Good morning. My name is Holly and I will be your conference operator today. I would like to welcome everyone to the Insperity First Quarter 2023 Earnings Conference Call. All participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. Please note this conference is being recorded. 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, 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.

Thank you. We appreciate you joining us. Let me begin by outlining our plan for this morning's call. First, I'm going to discuss the details behind our first quarter 2023 financial results. Paul will then comment on our recent accomplishments and our plan over the remainder of the year. I will return to provide our financial guidance for the second quarter and an update to the full year guidance. 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 more detailed discussions 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 on our website. Now let's discuss our first quarter results, in which we reported earnings above our expectations. We achieved a 29% increase in adjusted EBITDA over Q1 of 2022 to $152 million and a 34% increase in adjusted earnings per share to $2.67. These results reflect double-digit worksite employee growth, strong pricing, and operating costs in line with our forecast. As for our growth metric, the average number of paid worksite employees increased by 10% over Q1 of 2022, which was within our guidance. This growth reflects a successful year-end transition associated with our recent sales campaign and heavy client renewal period. Both worksite employees paid from new client sales and client retention were near our forecasted levels. As expected, net hiring by our clients slowed and was about 50% of the Q1 2022 level. Gross profit increased by 16% over Q1 of the prior year on the 10% worksite employee growth and strong pricing through the year-end transition, which was a key objective given the current inflationary environment. The first quarter contribution from our direct cost programs, including benefits and workers' compensation, were in line with our expectations. As forecasted, Q1 operating expenses increased 13% and included an 11% increase in the average number of hired Business Performance Advisors, as we plan for our future growth. The operating expense increase also included additional service and support personnel necessary to maintain our premium service level in a period of continued growth. We continue to invest in our technology, including the ongoing implementation of Salesforce. Net interest income increased $4 million over Q1 of 2022 on higher interest rates and invested balances. In the first quarter, the effective tax rate was 23.5%, which is lower than our expected full-year rate due to the tax benefit associated with the vesting of employee stock awards during Q1. Our financial position and liquidity remain strong as we continue to invest in our growth while providing returns to our shareholders. During the quarter, we repurchased 289,000 shares of stock at a cost of $35 million and paid out $20 million in cash dividends. We ended Q1 with $231 million of adjusted cash and $370 million of debt. Now at this time, I'd like to turn the call over to Paul.

