NSP
#Thank you.
We appreciate you joining us this morning.
Let me begin by outlining our plan for this morning's call.
First, I'm going to discuss the details of our second-quarter 2016 financial results.
<UNK> will then comment on the key drivers behind our strong results.
I will return to provide our financial guidance for the third quarter and an update to the full-year 2016 guidance.
We will then end the call with a question-and-answer session, where <UNK>, <UNK>, and I will be available.
Now before we begin, I would like to remind you that Mr.
<UNK>, Mr.
<UNK>, or myself 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 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 included in the Form 8-K filed today, which are available on our website.
Now let me begin today's call by discussing our second-quarter results, which were driven by continued midteen double-digit worksite employee growth and ongoing effective management of gross profit and operating cost.
Adjusted EPS increased 43% over Q2 of 2015 to $0.60, and adjusted EBITDA increased 13% to $25.6 million, in line with our forecast.
Through the first half of 2016, we remain ahead of our initial budget, having generated a 74% increase in adjusted EPS over 2015 to $2.23, and a 34% increase in adjusted EBITDA to $86.8 million.
Our second-quarter highlights were led by 14.2% increase in average paid worksite employees to 163,521, which is at the midpoint of our Q2 forecasted range of 163,000 to 164,000.
This growth continues to be driven by a high level of client retention, which averaged over 99% for the quarter, and an increase in sales driven by a 15% year-over-year increase in the average number of trained business performance advisors.
Net hiring in our client base was positive for the full quarter; however, included a dip in May, consistent with the weakness reported in the broader labor market.
Now along with achieving our forecasted Q2 growth in paid worksite employees, we also effectively managed our direct cost trends and operating cost to achieve our targeted bottom-line growth.
Gross profit increased by 9% over Q2 2015, and as expected was influenced by client and product mix changes, benefit plan selection, and the seasonality associated with payroll taxes.
Benefit and workers compensation costs continue to trend favorably when compared to our initial 2016 budget.
Adjusted operating expenses increased by 7% over Q2 of 2015 and declined 7% on a per-worksite employee per month basis from $211 in Q2 of 2015 to $197 in Q2 of this year due to cost savings initiatives and continued operating leverage.
We have continued to closely manage our operating expenses, as demonstrated by an increase of only 4% in corporate headcount, excluding the growth in the number of Business Performance Advisors, and only a 2% increase in G&A costs.
As for our balance sheet and cash flow, we ended the quarter with approximately $70 million of working capital, including $51 million of adjusted cash.
In addition, we have $95 million available under our line of credit.
We have repurchased just over 3.1 million shares through the first half of this year, with a majority of the shares acquired through our Dutch auction tender offer in January.
We've also paid out approximately $10 million of dividends, inclusive of the recent 14% increase in our quarterly dividend rate.
Now at this time, I'd like to turn the call over to <UNK>.
Thank you, Doug.
My comments today will focus on three primary areas.
First, I will discuss key drivers of our excellent recent results.
Second, I will describe our plans to continue our momentum over the last half of 2016, and third, I will discuss the critical elements we are focusing on to set up a strong 2017.
Our outstanding second quarter reflects that our overall strategy is in place and our simple formula for success is working.
Our wide array of business performance solutions and our premium workforce optimization offering are in demand and our business performance advisors are working the Insperity selling system.
Sales for the quarter were solid, as the number of trained Business Performance Advisors was up 15%, delivering a 16% increase in the number of paid worksite employees from new sales.
The number of discovery calls were up 14% and the number of business profiles or opportunities to bid were up 12%.
Total sales were 93% of target for the quarter and 99% year to date, so we are continuing to see solid execution from our sales organization.
Midmarket sales are on track and the pipeline for new business is our strongest to date.
This segment now represents just under 25% of our worksite employees and is 19% larger than one year ago.
Now this includes clients that grew into this segment from our core small business and emerging growth client base.
The sale of additional business performance solutions attached to a Workforce Optimization sale and on a stand-alone basis continued at levels from Q1.
These sales contributed at the gross profit line and added new clients to upsell to Workforce Optimization in the future.
Another highlight in the quarter and year to date was the effectiveness of our marketing efforts, which is very important as we head into the last half of the year.
<UNK>eting leads provided to our sales team are up over 80% as social media followers are up over 100%, and unique visitors to insperity.com are up over 40%.
As Doug mentioned, our client retention rates are continuing at historically high levels as our wide array of business performance solutions and the level of care from our service organization continue to meet or exceed customer expectations.
This is particularly amazing when considering the service efficiency gains that we've made over the last couple of years.
Our key service ratio of number of worksite employees per service provider improved 20% ---+ over 20%, while achieving record retention levels.
The third factor relating to our unit growth is the net change in employment and existing clients from month-to-month due to layoffs and new hires.
