, evident from our client data, our interaction directly with business owners, and our recent national survey. The key data elements we monitor to assess the small, medium-sized business climate are net hiring, wage inflation, overtime hours worked, and commissions paid to the sales staff of our clients. As Doug mentioned, net layoffs incurred in our client base over the second half of 2023 has continued through the first quarter of this year. Wage inflation, which peaked nearly 7% in 2022, has continued a downward trend all the way to slightly below 2%. Overtime as a percentage of regular pay is down to 9%, the lowest number in a few years. The most important metric that provides some insight into client sales and near-term revenues in their businesses is commissions paid to their sales organization. This metric was down to 6%. also the lowest number in the last couple of years. Recently, we've also had the opportunity to have direct discussions with the representative number of clients. While normal business owner optimism is still alive and well, comments about the effect of interest rates, inflation, and economic slowdown were common. Our recent client survey reinforced these anecdotal comments across the broader nationwide client base. Clients who feel their organization will perform better during 2024 and then during 2023, has decreased to 66% from 74% just one quarter ago. The percent of clients who expect increased staffing has dropped to 39% compared to 54% a year ago. One-third of the respondents expect the economic climate to have at least a somewhat positive impact on their organization, while 42% anticipate a negative impact. Consistent with past quarters and looking forward to 2024, client optimism about their own business performance exceeds that of their expectations for the economy. Two-thirds of clients surveyed were still optimistic for their own company performance, which was similar to January. Now, let me shift to the exciting update about our newest significant catalyst for growth, our exclusive Workday Strategic Partnerships. My enthusiasm for this opportunity was evident on our last call, and after the first three months working together and gathering client feedback has been reaffirmed. Our view of this strategic partnership as a potential game changer in the marketplace, and at the same time significantly elevating the trajectory of our company, driving long-term growth, profitability, and value creation for Insperity has been strengthened. As a reminder, through this strategic partnership, Workday and Insperity are committed to jointly developing, marketing, selling, and supporting the preeminent solution for targeted small and medium-sized businesses that combines Workday's HR technology with Insperity's HR services. We expect to offer this unique combined solution to the target market for less upfront capital costs, ongoing expense, complexity, and implementation time than currently available to those businesses. We believe this new solution has the potential to be competitively disruptive. Insperity and Workday are now strategic partners focused on four major objectives. All four of these priorities are off and running after just the first few months working together. First, a foundational step for this strategic partnership to be effective is Insperity becoming a Workday customer for our corporate staff, which is ideal for our 4,300-employed company with dynamic future growth. We believe it's important to have our entire staff on Workday to be ready to support our clients as we launch this new solution. Our corporate Workday tenant project plan is progressing on schedule. A significant milestone for this to be started and completed effectively is the completion of the initial corporate HR data workbook in order to build the foundation tenant to use in configuration sessions. This was submitted to Workday and the development site is up and running. Second, we are developing and embedding an instance of Workday as the client-facing HR technology within our workforce optimization offering to create this new joint solution for the target market of larger accounts. Now, this new Insperity Workday client tenant instance is a significantly more complex implementation. It's challenging to even describe how much work and detailed planning has already happened on this project. We are very pleased significant progress has been accomplished detailing out the master plan for this project and the teams are working together extremely well. Third, we're establishing a deployment and enablement team within the Insperity Service Organization with the help of Workday. Our goal for this team is to deliver implementations and provide support for the new solution in a similar efficient and effective manner as we do today. We're also off to a great start establishing this Insperity enablement team. A significant number of our service professionals have already completed training programs to establish a foundation for this team. The fourth major objective of this strategic partnership is a go-to-market plan for Insperity and Workday to address this target market, including co-branding, co-marketing, and co-selling. The most significant effort accomplished since the launch has been the organization, staffing, and alignment of teams to ensure the success of the strategic partnership and the go-to-market plan. We're very pleased with the demonstrated commitment reflected in the leadership of both companies' roles and responsibilities to make this partnership dynamic and effective for both companies. The first three months establishing the framework for this strategic partnership has not been without challenges. as this type of relationship is new to both companies. However, the corporate culture match between the two firms continues to reaffirm my confidence around our opportunity for long-term success. My confidence is also supported by the client-centric nature of this strategic partnership and the potential to deliver a highly scalable HR technology and service solution to a significantly underserved market. Dialogue with clients and prospects about this solution has also been exceptional. We were able to have personal interaction with over 200 business owners at our recent client events, and the energy from these discussions was encouraging. We're very excited about our upcoming Investor Day coming up on May 16th at our corporate office and available remotely online. The focus of this event will be an update on the fundamental drivers to our powerful business model, and the specific ways we expect our new Workday Strategic Partnership to be a catalyst to improve the likelihood, degree, and speed of our success into the future. At this point, I'd like to pass the call back to Doug.