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 first-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 second quarter and an update for 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 could cause actual results to differ materially from any forward-looking statements, and a 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 record high first-quarter results which were driven by further acceleration of worksite employee growth and effective management of our gross profit and operating cost.
Adjusted EPS increased 90% over the first quarter of the prior year to $1.63.
Adjusted EBITDA increased 45% over Q1 of 2015 to a record high $61.2 million.
Our first-quarter highlights were led by a 15% increase in average paid worksite employees, exceeding our forecasted range of 13% to 14%.
These results were due to our record high level of client retention during our heavy Q1 client renewal period, and continuing strong sales.
Client attrition totaled only 7.6% for the quarter, a significant improvement over an already favorable trend.
You may recall that attrition improved to 9.9% in Q1 of 2015 from 12.8% in the first quarter of 2014.
Our first-quarter retention results largely dictate the expected outcome for the full year.
Q1 2015's results led to full-year client retention of 85%, up from 82% in 2014, and each of these years above our long-term average of 80%.
During our heavy year-end sales and renewal period and throughout the first quarter, we also effectively managed both pricing relative to changes in our client mix and our direct cost trends.
This led to gross profit per worksite employee coming in within our target range.
Q1 benefits and workers' compensation costs came in on budget, and continue to trend favorably.
Now, moving on to operating costs, we continued to effectively managing expenses and leverage our cost structure.
Adjusted operating expenses increased by less than a 2% over Q1 of 2015, and declined 11% on a per-worksite employee per month basis from $230 in Q1 of 2015 to only $204 in Q1 of this year.
You may recall that we implemented certain cost savings actions beginning in Q2 of last year.
These initiatives, along with the typical leverage in our business model, brought about by a general 50-50 mix of fixed and variable costs, favorably impacted the Q1 year-over-year comparison.
Our effective tax rate in Q1 came in at 38%, below our forecasted rate of 41%.
This lower rate was largely due to a new accounting pronouncement addressing taxes associated with divesting of stock awards.
The related tax benefit had no impact on adjusted EBITDA.
However, it positively impacted adjusted EPS by $0.05 relative to our forecast.
For subsequent quarters, we are estimating an effective income tax rate of 40%, which then equates to a full-year rate of 39%.
As for our balance sheet and cash flow, we ended the quarter with $40 million of adjusted cash and $95 million available under our line of credit, which was recently increased from $125 million to $200 million.
This followed January's successful Dutch auction tender offer, in which we repurchased just over 3 million shares or 12% of our outstanding common stock.
Now, at this time, I'd like to turn the call over to <UNK>.
Thank you, Doug.
Today I'd like to address three topics.
We expect to create significant shareholder value in 2016 and beyond.
First, I'll discuss the key drivers behind the outstanding results we are experiencing, and the implications of these positive trends.
Second, I'll cover the essential elements of our strategic plan and explain why we are confident we have the right plans for the future.
Then, third, I'll discuss the design of our business model and the opportunity for sustainable high growth and profitability in the years ahead.
Our year-over-year unit growth rate has accelerated over the last two years, from 3% in 2014, to 12% in 2015, to 15% in Q1 of this year.
This ramp-up has been driven by systemic improvements in sales and retention of clients as a result of a dynamic, strategic plan to offer a wide array of business performance solutions to attract more clients and keep them longer.
These improvements in sales and retention, combined with the rightsizing of our cost infrastructure and the inherent operating leverage in the business model, are driving these outstanding results we are reporting today.
Last quarter, we indicated we were experiencing record level client retention in the midst of our heavy renewal period, which spans the year-end through February.
The 7.6% attrition number for Q1, which Doug just mentioned, is simply unprecedented, and punctuates the systemic change we were hoping to achieve through the new strategies employed.
In our residual business model, no one factor is more valuable than improving the client retention rate, which increases the lifetime value of the customer and the return on the investment to obtain those clients.
In order to understand the systemic change we have achieved in this area, it is important to look at our client segments, including small businesses with less than 50 employees; emerging growth clients with 50 to 149 employees; and our midmarket clients with 150 to several thousand employees.
Our biggest retention challenge has always been this larger client segment, where we have historically experienced a success penalty, helping clients get to this size, only to have them take their HR function in-house or sell to a larger company and eliminate the need for our services.
Due to our wide array of offerings and the customer-for-life service mindset, we now have a range of service models and customization capabilities driving the improvement in our retention rate in each of these segments.
Our small business and the emerging growth segments' attrition rate in the key year-end transition period have decreased by 37% and 32%, respectively, since 2014.