This reflection of the broader labor market continues to be a slight positive contributor overall, but remains unpredictable from month-to-month and week against historical comparisons.
Q2 was a good example of this, as April and June were slightly positive.
However, this metric was flat in May, and in total, lower for the quarter than last year on a larger client base.
We track several additional key indicators in our data to gauge the strength of the labor market in the small- to medium-sized business community, including overtime as a percentage of base pay and commissions paid to the sales staff of our clients.
Overtime as a percentage of base pay was down slightly from the same period last year, but remains just over 10%, which typically indicates the need to hire staff.
The commissions paid to the sales staff of our clients was up 5% year over year, which is about average compared to historical levels over the last few years.
As we look ahead to the last half of the year, our focus is on building on our growth momentum.
In order to do this, we will need to increase activity that leads to sales and retention results and be prepared to overcome any obstacles that may appear.
Each year, we boost sales activity in the last half of the year with our fall selling and retention campaign.
We expect to launch this year's campaign in early September, and our sales and service teams are up for the challenge.
Our recent marketing success bodes well for our plans to increase activity this fall.
Our goal will be to maximize the amount of time our BPAs spend in front of qualified prospects.
Another key factor in our favor for this fall is the direct cost stability we have experienced that translates into favorable pricing for our clients and prospects.
We expect these positive trends in our benefit and workers compensation programs will help in converting new and renewing accounts over the balance of this year.
In addition, the Affordable Care Act continues to cascade down state-by-state and carrier-by-carrier throughout the country.
This fall, many businesses will be facing community rating and narrowed networks for the first time, especially in the 50-to-100 employee category.
This translates into more firms looking for solutions to get out of the complexity, compliance, and cost of the Affordable Care Act.
We are also cognizant of the factors that can introduce uncertainty in the marketplace and negatively affect business owner sentiment.
This would include geopolitical events, which have increased in frequency of late, and of course the upcoming election.
Our approach will be to prepare our staff as effectively as possible and maximize the number of opportunities in order to achieve our objectives, even if uncertainty is elevated.
There are several key initiatives over the last half of the year designed to set up a strong 2017.
In addition to a robust fall selling and retention campaign, we will be focused on growing the sales team, deploying technology enhancements, and becoming certified under the Small Business Efficiency Act.
Recruiting and training Business Performance Advisors over the last half of the year is a major priority.
We have over 400 BPAs hired now, and expect that number to reach 425 by year end.
This will put us on track for growth goals for next year.
Another priority for 2017 is to deploy technology upgrades to both the PEO co-employment and traditional employment platforms.
Our industry-leading PEO platform will become more HCM-like in both look and feel and functionality.
The platform will also accommodate what we call BYO, or bring-your-own, HCM.
This will accommodate clients that already have a human capital management system that they've made an investment in and want to continue to use it within the PEO relationship.
We also have an upgrade to our traditional employment platform underway that we expect will drive our stand-alone payroll business and traditional employment bundles, called Workforce Administration and Workforce Collaboration.
We believe these upgrades in both the PEO and traditional employment platforms will continue to enhance our competitive advantage in the marketplace in 2017.
One other priority which sets up a strong year next year is completing the certification process under the Small Business Efficiency Act.
We will be completing our application in the near future, and we have prepared for the changes that come with this opportunity.
Once we are certified, we will no longer have to restart the payroll tax wage bases on new accounts that come on throughout the year.
This will lower our cost related to these payroll tax payments, increasing profitability and allow for more favorable pricing to prospects, enhancing our sales.
The combination of the stamp of approval from the Small Business Efficiency Act and the financial benefits of certification provide an additional lift to the PEO industry in general and for Insperity specifically for 2017.
So in summary, we are pleased with the recent results and the momentum we have in the business, and we are focused on the right priorities for the balance of the year.
And look forward to continuing strong results and increasing shareholder value.
At this time, I will turn the call back over to Doug.
Thanks, <UNK>.
Before we open up the call for questions, I would like to provide our financial guidance for the third quarter and an update to our full-year 2016 forecast.
Based upon our solid execution through the first half of 2016 and outlook for strong client sales and high client retention over the remainder of the year, we continue to expect worksite employee growth of 14% to 15% for the full year.
As for Q3, we are forecasting average paid worksite employees in a range of 170,000 to 170,700, an increase of 14% to 14.5% over the third quarter of 2015.
We also remain on target for a 28% to 32% increase in adjusted EBITDA over 2015 when combining our unit growth outlook with expected gross profit trends and operating leverage over the remainder of the year.
This increase translates into forecasted adjusted EBITDA of $141 million to $145 million, which averages to approximately $71 per worksite employee per month, a 13% increase over 2015.
As for the third quarter, we are forecasting adjusted EBITDA of $30 million to $32 million, which follows our typical seasonal earnings pattern.
