Insperity, Inc.
Q4 2020 Earnings Call Transcript

Published: 11 Feb 2021

[Operator:]

Good evening. My name is Cindy, and I'll be your conference operator today. I would like to welcome everyone to the Insperity Quarter 4 Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. . At this time, I would like to introduce today's speakers. Joining us are Paul Sarvadi, Chairman of the Board and Chief Executive Officer; and Douglas Sharp, Senior 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. Let me begin by outlining our plan for this evening's call. First, Paul will recap the 2020 year and discuss the major initiatives of our 2021 plan, and I will discuss the details of our fourth quarter and full year 2020 financial results and provide our financial guidance for the first quarter and full year 2021. We will then end the call with a question-and-answer session. Now before we 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 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. At this point, I'll turn the call over to Paul.

[Paul Sarvadi:]

Thank you, Doug, and thank you all for joining our call. My comments today will address 3 areas of interest for Insperity stockholders. First, I will discuss our strong Q4 and full year 2020 results, highlighting our success throughout the pandemic. Second, I will address our year-end transition into 2021 and the trends driving our game plan for this year. I'll finish my remarks with comments about the longer-term and our efforts to begin a new 5-year run of unit and earnings growth for Insperity. Our financial results for 2020 were quite impressive, with less than a 1% decline in worksite employees and a year-over-year increase of 15% in adjusted EBITDA, especially in light of the significant challenges faced throughout the year. Ultimately, the financial impact of shutdown-related layoffs in our client base was more than offset by lower direct costs due to behavioral changes in response to the pandemic. These results continue to demonstrate the resiliency of our small business client base, the value of our HR services and the strength of our business model in client selection and risk management. The highlight for the year was the way our Insperity employees immediately responded to challenges and delivered vital support to clients, worksite employees and their families. The dedicated service and personal touch from our people, caring for clients dramatically reinforced our tagline, HR that makes a difference.

[Douglas Sharp:]

Thanks, Paul. Now let's discuss the details behind our fourth quarter results. We reported Q4 adjusted EPS of $0.49 and adjusted EBITDA of $38 million. These results reflect outperformance in the level of paid worksite employees compared to our expectations in the continued uncertain and challenging business environment. Upside in our direct cost programs brought about by the structure and the ongoing management of these programs and some dynamics related to the pandemic and continued management of our operating costs. As for our growth, we continued the sequential increase in paid worksite employees since the low point in May of 2020, when the impact of the pandemic caused many of our clients to furlough or permanently lay off their employees. Our recovery in the level of paid worksite employees since this period was driven by the return to work of many of these employees and effective selling and client retention. Q4 average paid worksite employees increased 3% sequentially over the Q3 period, coming off the 2% sequential increase in Q3 over Q2. During Q4, all 3 growth drivers exceeded our expectations. Gross profit increased by 3.5% over Q4 of 2019, despite 1.8% fewer paid worksite employees due to improved pricing and the higher-than-expected contributions from our benefit and workers' compensation programs. During Q4, total benefit costs returned closer to pre-pandemic levels as lower health care utilization was largely offset by COVID-19 testing and treatment costs. However, previously deferred care costs did not materialize at the forecasted level. Our workers' compensation program continued to perform well due to ongoing management of safety practices and claims, and to a lesser degree, a favorable net impact from the reduction of workers' compensation claims associated with the work-from-home status of many of our clients' employees.

[Operator:]

Your first question from Josh Vogel.

[Josh Vogel:]

The first question I have is around the Salesforce implementation. Can you just give us a sense of when you think the implementation will be complete and then you can eliminate the duplicate costs?

[Paul Sarvadi:]

Yes, sure, Josh. We expect the Salesforce implementation to go over this year and next year. And we're starting in the sales and marketing areas and then moving over into the service and balance of the company next year. So the kind of bubble of expense will be in this year and next. And after that, you're kind of in our normal run rate.

[Josh Vogel:]

All right, great. And you had some comments around utilizing client data and analytic insights. And I'm curious, is that something that you can package and price? Or is it included in the client relationship?

[Douglas Sharp:]

Sorry, you cut out a little bit in the question. You want to say that one more time?

[Josh Vogel:]

Yes, I'm sorry about that. So the client data and analytic insights that you gain through Salesforce, I'm curious is that the ancillary product that you can provide into your clients? Or is that something that they're just going to automatically get?

[Paul Sarvadi:]

No. Actually, we're going to be the biggest -- the customer is going to benefit from how we're able to access all the data and information on their behalf. So it really isn't productized so much for the customer. It just becomes engrained to how we serve them and also how we target new customers and bring them in and through the whole life cycle of being a client. We expect it to be a much more cohesive experience for the customer, with less effort for our service providers to achieve those high service standards that we put out for the client -- for our clients. So we expect it will have a tremendous benefit internally and will translate into better service experience for our clients.