But the most impressive improvement is in the midmarket, where our client engagement strategy has reduced the attrition in our largest client segment by 74%, contributing to an overall decrease in year-end attrition since 2014 of 46%.
This dramatic improvement in the midmarket segment is the direct result of our capability to offer more service options, combined with a high level of engagement with senior management in these accounts.
The progress we have made solving this success penalty paves the way for more consistent, predictable, high growth at lower cost in this improved business model.
The improvement in client retention for the full-year 2014 and 2015, of 82% to 85%, set a historical high water mark for this metric.
With the start we have had this year, our expectation is to exceed the level of retention for the full-year 2016.
The second key driver to our recent results is the solid sales execution we are experiencing, growing the sales staff and improving sales efficiency.
The challenge we had to overcome in recent years was to integrate cross-selling into the Insperity selling system.
We have overcome that challenge.
Today we are seeing significant benefits and confirmation of the strategic decision to offer a wide array of business performance solutions to fit more of the prospects we call on day to day.
This has added to our ability to generate consistent, predictable sales results.
Q1 sales were 110% of budget, and a 16% increase over the same period in 2015 due to a 12% increase in the number of trained business performance advisors and a 4% increase in sales efficiency.
As I mentioned last quarter, any time you are growing the sales staff substantially, and sales efficiency increases instead of decreases, your sales management and training are hitting the mark.
These results demonstrate our capability to recruit and train BPAs and bring them up to a base level of sales efficiency in an appropriate time frame.
This competency is the key to driving consistent, predictable growth into the future.
We are continuing to grow the sales organization at rates to achieve targeted growth objectives.
Recently, our total number of hired BPAs exceeded 400, which puts us in a position to reach the trained BPA target level of 370 on schedule this year.
As we grow the sales staff, we have been able to increase efficiency by driving more qualified leads through our marketing efforts.
In the first quarter, we increased corporate leads by 76% over the same period last year, with a 40% increase in unique visitors to Insperity.com.
These increases are the result of our efforts in digital marketing, a robust loyalty referral program, and channel partner activity.
These programs are contributing nicely today, and have tremendous upside to continue to fuel our sales momentum.
In addition, in the first quarter, for each new workforce optimization client we added, we also sold another one of our business performance solutions, either attached to the sale or on a stand-alone basis.
This strategy adds to gross profit and expands our customer base that can be cross-sold on other offerings and eventually up-sold to workforce optimization in the future.
The final key driver to our recent results is a demonstrable operating leverage inherent in our business model.
For the last five quarters in a row, our unit growth rate has far outpaced our growth in operating costs, providing significant margin expansion.
Our cost infrastructure is right sized, and we expect to continue to see operating leverage and margin expansion going forward.
So the essential elements of our strategic plan are in place, and the power of our business model is just beginning to emerge: the role we envision of the business performance advisor as a trusted advisor; and the customer-for-life approach is paying off.
The number of trained BPAs we have today is appropriate for the size of the worksite employee base to achieve targeted growth rates, and our capability to grow and train the sales force is validated by our recent results.
Our broad product and service offerings are hitting the mark with our prospects and clients, resulting in higher client retention rates, additional contribution to the gross profit line, and an expanded addressable market.
We are positioned as the premium service provider in the marketplace, aggregating the best small and midsized companies on to our platform.
Our proprietary, risk-based client selection process allows us to maximize the value of our offering for clients and our own profitability at the same time.
Our unique capability to managing risk and matching price and cost continues to provide a stable environment for our clients on some of their most volatile costs.
This also contributes to improved retention and increased demand for our services.
Perhaps the most essential element of our strategic plan is the high touch service differential that comes from the way Insperity employees care for, and about, our clients.
The combination of our best-of-class cloud technology platform and our high level of consultative services is central to our unique position in the marketplace and the superiority of our business model.
Another highlight over the last two years is the efficiency gains we've made by optimizing our service models for each segment of our client base, lowering our cost of service while increasing customer satisfaction.
Our key metric in this area is the number of worksite employees served per Insperity service professional.
It has increased in each of the last eight quarters, improving by more than 20% since 2014.
So the icing on the cake of our strategic plan is the inherent operating leverage from our 50-50 fixed to variable cost structure.
As we continue to grow at double-digit rates, margins continue to improve.
We are confident we have the right strategic plan for the future.
And our clear focus as we look ahead is on consistent, predictable, high growth and profitability to drive shareholder value.
