Good morning. My name is Jenny, and I will be your conference operator today. I would like to welcome everyone to the Insperity Second Quarter 2024 Earnings Conference Call. Currently, all participants are in a listen-only mode and we will open for questions following the 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 second quarter 2024 financial results. Paul will then comment on our recent accomplishments including an update on the implementation of our Workday strategic partnership solution and our outlook for the remainder of the year. I will return to provide our financial guidance for the third quarter and an update to the full year guidance. We will then end the call with a question-and-answer session. Now before I 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. Now let's discuss our second quarter results in which we reported a 34% increase in adjusted EPS over Q2 of 2023 to $0.86, above the high end of our forecasted range. We also reported a 29% increase in Q2 adjusted EBITDA to $66 million. The earnings outperformance compared to our expectations was primarily driven by lower than expected benefit costs, continued strong pricing, and lower operating expenses. The average number of paid worksite employees increased sequentially over Q1 to approximately 307,000. The increase included net growth in our client base, although at a level significantly lower than Q2 of 2023 and lower than our expectations for the typical summer hiring period. Client retention remained at an expected 99% for the second quarter. Worksite employees paid from new sales, although at a similar level as Q2 of 2023, came in below expectations. In a few minutes, Paul will comment on the current business environment impacting our prospects and clients, and the sales and marketing efforts in place to sell into this environment. Gross profit increased by 16%, and a 1% decline in paid worksite employees was more than offset by continued strong pricing and lower benefit costs when compared to Q2 of 2023, which included a spike in health care costs. The combination of our other direct cost areas including workers' compensation and payroll taxes were generally in line with our forecast. Q2 operating expenses were managed below plan, increasing 13% over Q2 of 2023, including $14 million associated with the implementation of our Workday strategic partnership. Our year-to-date operating expenses now include $19 million associated with the strategic partnership along with the ongoing investment in our long-term growth and our service and technology offerings. The second quarter of 2024's effective tax rate came in at 28%, which was above Q2 of 2023's rate of 25%. We continue to provide returns to our shareholders through our regular dividend program and the repurchase of our shares. During the quarter, we paid out $23 million in cash dividends and repurchased 151,000 shares of stock at a cost of $14 million. We ended Q2 with $211 million of adjusted cash, an increase of $40 million over the December 31, 2023 balance, and we had $280 million available under our credit facility. 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 begin with comments on our solid second quarter and first half financial results in a challenging environment in the small and medium-sized business marketplace. I'll follow up with our plans to capitalize on our market opportunity over the second half of the year, and I'll finish with an update on progress on our Workday strategic partnership and the prospects for growth next year and beyond. Our Q2 financial performance was strong, exceeding the high end of our expected range in adjusted EBITDA and EPS, even while coming in at the low end of our range for paid worksite employee growth. Our strong pricing and direct cost management produced upside at the gross profit line and combined with lower operating expenses to achieve financial outperformance over last year and our guidance. Our 1% decline in paid worksite employees over the same period last year was primarily the result of our large account attrition. At year-end, we discussed last quarter, combined with the continuing effects through Q2 of the challenging economic environment in the small business community. Last quarter, we reported details indicating stress in the small business marketplace from a variety of economic issues, including interest rates and inflation. This was evident from our real-time internal data reflecting nominal net hiring activity, low levels of overtime pay, and a relatively low level of commissions paid to the sales personnel at client companies, which we believe reflects a weak economic climate. Our client survey information indicated a high level of optimism going into the second quarter and the potential for at least stabilization of these metrics. However, prospect and client decision-making reflected a higher level of uncertainty in Q2, and net hiring in our client base weakened further than expected. Recently, we have seen an increased level of hesitancy in hiring and buying decisions by small to medium-sized businesses. This often leads to more aggressive sales tactics and pricing in the marketplace, further lengthening the sales cycle. Even in the face of these headwinds over the first half of the year, we had what I believe is a significant level of success in sales. Both paid worksite employees from previously booked sales and new book sales over the first half of the year are in line with levels for the same period last year. These comprised approximately 90% of targeted booked sales and paid worksite employees from sales for the first half of 2024. Even with a 4% increase in BPAs out in the marketplace, I believe these are solid sales results against the backdrop of the uncertain economic and political climate. Our client retention has continued to be strong in Q2. However, nominal net hiring within our client base combined with the lower than targeted paid worksite employees from previously booked sales caused a lower starting point for paid worksite employees as we head into the second half of 2024. This lower starting point will have an expected dampening impact within our residual income business model. We now expect lower average unit growth for the balance of the year and the shift out one quarter before significant sequential worksite employee growth would be reestablished. The more important dynamic for consideration is the outlook for growth into next year and beyond. We believe we're very well positioned to have a strong second half in sales and retention, which lays the foundation for potential growth acceleration in 2025. Our confidence going into the second half comes from applying the learnings from the recent difficult period to improve sales and retention to reignite growth, even with no help from net hiring in the client base. We have four significant initiatives that we believe will enhance performance for the all-important fall selling and retention period over the balance of the year. First, our implementation of BPA assigned accounts through our account-based experience marketing and sales strategy I mentioned last quarter, and the corresponding training. This initiative retooled our sales motion and mobilized our entire BPA team for the balance of the year. This was a bit of a distraction in the second quarter, but now represents a new level of opportunity to improve performance going forward. Secondly, our marketing success over the first half of the year generated more marketing-assisted discovery calls and booked sold employees than the first half of last year, even in this challenging business environment. We have a new national brand campaign ready to launch that we believe will differentiate us in the marketplace and increase sales opportunities over the balance of the year. Third, we have completed a thorough evaluation of the sales and retention dynamic across the different segments of our client base. This has led to different approaches for each segment to incentivize prospects, current clients, and sales staff over the balance of the year. Last but not least, our new strategic partnership with Workday has the potential to contribute to our sales and retention efforts ahead. Yesterday, we reached the six-month point from signing our strategic partnership agreement with Workday. We completed a thorough evaluation of our progress with the face-to-face meeting of senior leadership from both firms last week in California. We are excited with the progress to date and the commitment and investment being made by both firms to go to market together with a co-branding, co-marketing, and co-selling game plan. All four of the key initiatives, including our corporate tenant for Insperity's internal use of Workday, the client tenant, which will be embedded into our PEO solution for the larger client target market, our go-to-market plan, and the establishment of our deployment enablement team, are well on the way. The Insperity corporate tenant deployment effort is on track, and we expect to begin using the Workday platform early next year. The application tenant is being built, and we plan to begin the next round of testing shortly. We are continuing to build out integrations for key systems. Administrative training is ongoing, and employee training is scheduled to commence in Q4. We believe that our experience through the deployment of the corporate tenant will provide Insperity valuable insights into the deployment and servicing of our clients on the future PEO client tenant. We are making excellent progress on the PEO client tenant design and deployment efforts. We've used the learnings from the delivery of our initial foundation tenant to shape our proposed solution design further. The joint solution product definition is taking shape, and we're well down the road on the design and development of the solution. We plan to continue to build out our client implementation and support strategy and train our providers to deliver services through the platform. We'll continue to refine our pricing model for the solution to appropriately represent the value to our clients. The product implementations and system integration efforts required to enable the joint solution are well underway and our teams are tracking progress against our project plans. We have started the pre-selection process to identify beta clients that could be a good fit for migration to the new joint solution and support our product design process. We have begun sharing leads between both companies and are continuing to refine our processes to act on these qualified opportunities. We established a campaign to formally introduce the Insperity Workday co-selling relationship directly to the sales team to educate each other on our sales motions. The goal is to drive an increased volume of leads exchanged over the next few months to test our system as we head into the very active year-end selling season. We believe there's an incredible amount of opportunity related to leveraging each company's sales investments efficiently. Insperity can meet the needs of many of these prospective clients now, even before the joint solution is available. Workday has products peripheral to their core HCM system that make a lot of sense for our current and prospective clients as well. We are working hard to put each other in the room with prospective clients that are actively searching and see value from these offerings. We are continuing to advance our client deployment and enablement strategy. In Q3, we will begin the design of customer onboarding playbooks for both new implementations and for existing PEO client migration to the new solution. Another significant outcome of the first six months in the recent senior leadership meeting is the effort over the balance of the year to integrate the go-to-market plan into both companies' 2025 business objectives. So in summary, we are pleased with the first half 2024 results against a more difficult than expected business environment. We're energized about our plans for the second half to reignite our growth into next year, and we remain excited about the possibilities for the long term, including our Workday strategic partnership.

