Good morning. My name is Jennifer, and I will be your conference operator today. I would like to welcome everyone to the Insperity Third Quarter 2024 Earnings Conference Call. At this time, I would like to introduce today's speakers. Joining us are Paul Sarvadi, Chairman of the Board and Chief Executive Officer; Douglas Sharp, Executive Vice President of Finance, Chief Financial Officer and Treasurer; and Jim Allison, Executive Vice President, Comprehensive Benefits Solution and CPO. At this time, I'd like to turn the call over to Douglas Sharp.

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 third quarter and 2024 financial results. Paul will then comment on our recent accomplishments, including an update on the implementation of our Workday strategic partnership solution and on our outlook for the remainder of the year. Then Jim Allison, who succeeded me upon my retirement, will return to provide our financial guidance for the fourth quarter and an update to the full year guidance. We will then end the call with a question-and-answer session. Before we begin, I would like to remind you that Mr. Sarvadi, Mr. Allison 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 before I discuss the third quarter results, I want to express my gratitude for the opportunity to serve as CFO of Insperity over the past 25 years. As we announced a couple of months ago, I will be retiring as CFO on November 15 and Jim Allison, the current Executive VP of Comprehensive Benefits Solutions and CPO, will be my successor. I'm grateful to have played a role in the significant growth of the company over the years and helping the company achieve its mission of providing premium HR services and products to the small and midsized business community. I'm retiring, knowing Insperity is in good hands with its current leadership team, including Jim, who brings significant experience in the company's operations and finances to the CFO role. So now let's discuss our solid third quarter results, in which we reported adjusted EPS of $0.39 and adjusted EBITDA of $39 million. As for our growth metric, the average number of paid worksite employees of just over 309,000 was at the midpoint of our forecasted range. As expected, the 2% decline from Q3 of 2023 was impacted by the continuing softness in hiring by our client base and the loss of several mid-market accounts at the beginning of the year. Client hiring continued to be weak during Q3 as slight net gains in the first two months of the quarter were offset by a net decline in the third month. We believe the current macroeconomic environment continues to weigh on our clients and prospects and contributed to slightly lower worksite employees paid for new sales. However, this was offset by strong client retention of 99% for the quarter. An 11% decrease in gross profit from Q3 2023 on the 2% decrease in paid worksite employees included a difficult comparison to the prior year's quarter, which was positively impacted by favorable healthcare claims development. Our Q3 2024 benefit cost trend was slightly above the high end of our forecasted range but below our initial budget. And when combined with our overall pricing strategy, we believe we have effectively managed to our long-term goal of matching price and cost. In a few minutes, Jim will provide more color in this area, including our expectations over the remainder of 2024. Q3 operating expenses were managed below plan with various savings in our G&A cost. Our year-to-date operating expenses now include approximately $40 million associated with our Workday strategic partnership. Now the third quarter of 2024’s effective tax rate was positively impacted by research and development credit, which contributed just $0.02 per share in earnings above our Q3 2024 forecast. And we continue to forecast the full year 2024 effective income tax rate of 28%. During the quarter, we continued to provide returns to our shareholders through our regular dividend program and the repurchase of our shares. We paid out $23 million in cash dividends and repurchased 167,000 shares of stock at a cost of $15 million in Q3. We ended the quarter with $212 million of adjusted cash, an increase of about $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 remarks on our third quarter financial results. I'll follow with commentary on our plans to take advantage of our market opportunity in Q4 to move towards growth acceleration in 2025. I'll finish with a discussion of sales and service initiatives we expect to implement over the course of the next year to drive long-term growth and profitability, including AI and our Workday strategic partnership. Now in Q3, we weathered the continued heightened uncertainty in the small and medium-sized business marketplace with solid financial performance in adjusted EBITDA and EPS. We achieved our worksite employee average target for the quarter with good client retention. However, worksite employees from net hiring versus layoffs were below expectations and even slightly negative for the full quarter. This factor included a net gain in the first two months, followed by a greater than expected reduction in September beyond what's typical from just summer help going away. We believe this reflects continued stress in the small business marketplace and possibly some pre-election hesitancy. This pressure continued to be evident from our real-time internal data beyond the normal hiring activity, including low levels of overtime pay and commissions paid to sales personnel at the client companies. Despite these difficult conditions, our booked sales were up 8% over the same period last year on a 2% increase in business performance advisers in the marketplace. In addition, pricing for our HR services was up 2%, reflecting continued adherence to our long-term pricing plan even in a competitive environment. Our pricing policy discipline also continued in our direct cost allocations, including payroll taxes, workers' compensation, and employee benefits. This is our standard mode of operation and it's important to highlight in this setting. For example, this quarter, our benefit claim cost was slightly higher than expected after our first half of the year with slightly favorable costs in this area. Our pricing allocation policy is not driven by these short-term variances but rather by our conservative view of long-term trends. Our pricing policy has continued our focus on trends that have been higher in the marketplace post COVID. This approach to match price and cost over the long term allows us to provide our small business clients with what we believe is a more stable employment cost structure than other firms, providing us with a significant competitive advantage. We are tweaking our guidance for the fourth quarter as you'll hear from Jim in a few minutes to factor in the slight increase in healthcare activity and the lower paid worksite employees, primarily from the lower net hiring in the client base. Now for the balance of the year, we believe we are well positioned to return to growth acceleration in 2025 with a successful fall selling and retention campaign. This would be achieved by reaching a starting point in paid worksite employees in Q1 that is even with the average worksite employees we expect to pay in Q4. Our fall selling and retention campaign is well underway and we have several reasons to be encouraged. We have over 700 trained business performance advisers in the field, a well-designed pricing and