Barrett Business Services, Inc.
Q2 2022 Earnings Call Transcript

Published: 6 Aug 2022

[Operator:]

Good afternoon, everyone, and thank you for participating in today's conference call to discuss BBSI's financial results for the second quarter ended June 30, 2022. Joining us today are BBSI's President and CEO, Mr. Gary Kramer; and the Company's CFO, Mr. Anthony Harris. Following their remarks, we'll open the call for your questions. Before we go further, please take note of the company's Safe Harbor statement within the meaning of the Private Securities Litigation Reform Act of 1995. The statement provides important cautions regarding forward-looking statements. The company's remarks during today's conference call will include forward-looking statements. These statements, along with other information provided that does not reflect historical fact, are subject to a number of risks and uncertainties. Actual results may differ materially from those implied by these forward-looking statements. Please refer to the company's recent earnings release and to the company's quarterly and annual reports filed with the Securities and Exchange Commission for more information about the risks and uncertainties that could cause actual results to differ from those expressed or implied by the forward-looking statements. I would like to remind everyone that this call will be available for replay through September 3, 2022, starting at 8

[Gary Kramer:]

Thank you, Claudia. Good afternoon, everyone, and thank you for joining the call. We had an excellent second quarter, both financially and operationally. Our performance and momentum continued across all facets of the business and resulted in us once again raising our full year outlook. We exceeded our internal estimates of controllable worksite employee growth, plus our clients continued to grow, which resulted in better-than-expected financial results. Regarding our client and WSE stack, we continue to execute on our various strategies to increase the top of the sales funnel, and I'm pleased to say that we once again exceeded our expectations in Q2. This is the result of our three-pronged strategy

[Anthony Harris:]

Thanks, Gary, and hello, everyone. I am pleased to report that we had strong results for the quarter in all areas of our operations. PEO gross billings increased 14% over the prior year quarter to $1.8 billion, while staffing revenues increased 21% over the prior year to $30 million. As Gary noted, our increase in PEO gross billings was driven by stronger-than-expected growth from net new clients in the quarter, continued stronger-than-expected hiring within our client base and higher average billing per worksite employee. Overall, WSEs increased 9% over Q2 2021, and average billing per WSE increased 5%. The increase in average billing per WSE was driven primarily by rising wages in our existing employee base, offset partially by a greater portion of lower wage rolls being higher than we have seen in prior quarters. PEO gross billings growth by region versus the prior year second quarter were as follows

[Gary Kramer:]

Thanks, Anthony. We continue to always think of the client first and to advocate for the success of the business owner. I want to thank all of our professionals who work tirelessly to help our clients thrive. The company is in a great position and the new benefits offering is only going to accelerate future growth. Now I'd like to turn the call over to the operator.

[Operator:]

Thank you very much sir. The first question comes from Chris Moore from CJS. Please proceed Chris.

[Christopher Moore:]

Hey good afternoon guys. Thanks for taking a couple of questions. Maybe we can start with the health care benefits. So just trying to understand the mechanics a little bit better. So will it be open enrollment throughout the year for the select markets or certain discrete dates when clients can sign up, kind of how does that work?

[Gary Kramer:]

Yes. Hey Chris, so we're starting outside of California -- well, let me take a step back. So we were active in the market looking for acquisitions. And one of the requirements was we were trying to find a company that had a benefits offering. We're not having a lot of luck in the acquisition side. So that's when we kind of turned and said, "Instead of buy it, we're going to build it." So we shifted to the build it. We have our IT in place. We have our people in place. We have our partners in place. And the product is a very good product, very good process, very compelling value prop to the small business. And we're going to do it outside of California to start, right, because we really want to learn and master our craft before we bring it into California. So what we're doing now is we will start to sell to our existing clients outside of California with the intent that we sign them up, we go through the open enrollment and then come 1/1/23, they're on our master plan. So hopefully, it's going to be a pretty seamless process as far as the value prop and conversion. We've got some assumptions for it. But once we get through the 1/1 selling season and we know what our conversion rates are for the clients, we'll have a better feel for how the numbers and the guide are going to work.

[Christopher Moore:]

Got it. And is it exclusive to one health insurance company? Or how does that look?

[Gary Kramer:]

For this side, we have one health insurance company, and then we have another company that we're going to offer the ancillary benefits through.

[Christopher Moore:]

Got it. And maybe just in terms of the revenue model from your side.