Thanks, Paul. We now expect earnings for the full year 2024 to be above the midpoint of our prior guidance based upon the combination of our outperformance in Q2, partially offset by slightly lower earnings expectations over the second half of the year. As Paul just mentioned, we now expect our prospect and client base to be impacted by the ongoing uncertainty in both the economic and political environment. Given these factors, combined with the starting point going into the second half of 2024, we have lowered our full year outlook to average paid worksite employees in a range of 307,400 to 310,600, which is a slight decline of 0.5% to 1.5% compared to 2023. The earnings impact from this lower worksite employee guidance over the last half of 2024 is expected to be mostly offset by strong pricing, favorable benefit cost trends, and operating expense savings. During the first half of this year, our pricing and benefit costs have been slightly favorable compared to our initial budget. We expect these factors to continue over the remainder of the year. As a result of our lower worksite employee outlook, we have planned on operating expense savings from our prior forecast, primarily in the areas of salaries and G&A. We will continue to focus our efforts and planned spending on the implementation of the Workday strategic partnership. Based on these factors, we are now forecasting full year 2024 adjusted EPS in a range of $3.33 to $3.88, with the midpoint up from our previous guidance of $3.17 to $3.90. We are now forecasting adjusted EBITDA in a range of $261 million to $290 million. For Q3, we are forecasting paid worksite employees down from 1.5% to 2.5% compared to Q3 of 2023. Regarding Q3 earnings, we are now forecasting adjusted EBITDA in a range of $32 million to $45 million and adjusted EPS from $0.21 to $0.45. Earnings comparisons to Q3 of 2023 are significantly impacted by low benefit costs in that prior period and the planned investments in the Workday strategic partnership in 2024. Now at this time, I'd like to open up the call for questions.