[Operator:]

And the next question from Mark Marcon.

[Mark Marcon:]

I want to -- can you talk a little bit more about your -- how you're pricing the health care plans for your clients for this year? It sounds like you're expecting the cost to go up by 6% to 7%. But I'm wondering, how does the pricing look? And in the case that there is higher increase usage of kind of the deferred electives, how do we think about the variance there? Obviously, you've got a pretty wide range in terms of your guidance and your accounting for that. But just wondering if you can kind of set the parameters in terms of kind of high-low and how you're thinking about that?

[Paul Sarvadi:]

Yes, absolutely. I think it's important to note that we're -- you have to really look at the benefit programs over a longer term, especially because of these last couple of years, '19 and '20. And then as you look into 2021, you're coming off of that flat trend year, that -- in our view, artificially flat because of the onset of the pandemic and the shutdowns and the behavior that came out of that. So the underlying trends have continued. And so that's kind of how we have baked it into the cost side. And as you know, we -- so that kind of translates to a couple of 3% to 3.5% increases back-to-back in '20 and then again in '21. That's why it's 6% to 7% off of last year's flat level over 2019. Now on the pricing side, as we've mentioned over the last 18 months or so, we've continued to move pricing at a level to make sure that there's a good match, and we earn the appropriate level of allocation, I should say, to make sure you're covering the cost escalation. So we did that very effectively last year. And so for this year, going forward, our pricing would look like possibly around the 4% level and then your customers make decisions to bring those costs down, individuals make decisions, et cetera, to bring their pricing down. But -- so we feel like we're really in great shape matching price and cost. Most of the kind of wider range relates to just the dynamic. It's just hard to tell how and when these COVID costs come back in or whether they're further possibly vaccination costs or it can even go the other way with shutdowns and limiting utilization. So there's just a lot of variables in there this year. But in terms of accounting for and pricing in a proper level of trend and the bigger picture, we feel real strong. We're in good shape there.

[Mark Marcon:]

Great. And then I'm wondering if you could talk a little bit about any sort of cap on a per claim basis? And then with regards to the existing client base, how -- to what extent are you baking in the potential for some of your existing clients to bring back employees that they haven't brought back yet from -- for lower layoff?

[Paul Sarvadi:]

Yes. From our point of view, the pretty much the return to work from furloughs, we're pretty much past that at this point. People either came back to work or moved on to what I'd call a layoff. And there may be a small amount of that left. But in terms of the change in growth in the client base that we've kind of implied and budgeted in for this year, we looked to the underlying dynamic of kind of regular new hires and regular layoffs that were going on over the last half of the year and into this year and kind of built off of that. So we think that's a good conservative way to look at it. If things improve in the business climate, that may be some upside there. And then the first part of your question was about the benefits in terms of the cap. And as you may remember, we put in $1 million stop-loss, if you will or pooling limit, in our plan with our carrier last year. And we continued that into this year. Over the course of this year, we will likely run some numbers and investigate what it's like for us on a going-forward at that level and maybe some lower limit levels, but we like the way things worked out last year, and we'll continue to evaluate it and see if there's an appropriate -- if there's more risk to offload that's appropriate or if we're in the right spot.

[Operator:]

Your next question from Jeff Martin.

[Jeff Martin:]

I wanted to touch on growth acceleration throughout the balance of the year. If things go to plan, what kind of growth rate are we looking at exiting the year in terms of worksite employee base?

[Paul Sarvadi:]

Yes, you get into high single-digits or 7%, 8% or so as you get into the latter part of the year, and you're really in a good position if you can kind of have a good year-end transition where you're about even as you go across the year-end, you're in a great position to ramp right up to double-digit growth. That's the plan. And it's -- it reminds me if you can think back to -- that's why I kind of think about the 2014 period, we kind of did that. We went from pretty flat growth to 3% in the third quarter, 6% in the fourth and then 9% in the first, the following year, and we're up to double-digit growth and then had a really nice extended run at that level. So that's where I'm focused, where we've got these pieces in place. There's a little tweaking here and there, get Salesforce in place, continue the BPA training and the remote selling and mixing in some face-to-face visits and optimizing that process. I think we're in really good shape with also the recent improvement that we've seen kind of the way the customers are valuing our service and at double-digit improvements in retention over the year-end transition in our core emerging growth and mid-market segments. So that reminds me of that period when we had a step-up in improvement in retention, and it was part of fuel in that extended run of pretty high-growth rates. So that's where I see us today. So you have this growth acceleration across the balance of the year. And I think in pretty good shape to see that come about.