Thank you, Doug, and thank you all for joining our call. Today, I'll provide some detail regarding our excellent results in the first quarter and the challenges we observed in the small to medium-sized business community. I'll also comment on the plans for the balance of the year to continue to capitalize on our market opportunity, and I'll finish with some perspective regarding how this year fits into our current five-year plan. One key factor to our first quarter every year is a successful completion of our heaviest selling and retention period to achieve a solid starting point for the year and paid worksite employees. This year's results were strong on both fronts, and when combined with some hiring within the client base over the quarter, led us to achieve double-digit growth. The other important factor in every first quarter is the pricing reflected once the year-end transition is completed. This was also a strong highlight in the quarter. We believe the combination of these two key factors puts us in a position for a solid year in both growth and profitability despite the current economic climate. These were strong results against the backdrop of a changing dynamic in the marketplace due to persistent inflation, rising borrowing costs, a weakening economy, and elevated uncertainty in the small to medium-sized business community. In Q1, new booked workforce optimization sales reflected this dynamic coming in below our budget. A degree of hesitation in the decision-making process was reflected across the country and to a greater degree in California coinciding with the turmoil in the financial system, sparked by the collapse of Silicon Valley Bank and Signature Bank. This was also reflected in the recently reported National Federation of Independent Businesses optimism impact declined in March. These survey results were in alignment with our internal client survey. The most significant change in our client base outlook was the expected impact of the economic climate. One quarter ago, those expecting a negative impact was less than 10% and is now over 20%. Those expecting a positive impact from the economic climate dropped from 65% to 55%. Our internal data we monitor in our client base also reflects some slowdown in the economy. Both the average increase in pay year-over-year dropped below 4% and overtime pay as a percentage of total payroll dropped below a 10% threshold for the first time in a couple of years. The commissions we pay to worksite employees of our clients, which reflects the recent strength of the sales pipeline in our client companies, were down to mid-single digits for the second quarter in a row compared to strong double digits seen in prior quarters. None of these developments we're seeing in our client base and the overall small to medium-sized business marketplace are unfamiliar to us over our 37 years of experience. We understand what our clients and prospects are experiencing and how their needs for sophisticated HR solutions change in this environment. We also know what tweaks to make in our sales, service, and support organizations that have worked before to meet these types of challenges and continue solid growth and profitability performance. The most important factor to drive growth in this environment is the number of sales opportunities we generate. The two most important drivers for this factor are the number of business performance advisors and the number of discovery calls. We believe we are in excellent shape on the most critical long-term growth driver for the company, the number of business performance advisors. As Doug mentioned, currently, we've ramped up to more than 700 BPAs, an 11% increase in this key metric over last year. Now our focus is on driving the activity numbers up across the board in discovery calls and opportunities to bid our services. Our marketing efforts are an important driver of these opportunities, and we're off to an excellent start this year with marketing leads up 13%, discovery calls up 11% in Q1 year-over-year. We also launched our spring brand awareness campaign early this month, which continues into mid-June. This includes market-specific media plans designed to continue this momentum in all our markets across the country. The combination of our growth in the number of BPAs, our marketing plans, and our sales management focus on activity levels gives us confidence in our growth plan for the balance of the year and beyond. We also believe we're in an excellent position for solid profitability for the year, as you will see, as Doug provides specific guidance in a few minutes. Our strong pricing is the key driver of our raised guidance in the near term and our progress in our Workforce Acceleration offering is contributing to our long-term outlook. New booked Workforce Acceleration sales were up 36% year-over-year in Q1, reflecting the increased focus of our sales organization on this offering. Recent adjustments to our sales compensation and recognition programs have successfully enhanced this effort. Our Workforce Acceleration offering has significant long-term potential to enhance our business model by leveraging our current sales process that allows us to see nearly 40,000 business owners face to face each year. Workforce Acceleration has the potential to further improve our sales efficiency, lower BPA turnover, and enhance our customer-for-life strategy for client retention. So as we look at this year in the context of our five-year plan, we remain on track to meet and exceed our year two targets on our two key metrics, paid worksite employees, and adjusted EBITDA. Even in a challenging economic environment, we have the potential for high single-digit growth in worksite employees and double-digit growth in adjusted EBITDA this year. A look back at our 10-year history, compound annual growth rates on these key metrics demonstrates the strength of our business model with rates of 10% in worksite employee growth and 15% in adjusted EBITDA, even with the pandemic during this period. We provide best-in-class small and mid-sized companies with premium sophisticated HR solutions that elevate their likelihood and degree of success. These services are provided by an incredible team of professionals here at Insperity that are dedicated to the success of every client. We expect this level of commitment to continue to produce excellent results for clients, worksite employees, communities, and our shareholders. At this point, I'd like to pass the call back to Doug to provide our specific guidance.

