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Insperity, Inc. (NSP) Q4 2023 Earnings Call Transcript

Insperity, Inc. (NSP)

Q4 2023 Earnings Conference Call

Company Participants

Paul Sarvadi - Chairman and Chief Executive Officer

Douglas Sharp - Executive Vice President-Finance, Chief Financial Officer and Treasurer

Conference Call Participants

Andrew Nicholas - William Blair

Mark Marcon - Baird

Tobey Sommer - Truist

Jeff Martin - Roth MKM

Presentation

Operator

Good morning. My name is Paul and I will be your conference operator today. I would like to welcome everyone to the Insperity Fourth Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] Please note this conference is being recorded.

At this time, I would like to introduce today's speakers. Joining us are Paul Sarvadi, chair of the board -- chairman of the Board and Chief Executive Officer, and Douglas Sharp, executive Vice President of Finance, chief Financial Officer and treasurer.

At this time, I'd like to turn the call over to Douglas Sharp. Mr. Sharp, please go ahead.

Douglas Sharp

Thank you. We appreciate you joining us. I'm sure you've seen the exciting news announcing our strategic partnership with Workday released this morning. Our call today will be largely focused on the strategic partnership and how it fits into our long-term plan. However, we will begin by discussing the results of our fourth quarter and full-year 2023 results and end the call with a discussion of our outlook for 2024, which includes the strategic partnership with Workday.

Now, before I begin, I would like to remind you that Mr. Sarvadi 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 to differ materially from any forward-looking statements and reconciliation 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 $0.75 in adjusted EPS and $56 million of adjusted EBITDA, both above our expectations. our growth in paid worksite employees continued to be impacted by macroeconomic headwinds, particularly the significant decline in our hiring base over the past year.

In fact, minimal hiring in our clients -- client base experienced over the first half of 2023 turned into a low level of net reductions in the latter half. This contributed to paid worksite employee growth in Q4 of 2.5%, slightly below the low end of our forecasted range. In a few minutes, Paul and I will comment further on the outcome of our recent sales campaign and heavy client renewal period leading into our 2024 growth outlook.

Fourth quarter gross profit exceeded our expectations on higher pricing and lower benefit costs and payroll taxes. The Q4 year-over-year comparison represents a decline in gross profit due to the unusually low-benefit cost in Q4 of 2022.

Operating expenses increased 5% over Q4 of the prior year, in line with our forecast and included a planned increase in Business Performance Advisors and service personnel, and continued investment in our technology. Net interest income was consistent with the prior year. Our Q4 effective income tax rate came in at 19% and was favorably impacted by lower state taxes and R&D tax credits.

Now, let me recap our full-year 2023 results. We earned $354 million of adjusted EBITDA and adjusted EPS of $5.52. As for the drivers, we achieved 6% growth in average paid worksite employees despite the significant decline in net hiring in our client base due to macroeconomic headwinds. these same headwinds contributed to declines in client retention to an annual rate of 83% and worksite employees paid from new sales.

gross profit per worksite employee per month, our key pricing and direct cost metric was $277 in 2023, just slightly below our budget despite elevated healthcare costs in Q2. these results demonstrated our ability to effectively execute our pricing strategy while managing our direct costs over the full year. Operating expenses increased 7.5% over 2022 and included key investments in our long-term growth plans. In addition to a 12% increase in the number of Business Performance Advisors, we increased our service capacity and continued to invest in our technology, including the implementation of Salesforce across both our sales and service organizations.

The current inflationary environment drove high -- drove higher compensation of our corporate employees and other operating expenses such as travel costs. We continued to produce strong cash flow and ended the year with a solid balance sheet while continuing to invest in the business and providing strong return to our shareholders. We invested $40 million in capital expenditures in 2023 and returned $216 million to stockholders through dividends and our share repurchase programs. We repurchased a total of 1.3 million shares at a cost of $132 million. We also paid out $84 million in cash dividends, which included a 10% increase in our regular dividend rate in May of 2023. we ended 2023 with $171 million of adjusted cash and continued to have $370 million outstanding under our credit facility.