Hi. Good morning. Thank you for taking my questions. I wanted to start by talking a bit about the worksite employee guidance change. Is there a way to maybe break out the lower second half outlook between reduced expectations for net client hiring versus softness on the new business side or sales execution front? If you could maybe unpack that a little bit further, that would be helpful.

Sure, Andrew. Thanks for your question. The primary factor influencing our unit growth outlook for the remainder of the year is the starting point. We have also continued to minimize the impact of client hiring, as the uncertainty level remains high, and I anticipate this will persist at least through the election period. The most significant concern is the recent behavior of our client base, which led to a lower starting number. There were two main factors contributing to this. While I believe our sales efforts have been effective in this environment, the starting point was impacted by a shortfall in reaching our target for paid worksite employees. Ultimately, the key issue is the starting point in June, which showed a notable decrease in hiring as the quarter progressed compared to last year.

Understood. And then Paul and Doug, I mean in your prepared remarks, you touched very briefly I think on the competitive environment and how different firms or PEOs can be more aggressive when it's harder to close some of these deals. I'm just wondering has that gotten worse or more competitive versus last quarter? And how would you characterize your own aggressiveness or participation in that kind of activity?

Yes. First of all, I don't believe it's changed significantly. It's been this way for a while now. I would say we started becoming more aggressive about a year ago, especially as we approached year-end. Throughout this year, it has remained largely the same. We have continued to capture our share of accounts effectively, particularly since we understand which accounts are the best fit for us. We put in the necessary effort to ensure that these accounts are the ones we secure. We've maintained the same percentage of accounts despite the competitive landscape, and it's really the overall activity level that has influenced the volume more than anything. That's to be expected. Additionally, we've noticed more reluctance in making final decisions than in the past. Some accounts that were sold have also postponed their start dates, which impacts our immediate employee count at work sites.

Thank you for the helpful information. I have one more question regarding the guidance and its conservatism. It seems you have lowered the outlook for worksite employees, but have been able to maintain, if not slightly improve, the EBITDA and EPS outlook. I'm curious if there's less conservatism in the healthcare segment as a compensating factor, or if it mainly stems from the cost measures and salary and G&A savings that you mentioned, Doug, in your script? Thank you again.

Well, I think it's a combination of two. If you look on the healthcare side, it's two things. It's the stronger pricing that we've been getting relative to our initial targets. So, that's as much a piece of it as the cost side of things. If you remember going into the year, I commented on initial medical healthcare cost trend in the 4.5% to 6% range or so. Looking through the first half of the year, it's been trending at the low end of that range, maybe even slightly less than the low end. We see that trend continuing over the remainder of the year. Our intent is always to be conservative on that number, as you know, because that's where you can have a bit more volatility from quarter to quarter. If you recall, we came off the first quarter with some of the experiences behind this change healthcare issue, and I think we appropriately reserved for any delays in processes and the result of that issue that came up. I feel like we're still conservative in that number, and what we recorded at the end of the second quarter for our IBNR. So overall, we always want to be intent on being conservative in our estimates both on the healthcare side and the workers' comp side. But it has been trending favorably over the course of the year thus far. Even with what we feel is a level of conservatism, we still feel like it ought to trend towards the lower end of my initial range.

I would just add that in the nature of our business, there's never a time where we would ever be aggressive on such a number. It makes sense in the business to be conservative in our outlook relative to the benefits.