Thanks, Paul. Now let me provide our Q2 guidance and an update to our full year guidance, in which we are refining our forecast to paid worksite employee growth and raising our 2023 earnings expectations. We are now forecasting 7% to 9% worksite employee growth for the full year 2023, compared to our initial guidance of 7.5% to 10.5% growth. Our updated guidance still points to high single-digit worksite employee growth in a period of economic uncertainty and what appears to be some caution and negative sentiment in the marketplace. As for Q2, we are forecasting year-over-year worksite employee growth of 7% to 8%. We're now forecasting full year 2023 adjusted EBITDA in the range of $370 million to $410 million and adjusted EPS in the range of $5.62 to $6.39. We have increased the midpoint of this updated guidance to include our Q1 outperformance and an expected improvement in profitability over the remainder of the year. This improvement in profitability is based upon our recent strong pricing, direct cost trends, operating expenses generally in line with our budget, and higher interest income on rising interest rates. Our operating plan continues to include the necessary investments to meet our five-year planning objectives, including the growth in BPAs and service personnel and the necessary marketing and technology investments. We are now estimating a full year 2023 effective income tax rate of 26%. As for Q2 earnings, we are forecasting adjusted EBITDA in the range of $81 million to $90 million and adjusted EPS from $1.16 to $1.32. This guidance considers our typical quarterly earnings pattern. And as you may recall, our Q1 results are typically higher than subsequent quarters as we earn a higher level of payroll tax surplus prior to worksite employees reaching their taxable wage limits, and benefit costs are typically lower in Q1 and step up over the remainder of the year as deductibles are met. Now at this time, I'd like to open up the call for questions.

Certainly. At this time, we will be conducting a question-and-answer session. Your first question for today is coming from Jeff Martin at ROTH MKM.

Thanks. Good morning, Doug. Hope you're doing well. Wondering if you can provide some additional detail with respect to the California market. Were sales impacted in California in the period? And was there any material loss to worksite employees as a result of the financial turmoil? Thanks.

Sure, thank you for your question. I appreciate that. Now what we experienced in the month of March was more what I would describe as just the shock effect of the financial market or banking industry issues that came up. And what happens in this environment like that is there's just a hesitation in making decisions. And of course, in our case, the decision to use the PEO service is a significant one. And so in fact, it's more the framework of almost like a capital decision they make. So it's very natural to kind of have a hesitation if there's something significant that happens. So we've already seen that begin to wane, which it usually does once things have settled out a bit. And in California, and even in the New York area where there's more technology and financial-type companies, we saw that a little bit heavier than we did, but it did happen across the rest of the country as well. So I'd consider it a blip, a brief one. And that's why you can see in our expectations for the rest of the year. We still had a great quarter and double-digit unit growth, and we're still expecting high single-digit growth this year, and we're really in good shape on that front.

Great. My second question has two parts. First, did you notice any changes in the hiring trend throughout the quarter as we moved from January into most of April? Thanks.

Yeah. So we expected a significantly reduced hiring rate compared to last year. And we have seen it really slowed down in the third quarter and then even in the fourth quarter dramatically. And so we were expecting around 50% of the level of the first quarter last year, and that's where we came in. So it met our expectations, but it's certainly significantly lower than last year, and that's what we expect to continue for the rest of the year. We do a lot of research with our client base about their hiring expectations, and we still have about a little over half of the client base that expect to have more employees in their organization as the year progresses. And it's still a small number that expect less and a little bit bigger number than usual that expect to stay the same.

Great. And then the other part of my question was with respect to pricing, is there anything directly attributed to the strong pricing trend?

So we really had a focus on that effort across the entire year last year in our new and renewing business. And this was because in an inflationary environment, it's really important to drive those numbers in the right direction, especially when a service organization went over 60% of your total cost or your own labor cost. And when you have wage inflation like is going on and you want to hire and retain the best people, we just need to really have a good focus on your pricing strength. We did that, and that group did just an out-of-the-park home run for the full year. And so this is absolutely a perfect position for us to be in on the front end of who knows what this turns out to be, but we do know it's a slowdown in the economy notes, weakens to a degree. And you have some challenging environment out there. But for us to be at this point, with a double-digit growth in the number of BPAs, strong marketing effort, and having a strong pricing foundation, that's the best position for us to be in. We've been through these kinds of positions before. And this is right down the middle of the fairway of where we want to be when you're facing a time period like this, so we can support our clients well and continue to grow the business and continue to improve our profitability.

Your next question for today is coming from Tobey Sommer at Truist Securities.

Thank you. Good morning. I was wondering if you could talk to us about the Salesforce productivity measures, how those are trending? And how you think about pulling the levers of increasing the sales force as well as and/or marketing over the course of the year? Thanks.