incentive strategy for each target market segment and a robust marketing campaign and, in addition, a strong mid-market pipeline. We also have reason to believe there may be post-election relief of hesitation and uncertainty in the target market. The election is over soon and both parties have highlighted support of the small to medium-sized business community. Throughout our history, we have seen some level of rebound from periods of uncertainty. We have seen companies in our target markets of the best small and midsized businesses in the country typically have a growth mindset and can't be held back for long. As we focus on 2025, we believe we have an exceptional opportunity for growth acceleration as we also lay the groundwork for greater effectiveness and efficiency in both sales and service. We anticipate implementing a role-based approach to optimize our sales organization with our offerings, including our long-standing core PEO to the small business marketplace, our traditional employment business, and our significant mid-market opportunity. We also expect to focus on improving effectiveness and efficiency on the service side of the business. This is made possible by our dramatic progress leveraging our own vast HR content knowledge and data through AI after so many years delivering the most comprehensive HR service in the marketplace. Our AI strategy is centered on creating efficiencies, leveraging our deep embedded HR expertise and enhancing, not replacing, the best-in-class service that Insperity is known for. Our technology investments in recent years have focused on modernizing our data platform and elevating our capabilities in data strategy, governance, engineering, and analytics. These initiatives laid the groundwork for our efforts to capitalize on AI investments. As examples, the implementation of Salesforce as our CRM and the creation of a modern data hub enable us to scale and be more nimble with business priorities like powering the marketing funnel and developing our own internal AI tool. We can also quickly ingest and transform new data sources as well as our own vast body of HR thought leadership content and knowledge. By leveraging enterprise AI solutions to process our proprietary information, we are building and testing an internal tool that we believe will drive both efficiencies and deeper knowledge for our service and sales teams to further enhance the client experience. Service areas like the contact center and payroll lend themselves naturally to AI support. We believe the use of AI will increase the speed and proficiency of our service teams. As we design and test our AI solution, we're measuring the benefits in these areas and believe that it will help us with operational capacity management and optimization. Longer term, we are targeting a client-based conversion of our tool that would allow clients to get answers to common questions more easily. We're also expanding our use of machine learning and AI to drive predictive insights that we believe can directly impact growth in retention. Significant progress has also been made advancing our strategic partnership with Workday. I've spoken previously about the four defined pillars of work, including our Insperity corporate tenant, our exclusive client tenant, our deployment and enablement services, and our joint go-to-market plan. I'd like to provide a brief update on the execution of each of those. And as a reminder, through this strategic partnership, Workday and Insperity are committed to jointly developing, marketing, selling, and supporting the preeminent solution for targeted small and medium-sized businesses that combines Workday's HR technology with Insperity's HR services. We expect to offer this unique PEO solution to the target market using Workday technology for less upfront capital cost, ongoing expense complexity, and implementation time than currently available in the marketplace. Our go-to-market plan for this strategic partnership is centered on co-selling, co-branding, and co-marketing to the target market of companies with fewer than 3,500 employees. We've established an incentive program in concert with Workday to increase opportunities for sales. We are currently focused on the integration of this go-to-market plan into the 2025 business plans for both firms. We are progressing well on our co-branding, co-marketing efforts as both Workday and Insperity's marketing teams are engaged in building out a mutual approach to generate awareness, excitement, and interest for the new joint solution. We plan to deploy the Workday platform for Insperity's corporate use first to better understand the implementation process and how to configure and integrate the systems we will use across both tenants. We've made excellent progress and we believe we are now on track to deploy this solution in the first half of 2025. Our strategy to deploy the Workday solution for our own corporate use before taking our new joint solution to the market is proving out. Many of the nuances of integration and configuration that are part of the implementation are directly applicable to the development of the joint solution. Now we're also progressing well on the development of the joint solution client tenant. We have an agreed-upon development plan well underway with Workday that we believe would make the technology platform fit our PEO business model. We continue to refine the definition of differentiation of the product offering. We remain focused on delivering a comprehensive HR and technology solution with speed to value and total cost of ownership as key drivers as well as the pricing methodology that will apply to the new joint solution. We're well underway establishing our deployment and enablement organization as well. This is not a new test since we already deploy and enable new clients onto our own premier HR technology platform in our current PEO offering and onto another HCM platform for our traditional employment clients. Throughout this year, our service operations group has been completing advanced training and certifications for specific roles while establishing our playbooks for customer support for the new joint solution. They've had the advantage of being able to use the corporate tenant deployment to provide the basis for much of this effort. These playbooks will include processes similar to the approach used in our current fast deployment onto our current system. We're also well along the path of identifying an initial group of clients that will be migrating to the new platform ahead of launching the joint solution to new clients. In summary, we're focused on a successful fall selling and retention season to achieve a solid starting point for 2025. We also see an opportunity for growth acceleration next year with sales and service improvements as we leverage our data infrastructure with AI and our Workday strategic partnership. Now before I pass the call on to Jim for our guidance discussion, I'd like to publicly thank Doug for his outstanding performance in his key role here at Insperity for so many years. Doug has had an excellent career demonstrating dedication, commitment and making a significant contribution to the success of Insperity. I'm also very excited to execute an effective succession plan having Jim Allison as our new CFO. Jim is uniquely qualified and experienced to immediately take over this role. We look forward to the opportunity for you to meet and work with Jim going forward.