Good morning, and thanks for taking my question. So, two sets of questions. The first set revolves around the Workday partnership. Paul, I'm wondering if you can talk a little bit about the quality of the leads that you're currently seeing, just the level of cooperation. I really appreciate the update regarding how much you've been spending so far on Workday. I'm wondering if you've got any updates now that you've got greater clarity with regards to the year in terms of how much you're going to spend this year and what your preliminary thoughts are for next year. Lastly, related to Workday, are you going to incorporate Workday in terms of your new campaign, which you mentioned you're going to be launching?

Great. Thanks for the question. As I was mentioning in my remarks, we just hit that six-month point and we had a leadership meeting to evaluate where we are, where we're going, what to really focus on, etc. It's very encouraging as we move forward on all of the fronts that we envisioned in this strategic partnership. Has everything moved as fast as I wanted? No, nothing ever moves like that. But as I mentioned, this effort to communicate with both sales organizations is what drives the quality of the lead flow. That process has already begun and has already shown some very good signs. There were ways we could have thrown more mud up against the wall quicker, with leads that would be less qualified, but I believe the work that we've done together really puts us in a strong position to do the level of piloting over the next month or two and then some stronger volume of activity over the balance of the year that allows both companies to put into our 2025 plan targets, which is critical. As you know, people always respond to what's in their game plan. Now, we started this agreement just barely in time to build things into our plan but beyond the opportunity to build them into Workday's plan. And it was hard to predict some of those things in the first place. So we are well down that road now and very excited about how this is going to work together as the two companies target this market with a plan that both of us are working on to take both companies' product sets into the market together. In preparation for this joint solution that we believe is going to be a hand-in-glove fit for a significant portion of that marketplace in a disruptive manner relative to lower cost, quicker timing of deployment and enablement, and obtaining value from this solution being embedded into our PEO opportunity that we're bringing to the marketplace. So we're very encouraged about that. I don't have conversion rates yet or things of that nature. We didn't build a lot of benefit of this into our results for the year, but there's quite a bit of upside potential simply because of the account size and the ability to post-sell them. So, we're excited about it, but being cautious about the timing for that. We're not after a flash in the pan. We're after a long-term arrangement that continually provides growth for both firms in this target market. Do you want to comment about content investments? I'm sorry, go ahead. What was that?

I was just wondering if Workday was going to be incorporated into the campaign, but I appreciate the discussion with regards to investments as well.

As I mentioned, we talked about our different segments. There will be, and there is an ongoing effort of communication that introduces and then reinforces and supports the introduction of the partnership, especially to the higher end and even kind of our emerging growth customers. So yes, there are some aspects of that. You will not see that in the national campaign at this point. It's too early for that. But that dynamic is something we'll be talking about for next year.

Good morning. And as a follow-up to that, I think Doug was about to introduce the investment for maybe the balance of this year and into next year. So I'll follow up on that.

Yes. If you recall, coming into this year, we were estimating our cost from both our internal resources that are fully dedicated to this partnership, along with our costs associated with the utilization of Workday resources, in the neighborhood of about $60 million for this year. Through the second quarter, it's in the area of $19 million or so. We look forward for the remainder of this year. Through the third and fourth quarters, we still like that the investment is still in that same ballpark of $60 million or so. We didn't quantify specific dollars for next year's investment. However, we did say that the majority of the full investment is weighted heavier in the first couple of quarters, the first couple of years. So as you look at it in 2025 relative to the $60 million we're investing this year, it should be generally in that same ballpark.

Yeah. So the first part of your question, I can handle that on our game plan for implementation and moving all of our corporate staff onto Workday. As I mentioned in my prepared remarks, we are on track for early next year as planned. We are even in the process now of having people leadership trained so we can in the fourth quarter, train the whole staff to be moving onto the system.

If you remember last year, our pharmacy trends were elevated, particularly dealing with the specialty drugs like Ozempic and the butanes, etc. So we had an elevated trend, obviously last year. Thus far this year, we've seen more normalization this year, and I wouldn't say all the way back. Obviously, those drugs are still being used, but we feel like it's less than 10% or so that pharmacy trend this year. Last year, it was about 17%. So you can see that trend has come down. Some of it is the year-over-year comparisons, but that's what we're seeing and that's what we're modeling for this year.

Thank you.

Yeah. Hey, good morning. This is Jack Wilson on for Toby. Maybe just a little bit of a follow-up on Workday in the fall selling season. It sounds like it will not be in the national campaign. Could it still be a material driver of sequential growth in early 2025? Or is that still sort of too early to see it?