Thank you, Tobey. When we expand our sales team quickly, it can temporarily impact certain metrics like sales efficiency. However, these fluctuations align with our expectations, except for a brief slowdown in closing deals at the end of the quarter, which I believe is a minor issue. We are confident that our current strategies will positively influence those metrics in the long term. Our immediate focus is on increasing activity levels since we've learned that during challenging times, when there is some uncertainty among small to medium-sized businesses, we require more opportunities. We are successfully replicating our marketing efforts, including our new spring campaign launched this month. We plan to invest significantly in marketing to generate more opportunities, along with leveraging our partnerships and loyalty programs. While we recognize that some of our metrics may decline due to the economic climate, we are prepared to drive growth even in this environment. The positive aspect is that these opportunities provide excellent training and experience for our sales team. Historically, during tough periods, we have seen less decline compared to others because we continue to grow, and we emerge from these downturns more quickly by concurrently expanding our sales team and increasing opportunities. While we dislike the current economic challenges, we are motivated because we know how to navigate such situations and it allows us to demonstrate our capabilities.

Thanks. I wanted to ask a question about Workforce Acceleration. You've seen really good growth there over the last two or three years. Is there a point at which it would make sense to make any changes to the way that you either manage that or the way you report it to us externally?

Yeah. I believe we will be making some changes once we get that up to a level and have enough time period where the metrics have some consistency so we can measure them directly. Right now, we're in that stage of getting more adoption of this in the sales process across the entire organization. That's the steps that are really taking place now, and we're really on a great track there. And we see this as like a silver bullet for us in the business model. And at the correct point, we'll be discussing it differently. We won't be managing a lot differently because we think we're managing it in a way that makes sense to drive the results we want, but there will probably be more reporting of information that I know will be good for everybody to have to increase understanding.

If I could ask one last one, in terms of the healthcare benefit cost center. We've heard from public hospital companies talking about more activity levels, more patient volume in some of the managed care companies talking about higher medical loss ratios. How does it trend so far year-to-date? What's your expectation for the balance of the year?

Yeah. So in the first quarter, obviously, we take those factors into account going into the year, and we work with UnitedHealthcare, and we give some of that same information out of them for the first quarter. The benefit cost side of things was just a little bit above our expectations. But as we mentioned on the call in our prepared remarks, the pricing came in stronger. So in total, that program in the first quarter ran as expected. And I would say, as we look over the remainder of the year, obviously, things can change. But as we see it now, we sort of have stuck with that over the remainder of the year, what our expectations are. So we've bumped up the benefit cost trend just a bit, but really the pricing coming in a little bit favorable relative to our expectations has helped to offset that. And just following up on the workers' comp program continues to be managed to our expectations. And you're still getting nice contributions out of our workers' compensation program.

Your next question for today is coming from Mark Marcon at Baird.

Good morning. This is Andre Childress on for Mark. So, you've spoken quite a bit about some of your marketing initiatives as well as the spring brand awareness campaign. Could you give a little more color on some of the initiatives that you're actually taking and maybe some early trends from that awareness campaign?

It's a little early for that because that just started, of course, at the beginning of this month. But I can tell you that the whole plan reflects the successful programs we had in the spring last year. The first time we did very specific media and marketing campaigns in every market of ours across the country. And then we repeated that in the fall, got excellent results from that. So what I mean by that is it's very localized, even radio ads are done by local celebrities and voices. So it shows us being really involved in the local community. And the plans are different based on whether billboards work in one environment or don't work in another environment, et cetera. So there's a lot of work in each marketplace, coordination with our team in each of those marketplaces, they understand what we're doing and why we're doing it. That has proven to be very successful, and we expect to have great results in that, we believe we will, based on how it's working before.

Great. And switching over to demand. In this environment, are you seeing greater preference for workforce acceleration over optimization? And how are you thinking about that for the remainder of the year?