[Jeff Martin:]

Okay. That's encouraging. One thing we haven't heard much of in a while is the ancillary service products that are either a lead generation source or an enhancement to the offering. How is that tracking? Could you give us maybe some qualitative and quantitative sense of how that part of the business is running right now?

[Paul Sarvadi:]

Sure. We were making some good progress, especially with our workforce acceleration offering, which is a traditional -- our traditional Employment Solutions division. And when COVID hit, it was kind of all hands on deck at the core business. But shortly thereafter, as remote selling went into place and started to become effective, we started to see improvement. And then we had a very strong fourth quarter recovery in the sale of our workforce acceleration offering. And so we're kind of back on track on that front. I didn't talk about it much this time, but I'll probably include that in our next visit.

[Operator:]

And the last question from Tobey Sommer.

[Tobey Sommer:]

Could you discuss your sales pipeline efficiency metrics and how they're kind of evolving from -- through the pandemic until now? And what you may be toggling differently in 2021 based on what you've learned and kind of what you expect in the next few quarters?

[Paul Sarvadi:]

Sure, Tobey. Thank you for the question. It's really interesting right now because I think what happened through the pandemic, first of all, when it came about -- because we sell a complicated service offering directly to small and medium-sized business client owners, it was -- I wondered how that was really going to work. And for us to achieve over 80% of our pre-COVID budget throughout that period, was really impressive to me and real proud of our team for adapting and being able to do that. But what we saw from the funnel metrics during that period was a bit -- a significant drop-off in the number of leads, the lead flow, the inquiries coming in and folks who were ready to talk about a new product or service. As an example, in the fourth quarter, we were 13% down at that top of the funnel metric. But what we also saw is the ones who were ready to talk to us seem to be more serious. So closing rates were a little better and got significantly better as we went through the year and even to -- up to 17% improvement in our closing for -- a rate of the ones that we actually proposed the offering. And that was a great step up. Also, what was going on was further refinement of our targeting of accounts to try to get more customers in the funnel that are more serious and more closer to being ready. They are a better fit, closer to being ready for taking action. And we've made some progress there. That's why I think we have more progress to make. That's where I think Salesforce is going to really help us even refine that further. And so all those kind of come into the mix. But I also think as the economy improves or as the pandemic wanes or lightens up, you'll get more top of the funnel flow. And hopefully, we're able to continue to add more at the top that fit this profile that we're working on.

[Tobey Sommer:]

And from a client segmentation and offering perspective, sort of PEO, non-PEO services, what is growing more quickly and/or more slowly and how would you explain those differentials? Sort of what are the drivers?

[Paul Sarvadi:]

Yes. Well, at this point, we're seeing this period of growth acceleration, we're prepared for on the co-employment side. And on the other offerings, we're really focused on leading the way with our traditional services bundle that's -- gets people in the tent. And we've done some optimizing through the -- taking the information from the year-end into the new year and kind of went over everything with our BPA team at our virtual convention. And so we're -- I think we're in a good place to really build that feeder system, if you will, that we've been trying to put into place. And so we're really focused on that. We do have the other items. We're -- for example, our 401(k) offering has just been -- we've had a really good year there in not only current accounts coming in but also on the new accounts and what percentage of those came on. We did also make an important move, I think, during the pandemic. We made our recruiting services part of the deal to help the customer during this downtime, and that helped us to get some accounts and helped to demonstrate how we were supporting customers through the period. We're continuing that right now. We'll see when we reverse that back out to charging for it again. So we're -- the different offerings that we have, we used to -- at different times, to support the clients and expand that base of traditional solutions.

[Tobey Sommer:]

Last one, just could you catch us up on what client activity and success was like in the second PPP round compared to the first?

[Paul Sarvadi:]

Yes. We continued -- that didn't have near the visibility here than it did in the first round, but I think that's because people were -- knew what to do, knew how to do it. And all of our reporting and stuff was ready to rock and roll. So -- and keep in mind, in our client base, as we spoke about earlier, we have -- we don't have that big a base in the most severely hurt industries out there in the travel and restaurants, those kind of things. So I would say we had a lot fewer clients get in line and take the second round, but they were certainly able to do it quickly and effectively. And for many customers, that's certainly helping.

[Operator:]

There are no other questions at this time. And I would like to turn it back to you -- the call over to Mr. Sarvadi.

[Paul Sarvadi:]

Thank you very much. And once again, thank everybody for participating on our call today, and we look forward to interacting with you through conference calls, Zoom meetings and maybe eventually even face-to-face. So thank you again for participating.

[Operator:]

Ladies and gentlemen, this concludes today's conference call. Thank you, everyone, for participating. You may now disconnect.