Our business model is designed to produce double-digit unit growth, and we believe our plan in place has increased both the likelihood of success and the growth rate we can achieve in the future.
In this model, when we grow the number of paid worksite employees in the 10% to 20% range over an extended period, generally you can expect adjusted EBITDA growth in the 15% to 25% range.
We are now forecasting a second year in a row with adjusted EBITDA growth above this level.
In 2015, 12% worksite employee growth resulted in a 31% increase in adjusted EBITDA.
For 2016, we're off to a very strong start.
And in the revised guidance for this year, you can see the benefit in the growth rate in adjusted EBITDA from growth achieved through higher retention and lower cost.
In summary, our recent strong execution and results, which validate our strategic plan, have provided a positive outlook for both the balance of this year and beyond.
At this point, I'll pass the call back to Doug to go over our revised 2016 guidance.
Thanks, <UNK>.
Now, before we open up the call for questions, I would like to provide our financial guidance for the second quarter, and an update to our full-year 2016 forecast.
We continue to expect worksite employee growth in the mid-teens and are forecasting Q2 average paid worksite employees in a range of 163,000 to 164,000, or approximately 14% to 15% growth over Q2 of 2015.
Based upon our strong start to 2016 and an improved outlook for sales and client retention, we have raised the low end of our initial full-year guidance and are now forecasting full-year worksite employee growth of 14% to 15%.
We are also projecting higher adjusted EBITDA, based upon the strong first-quarter results, the expected improvement in our growth outlook, and further operating expense savings over the remainder of the year.
We are now forecasting an increase in adjusted EBITDA of 28% to 32% over 2015, up from our initial guidance of 22% to 28%.
This increase translates into an updated forecast of $141 million to $145 million.
As for Q2, we are forecasting adjusted EBITDA of $24 million to $27 million, which, as expected, is down sequentially from Q1 due to the typical seasonality in our gross profit.
We are now forecasting 2016 adjusted EPS of $3.46 to $3.58, up from our initial guidance of $3.19 to $3.36.
This translates to an increase of 58% to 63% over 2015, up from our initial forecast of 46% to 53%.
This guidance assumes approximately 21.5 million shares outstanding, similar to our initial forecast.
The Q2 adjusted EPS is projected in a range of $0.54 to $0.62, an increase of 29% to 48% over Q2 of the prior year.
In conclusion, we are very encouraged by another strong start to our year, and we look forward to updating you on our progress throughout the year.
Now, at this time, I'd like to open up the call for questions.
Yes, <UNK>, it's contributing in the $16 per worksite employee, per month range.
And of course that's actually down a little bit from where it was a year ago.
But that's because our worksite employee base, the denominator is growing faster than that top line, and it is still growing at 10%, 11%.
Okay, I would just add to that, that that's a ---+ we're just now seeing the beginning of what that can be.
And the exciting part for us is that there are two key elements to that as part of the strategic plan.
One is that is the third contingent in the gross profit line.
But, more importantly, it has ---+ it's not risk-based.
It has unlimited potential.
So, it was definitely a very nice strategic addition.
<UNK> is correct to say that we are growing fast at this point, so you've got to grow those businesses even faster.
And with the referrals that are building and the attachment rates that are going forward, we are very excited about that element of the business for the future.
Sure, there's three.
I'll highlight just three right now that are just ---+ the portfolio quarter to quarter, you have some do better than others.
Of course, right now, our recruiting group is really knocking it out of the park throughout the year-end transition.
Our retirement services group, added ---+ we're just really adding a lot of customers in that area.
We also, I would say, is the continuing strong performance in the time and attendance area.
And a lot of that is driven by the ACA requirements of hardly even think about trying to manage those reporting requirements for that on effective time and attendance solution.
So, those three I would highlight as leaders of the pack, at this point in time.
But I think it's important to understand that having this wide array of solutions is what enables a level of customization so that we can customize an initial solution for client, and then keep them longer by continually updating their set of solutions in what we call our customer-for-life strategy.
And it just feels like we're able to continue to meet our customers' needs, because we actually are.
Yes, it's ranged kind of from 0.8% to 1.0%.
But here in the recent years, it's been ---+ and we've had a shift, over the last five years or so, of more toward the year-end and less throughout the year.
So we will see how the year plays out.
But in any event, it looks to us after (technical difficulty) got through this year-end period that we really do have the systemic change in client retention that we were hoping to achieve with the new strategy.
Yes, no.
We were heading for 400 total, 370 trained, has kind of been our plan for through our whole planning cycle at the year-end.