We're assessing that, but I don't really foresee a significant change. It's noteworthy that when a client or prospect is ready to take that step, there’s nothing holding them back. Therefore, presenting both options is a suitable strategy. Where they stand as a company and whether it's the right time to fully transition to the complete model or initially engage in Workforce Acceleration varies from client to client. The positive aspect is that over time, many clients entering Workforce Acceleration eventually advance to workforce optimization. We anticipate seeing more of this trend in the coming years. Additionally, we have a way for clients to revert if necessary due to changes in their situation. We don’t view these options as competing; in fact, they complement each other by addressing clients' needs at any given moment. In this context, the demand for effectively managing HR issues is crucial, making it an essential part of their strategy to navigate challenging times. I see sustained demand and an understanding among clients about what they need to do to sustain their businesses through difficulties.

I want to clarify that the guidance we provide for worksite employees is specifically related to the PEO. The gross profit we generate from workforce acceleration in that product is additional to our overall PEO gross profit. While some might report differently, our worksite employees are definitely tied to the PEO offering.

Yeah, that's a good point, Doug. What we mean is that nearly 60,000 or so employees that are clients on the Workforce Acceleration program are not in our over 300,000 worksite employees in the PEO model.

Great. And just last one for me. So you repurchased 289,000 shares in the first quarter. Could you provide an update on your thoughts on capital allocation at this point?

We really are kind of the same mindset. We like to take advantage of the market opportunity and to continue to move the dividend in the right direction. We have a target for what payout ratio should be, et cetera, and what kind of dividend yield we like to have for our shareholders. We also have a policy of buying back at least enough shares to offset any potential dilution from incenting our teams. But in addition to that, if you look at our history, we've bought back a lot more shares than that. This is all about the fact that this is a cash flow machine. Doing the right things with the cash, that's important. We still would say that the return to shareholders is the highest priority. The amount of capital we need to invest is modest for this model. So we don't expect a lot of increases on that side and that gives us continued expectation to have plenty of cash available to do.

Hi, good morning. Thanks for taking my question. I wanted to start with one on the worksite employee growth guidance. It does look like it's a touch lower within your previous range. Is that primarily a function of being a bit on the lower end in Q1? It seems like retention was as you expected, existing client hiring was as you expected. Just trying to figure out if there are any other kind of incremental headwinds that you're baking in there or if it's solely a function of the lower Q1 start?

The lower Q1 number is the main concern. We ended up at the low end of our range, and while we're considering some sales impacts, they're minor. Looking at the whole year, we're still within the range, though we've narrowed it. Initially, our range was 7.5% to 10.5%, and now it's 7% to 9%. This shifts the midpoint from 9% to 8%. The main reason for this decrease is the first quarter being at the low end of the range; timing and client onboarding play a significant role, and a bit of hesitation can push things back, so we need to take that into account.

Makes sense. Yeah, I realize it's in big picture, pretty small change. I just wanted to make sure. And then for my follow-up, on the operating expense side, you talked quite a bit about BPA growth and staffing up on the support side. Are you in a good spot on the latter part in terms of service personnel and staffing? Or do you still need to do some catch-up hiring given the strong growth over the past several years?

So we had a really strong last half of last year on that front, and we're able to catch up significantly. In the first quarter this year, we were digesting a lot of new great people that have joined our organization. We had just a hair of a pause there for a month or two, and now we're back on to what I would call just the routine level of increased managing against our growth expectations. So we're in a good solid position on both the BPA front which is, like we said, 11% growth year-to-date, we'll kind of be at that level, I think, for the year. And then also the service and support staff. We're in much better shape now than we were a year ago. On that front, we're in a solid position. We don't see any dramatic operating expense changes based on any of that.

That's helpful. Thank you.

We have reached the end of the question-and-answer session, and I will now turn the call over to Mr. Sarvadi for closing remarks.

Once again, I'd like to thank everyone for participating on the call today. We look forward to updating you again next quarter. Thank you very much.

This concludes today's conference, and you may disconnect your lines at this time. Thank you for your participation.