No, it absolutely can be. I want to be cautious about it. It's challenging for me to be cautious when discussing the Workday relationship and its potential because it is significant. The timing of that potential is a bit harder to predict and it’s more variable due to the larger accounts involved. So, if it’s only slightly effective, it can still impact our January 1 numbers. I’m optimistic about at least some effectiveness, although we haven’t really incorporated that into our outlook for the rest of the year because most of these larger accounts won’t start until January anyway. I’m very excited about the opportunities we have. We’re collaborating very well. Now we’re translating that into operational plans so that we can start seeing some results. We’ve done all the groundwork, and now we’re beginning to see initial outcomes. But we won’t rush this process; we’ll start slowly to ensure everything is functioning well before ramping up. This is precisely what will occur throughout the rest of the year. At the very least, we’ll gain a lot of insights on how to make this highly effective by 2025. Nevertheless, I believe we will observe increased activity related to following up on leads. In our industry, that typically translates into new business. We are approaching the point where our new offering aligns with the timeline of companies considering Workday. Remember that for most organizations, the process to get on board takes 12 to 18 months. We are nearing that timeframe, and that’s when we will actively co-sell and assist customers in the strategies that best suit them. That’s what we’ll be focused on in 2025 and to some extent this fall.

Okay. Thanks for that color there. Just maybe a quick one on the guide. Quick math shows the midpoint of EBITDA is out sort of $2 million higher than the prior guide. Is it possible to quantify the moving pieces in that?

Yeah. I mean the pieces are, of course, that the worksite employee count is lower because of the starting point primarily. And that's why it kind of shifts out when that growth acceleration begins in the fourth quarter instead of the third, where we were. But when you have that volume difference, that obviously is a drag, but that's being offset mostly all, but we beat the quarter by $6 million. The year is only going up 2. The negative four is due to that volume. That volume is quite a bit more than that, that was offset by the lower benefit trend and mainly the pricing side, which has also been strong. Also, if we have a lower level of worksite employees, we manage expenses to match that. So some of that also helped in there. We're hopeful to see upside from where the guidance is, but we believe this is the appropriate guidance based on where we're starting in the last half of the year.

Could you elaborate on the strong gross margin and gross profit per worksite employee from the past quarter? Were there any accrual reversals or similar factors that contributed to this? Additionally, you mentioned that clients are hesitant, yet pricing appears to be stronger. Could you explain what is driving the improved pricing compared to your plan?

Yes. I mean, as far as your comment with respect to any adjustments. Obviously, I think you recall going back to this change healthcare breach; it was appropriate for us when that was going on to make a very conservative estimate on IBNR, because obviously, when that happens, there's a change in the payment process by our insurance carriers to the participants because the whole flow of information from the provider to the insurance carrier was impacted by that. We feel that at the end of the first quarter, we made an appropriate conservative IBNR adjustment to take that into account. Going into the second quarter, it proved that it was definitely conservative. But we could, of course, reduce that reserve appropriately. Thus, the claims that ran off and were paid in the second quarter came off lower than what we had initially estimated the impact of that breach to be. So yes, there was a reserve adjustment on the medical side as it relates to that particular issue that hits the second quarter earnings. Regarding your second part of the question on the pricing side?

Yes, everything is going well. It's important to remember that pricing in our industry encompasses the total cost of our services, including our markup and all direct and cost-related allocations. Each month, we see new and renewing business, and our pricing strategies are proving effective on both fronts. We are also able to adopt aggressive tactics when necessary to navigate the economic environment. As noted in previous quarters, we can be assertive in attracting new customers through a try-and-buy model to remain competitive in the market. Nonetheless, we continue to uphold our status as the premium service provider. Our extensive range of services and the level of care we offer distinguish us from others and justify our pricing. We must ensure that our premium price remains attractive enough for customers to choose us. Thanks to our collaboration with the sales team and our pricing review group, we've managed this effectively.

That's great. How would you characterize pricing relative to say a year ago just in terms of the services that you're providing? Is that up a few percent? Or how would you frame that if you're stripping out the pass-throughs?

Yes. So listen, on the renewing business, definitely up as our strategic plan is, and then on new business, actually about the same, just a hair higher maybe.

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

Well, thank you. Once again, we want to thank everyone for participating today, and we are super excited about the last half of this year and how we're positioned in the game plan we have, along with the specific initiatives that we believe will drive us toward reigniting our growth plan. We're excited about our Workday relationship and how that has evolved to this point and what that means for us going forward. So once again, thank you for participating. We look forward to our next dialogue next quarter. Thank you.

Thank you very much. This does conclude today's conference. You may disconnect your phone lines at this time and have a wonderful day. Thank you for your participation.