But we were around ---+ just under the 350 number, I think, for the first quarter.
So we're on track to get to that number.
And we feel good about that, that that is the right number based on the sales efficiency we're seeing and the ramp-up rate for the new BPAs.
I think it's going to be ready much in the same range as it was last year, <UNK>.
And it does really completely relate to mix.
All of our cost centers and the surplus of ---+ other than, obviously, the benefits, which is always a negative ---+ are really right on target where we forecasted it to be.
So, we're feeling good about the trends in those areas.
It's a good question (laughter).
We are very hopeful that they are going to meet their publicly stated objective of having the information available by July 1, so that (technical difficulty) can become certified under the law.
And ultimately not have to (technical difficulty) a payment of [tax] in 2017.
So that does present some upside to the model in a couple of ways.
It obviously allows us to not have to fight in that double payment of customers.
So we're hopeful that that clears up some confusion in the sales process and offers a lower price to the customer, so less of a leap to come on board.
And at the same time will save us a lot of costs, since we've been subsidizing that double payment in our business model.
So it represents some upside for us at the gross profit per employee line as you go into 2017.
And hopefully (technical difficulty).
Right.
In the course segment, yes, we certainly have our BPAs across the board are capable of helping to attach various solutions to the full workforce optimization option in order to help make the sale.
And that's a very good thing, because ---+ so, if somebody, for example, they look at the workforce optimization, and maybe it's going to cost them some money on a per-employee basis every month.
What we might offer a couple of solutions that actually lower cost, like our retirement services solution.
If they happen to have retirement plans, we're going to have a more efficient delivery of that solution.
So we are able to actually offset cost with some of the other solutions, which makes the sale of workforce optimization more likely.
And then it comes within ---+ with other business performance solutions attached.
So yes, it definitely took a long time to get in place with this mindset of how to use these other solutions to deliver what feels more like a customized solution to the customer, and helps become part of the mix to make the workforce optimization solution ---+ make the right choice.
Now, if they are not ready for that, I think we have a lot of upside in providing what I'd call a traditional employment solution, which we've been doing in the midmarket, as presenting some options for customers that want more flexibility.
But I think there's a nice future for us, presenting kind of a payroll-centered solution in the small business client base, and that they have a few items attached to it, pay-as-you-go workers' comp and a simplified 401(k) plan.
And if the customer is not ready for workforce optimization, if they are the right profile customer for us in the long run, we'll bring them on that model and hopefully upsell them over time.
And in addition to that, you can have customers in the workforce optimization model that, for various reasons, need to move out of that model; maybe from a cost [prohibitive] perspective or whatever, it's nice to have someplace else to go for those customers, and keep them in (technical difficulty).
You bet.
There's a couple things, as you know, I keep an eye on what I would call a capacity measure, which is the percentage of overtime pay to regular pay.
And we generally look for a 10% or better number to indicate the need to hire new employees.
Business owners only hire new employees if they need to, because of the capacity issue, but also if their pipeline for new business has to be good enough to where they think that's going to be sustained for a while, and they actually would make more money by hiring new people than just working overtime.
So, the other thing I look at is the commissions paid to the sales staff of our clients.
Since we run all the payroll, we're able to compare on a year-over-year basis what percent of base pay and commissions were in one period for the same group of employees or [same group] of clients compared to, say, a year ago.
So that number ---+ we also look for that number to be strong enough, typically over, around 8% or so to support the need for ---+ not just the need for new employees, but the likelihood that they need them as full-time on an ongoing basis.
So, actually, this quarter was the first time really since the 2008 period that we've seen both of those numbers finally at the level we're looking for.
Overtime was 10%; commissions were up 11% on a year-over-year basis.
So, that should be the mix we're looking for.
And we're actually in the ---+ during this quarter, and toward the end, we started to see a little bit of uptick there.
So, it's been ---+ the actual net hiring in the client base has been a slight positive now for several years, but not at the rates you would expect in a normal recovery.
And we're always just happy if it's not a headwind ---+ layoffs exceeding new hires ---+ but we haven't built any of this into our going-forward growth plan.
We prefer that it be driven strictly by our sales and retention, things more in our control.
But if this continues, I would expect to see a little bit more of a tailwind coming out of this, faster.
All right.
Well, thank you very much.
Sorry if we missed Mark there.
But we'll be in touch with him off-line.
Thank you again for participating in our call today.
And we look forward to seeing you out on the road, or updating you further as the year progresses.
Thanks again for your participation.