We are now forecasting an increase of 60% to 64% in adjusted EPS over 2015 to a range of $3.50 to $3.60.
This is up from our previous guidance of $3.46 to $3.58.
Q3 adjusted EPS is projected in a range of $0.72 to $0.78, an increase of 26% to 37% over Q3 of 2015.
In conclusion, we are pleased with our continued strong growth and profitability and look forward to updating you on our progress over the remainder of the year.
Now at this time, I would like to open up the call for questions.
Yes, in the last quarter, I mentioned in my remarks that it has been a slight positive overall, slightly less positive than it was a year ago, and it has remained a little choppy.
We had a couple normal months in April and June, and then May was pretty much flat.
Layoffs and new hires about even.
And so that was a fairly weak number, kind of reflecting what was going on in the labor market overall.
So we are keeping a close eye on it.
The good news is that overtime is still up over 10%.
Commissions we pay to the sales staff of our clients, which gives us some insight into their pipeline for new business, still remains pretty good.
So we think we are probably going to see more of the same; slight positive tailwind.
But the growth comes from the new sales and the retention rate.
We are just always happy when it's not headwind.
No, not really.
We really don't break it down too much by sector.
We do some internal analysis of that.
But we haven't seen anything that I would call a change in that area.
Yes, we continue to see some really good results by having a wide array of business performance solutions.
It helps us to sell our core workforce optimization offering.
Our attachment rates were good in the quarter.
And we also sell those services on a stand-alone basis, which expands our customer base and gives us other clients to sell into and sell upsell over time.
And so we had really good results in the retirement services area, where it makes a whole lot of sense when you become a Workforce Optimization customer to go ahead and attach the 401(k) because our recordkeeping services are very economical.
And it helps to make the financial numbers work to become a client.
We are also continuing to see good strong attachment of the time and attendance offering because of course under the Affordable Care Act, we really have to be all over your timekeeping and recordkeeping.
And so that becomes a nice add-on as well.
So those two are kind of leading the way, although we've had a really strong year on the recruiting front, which is kind of interesting in a fairly weak labor market.
But our recruiting offering has a lot of uniqueness to it and is well received in the marketplace.
And so we've done well there as well.
I would say that as far as our contribution on the income statement, it's right in line at the gross profit line with what we've been forecasting for the full year when you take the whole array of those Business Performance solutions so together.
So we are real pleased.
As far as the contribution from the other products and services, it's fairly simple on a per-worksite employee basis as it has been historically.
So it's pretty much grown in line with the unit growth.
The year-over-year increase in gross profit dollars is up 9%.
You may be referring to gross profit per employee number, and a lot of that has to do with seasonality and the benefit plan migrations in the mix of our clients and products and services.
I think if you look at the full year, we are expecting it to be fairly similar with the prior year.
And so ---+ a lot of it is just seasonality and product mix.
But it's still in line with what our initial budget was going into the year, so no real surprises there.
Yes.
As our budgets get larger each month throughout the year, so we are still at 99% for the year.
We were 93% for the quarter, so still a good strong number.
And the number of worksite employees paid in the quarter was up 16% on a 15% increase in number of BPA.
So all systems go there and pleased with the results.
We just like to set pretty good robust internal targets as the year progresses.
And we always build in a little bit of room between the sales targets, of course, and what we book into our ---+ or roll into our financials.
<UNK>, this is <UNK>.
The trends that we are seeing on both the benefits and the workers compensation are right in line with what we forecasted for the year.
On the workers comp, it has actually become a little bit better in the last two quarters because, you know, we are under a policy year that starts in October and runs through September.
So when we look at this policy year to date, our severity rate on claims is actually down over 20% better.
So that trend has been really good.
On the benefit side, we are seeing ---+ this quarter, we saw a little about a 2% trend in the medical side of our claims and it was a 6% increase or a 6% trend on the pharmacy.
Now that compares to last quarter, where we had about a 1% medical trend on the medical side and a 19% trend on the pharmacy.
So second quarter is definitely an improvement over the first quarter, but when we look at the whole policy year, on the benefit side, we are right in line with exactly what we looked at early on.
You look on the revenue side of the business, obviously because one of the big elements of our revenue is the amount that's built-in for the medical component of our service.
So when people continue to migrate to the lower-cost, higher-deductible plans than what we expected our forecasted for the quarter or for the year, obviously our revenue is going to be lower.
But as you all know, it isn't about our revenue, anyway.
It's about the gross profit and the contribution at the operating income line, because every worksite employee is a unit of revenue and a unit of risk.
And so that's how we measure it.
Once again, thank you all for following the Company.
We all look forward to continuing these type of results and getting ready to launch our fall campaign for the year.
And we will be reporting on that next quarter.
Thank you again for participating today.