[Gary Kramer:]

So on the revenue side, this will be a 2023 event, not a 2022. And when we give guide next year, just figure we'll know what our conversions were for the 1/1 selling season, and we'll have a good handle on what we think the positive effect of revenue and margin will be.

[Christopher Moore:]

But in terms of as clients sign up and start to enroll on the 1st, just what does it look like in terms of how do you get paid as these customers sign up? Is it a flat fee? I'm just trying to understand what it looks like.

[Gary Kramer:]

So the important thing here, what everybody needs to understand, is that we're not taking underwriting risk, right? We got out of the underwriting risk business on the workers' comp when we derisked the model, and we are not taking underwriting risk on the health care either. But just in general, we have good underwriting. We're underwriters on workers' comp, and that's how we get the good terms when we go out and renegotiate our workers' comp program to the market, and we're going to be good underwriters on the health care side. So this isn't going to work for everybody. It's going to work for those that fit well into our model because we've got to preserve the underwriting integrity of it. But the basic math is our revenue is going to go up. We will have a health care expense that will be passed through. And ultimately, we're going to keep the margin on this business that compensates us for all these activities. I mean if you want to think of it in simple terms, we are a reseller of health insurance and receive compensation for the resale.

[Christopher Moore:]

Got it. That definitely helps. I will leave it there and jump back in the line. Thanks.

[Operator:]

Thank you. The next question comes from Vincent Colicchio from Barrington Research. Please proceed Vincent.

[Vincent Colicchio:]

Gary, I wasn't clear on your pipeline for new sales prospects and referral partners and how it compared to the prior quarter. I don't know if you mentioned that.

[Gary Kramer:]

I didn't mention it, but our lead activity, we're seeing much more in the top of the funnel than we've seen over -- we're way over pre-pandemic levels now. So Q2 was better than Q1 as far as business coming in at the top of the funnel. And that's got to do with, A, the work the folks are doing in the field; and then B, the effort and strategic initiatives we have as far as meeting and bringing on new referral partners and then also trying to get some business on the direct side.

[Vincent Colicchio:]

So if I look at your guidance, your growth expectation for worksite employees, it looks like very little increase in the second half. Is that just conservatism? What are your thoughts there?

[Gary Kramer:]

Yes. I'll say we've tempered expectations a little bit on the back half of the year when we look at same customer sales as far as our clients hiring. It is a tight labor market out there. Our clients hiring exceeded our expectations in Q1 and Q2. But we're trying to go back to, say, a more moderate pace, more of a flattish same customer sales on our clients hiring on the back half. And that's the whole point, right? Everything in our data and everything is looking good. We do not see an economic slowdown here. There feels to be a little bit of a disconnect between Wall Street and Main Street right now as far as employment. But just in general, we're trying to be cautious as we give guide as we look at the back half of the year.

[Vincent Colicchio:]

And could you give us some help directionally what Q3 rev should look like versus Q2?

[Anthony Harris:]

Yes. So Q3 billings, we think year-over-year will be strong similar growth rates, honestly. I mean the trends are very consistent in terms of our progressive sequential growth Q2 going into Q3, So similar year-over-year sequential growth from Q2 to Q3.

[Gary Kramer:]

And then keep in mind, for Q4, we lose a business day. And that's about 50 basis points.

[Anthony Harris:]

Yes, in the year, it's about 50 basis points. In Q4, it will be about 2 percentage points off because of the lost business day.

[Vincent Colicchio:]

Okay. And on the acquisition side, assuming we go into -- everyone's debating if we're in a recession or not. Adding the health care is a big positive for business development here. Will you be opportunistic if we go into recession, the values drop significantly on the acquisition side? Or is that kind of shut off for now?

[Gary Kramer:]

We're actively looking. We don't say no to looking at deals, but we do say no if the deal doesn't make sense, but we're actively looking at the market.

[Vincent Colicchio:]

Okay. I’ll go back in the queue. Thanks.

[Operator:]

There are no further questions. At this time, this concludes our question-and-answer session. I would now like to turn the call back over to Mr. Kramer for closing remarks.

[Gary Kramer:]

Thank you. Thank you, everybody, for dialing in. Thank you, everybody, for your interest in BBSI. Things are going really well at the company, and we're looking positive ahead. So we are optimistic and looking forward to the future here. So thank you, everybody.