Now, at this time, I'd like to turn the call over to Paul.

Paul Sarvadi

Thank you, Doug and thank you all for joining our call. Today is a pivotal day in the 38-year history of Insperity with the announcement of our exclusive strategic partnership with Workday. In my view, this could be a game changer in the marketplace, and at the same time, significantly elevate the potential trajectory of our company driving long-term growth, profitability and value creation for Insperity.

The focus of my comments today will be to explain the nature of this agreement, including how and why I believe this is so monumental. I'll also provide context around how this relationship plays into our long-term strategy and our outlook for 2024 based upon our 2023 performance and the business economic environment.

Let's begin with the nature of this strategic partnership and why it has the potential to be so significant for Insperity and Workday, and most importantly, small and mid-sized companies in the marketplace. 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 into a new exclusive Insperity PEO offering. we expect to offer this unique combined solution to the target market for a significantly less upfront capital cost, ongoing expense, complexity and implementation time than currently available to those businesses.

By addressing these issues, we believe this new solution has the potential to be competitively disruptive. We believe that our joint solution will provide the target market of growing small and mid-sized businesses with as few as 100 employees with a new scalable capability with the potential to greatly enhance their likelihood, degree and speed of success. The complementary strength of both firms directed toward this target market creates a powerful opportunity.

Historically, Workday disrupted the marketplace by providing a best-in-class HCM technology solution and began at the high end of the market targeting the Fortune 500. They have been tremendously successful, and we believe they are the industry leader and premium brand in the space.

Now, as Workday has expanded downmarket, the reality is the smaller the company, the more they need HR services to implement and get the full value from their solution and be successful. This is where we believe Insperity is an excellent fit for Workday. Now, Insperity disrupted the marketplace by providing a best-in-class HR service solution and began at the other end of the market, serving companies with as few as 10 employees. We have also been tremendously successful and we believe we are the industry leader in the premium brand in our space.

As Insperity has expanded upmarket, the reality is the larger the company, the more they need more sophisticated technology to get the full value from our solution and be successful. This is where we believe Workday is an excellent fit for Insperity. Now, over our history, we have built a deeply-integrated and highly-effective system to manage a PEO and comply with the unique legislative, regulatory and industry-specific requirements. We have historically used our proprietary HR technology platform for all our clients from the smallest to the largest.

Now, the process over the last couple months evaluating the feasibility of developing this new solution highlighted the sophistication and quality of our own Insperity PEO HCM platform. We intend to continue using this platform for smaller clients and those that otherwise are not ready or don't fit the new joint solution.

So, Insperity and Workday are becoming strategic partners focused on three major objectives. first, we'll be developing and embedding an instance of Workday as the client facing HR technology within our Workforce Optimization offering to create the new joint solution for the target market. second, we are establishing a deployment and enablement team within the Insperity service organization with the help of Workday. We believe our speed of implementation for our PEO clients distinguishes us compared to the HCM space.

Our goal for this team is to provide implementations and support for the new solution in a similar efficient and effective manner as we do today. Third, we are initiating a go-to-market strategic plan for Insperity and Workday to address this target market, including co-branding, co-marketing and co-selling. We believe there are opportunities for each company to benefit from these aspects of our strategic partnership even before the new solution is launched.

Now, let me focus on how and why this strategic partnership could be such a game changer for Insperity. This partnership has the potential to dramatically improve all three of our most significant drivers of our financial model, new sales, client retention and pricing of our services.

Importantly, this is an exclusive agreement with Workday within the PEO industry. The exclusivity extends for at least five years beyond the launch of the joint solution. I believe this provides Insperity with a significant new competitive advantage and influences all three of these key drivers of our business. I believe the effect on sales can begin immediately, primarily due to a step-up in leads we expect through an automated process and the ultimate potential for prospects to upgrade to Workday HCM once the new solution is launched....

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