Thanks, Paul. Our outlook for full year 2024 earnings remains within the range of our prior guidance, albeit at the lower end of that range. As Doug and Paul have mentioned, the environment for worksite employee growth continues to be challenging due to the economic climate and labor market in our target customer segments. We are cautiously optimistic that recent and anticipated interest rate decline along with the completion of the current election cycle could provide improvement over time, but we have not incorporated a change in the short term. Given these factors, combined with the starting point going into the fourth quarter, we have adjusted our full year outlook to the lower end of our previous guidance and now expect average paid worksite employees in a range of 307,400 to 308,100, which is a decline of 1.3% to 1.5% compared to 2023. On a year-to-date basis, our pricing and benefit costs have been slightly favorable when compared to our initial budget. Our benefits cost in Q3 returned closer to our original budget due to a slight increase in utilization and we have assumed a similar level in our Q4 forecast. We expect that our full year benefit cost trend will remain near the low end of our initial 2024 expectations of 4.5% to 6%. We expected somewhat elevated healthcare cost trends for both 2024 and 2025 and we did not adjust our pricing targets based on the favorability we experienced in the first half of the year. As a result, we believe that our pricing remains in a solid position at this point. We continue to closely monitor healthcare and other direct cost trends along with the competitive landscape. And if necessary, we would adjust our pricing targets next year consistent with our long-term pricing strategy. Operating expense management remains a key focus due to the lower worksite employees. We forecasted and achieved savings in Q3 and we have refined our plan for Q4. That said, we continue to focus efforts and planned spending on the implementation of the Workday strategic partnership and we expect total spend on this initiative of around $60 million for the full year as originally estimated. Based on these factors, we are now forecasting full year 2024 adjusted EPS in a range of $3.42 to $3.66 per share within the range of our previous guidance of $3.33 to $3.88. We are now forecasting adjusted EBITDA in a range of $262 million to $274 million. As for Q4, we are forecasting paid worksite employees down 1% to 2% compared to Q4 of 2023. For Q4 earnings, we are forecasting adjusted EBITDA in a range of $15 million to $27 million and adjusted EPS from negative $0.10 to positive $0.12. Earnings comparisons to Q4 of 2023 will be significantly impacted primarily by the planned investments in the Workday strategic partnership in 2024. At this time, I'd like to open up the call for questions.

Your first question is coming from Andrew Nicholas of William Blair.

I wanted to first ask on client retention and just maybe market competitiveness overall this fall season. I know you're still in the midst of it and the next couple of months won’t make a big difference, but I guess, two-part question is, is the Workday partnership or the plans to launch that in the first half of next year having any noticeable impact on large client retention to this point? And then again, just on market competitiveness. It seems like you've priced your book very effectively relative to cost trends. Just wondering if that's giving you any sort of advantage in the market or if there's still quite a bit of aggressiveness from competitors in terms of undercutting on price?

Certainly, there has been a competitive environment that we've talked for many quarters. We've responded to that in a very exceptional way, I believe, in that we have created incentives for our potential clients, our prospects, different incentives in each segment knowing what each segment really highlights as their incentive for coming on. But what we've done is we've created these incentives that are shorter term; they don't affect the long-term pricing of the client. And that has worked and has been favorable because we believe some of the pricing that's going on in the marketplace has been more desperation and we believe that our long-term pricing policy really is the better answer, especially for the clients because it allows us to give them a more stable cost structure into the future. So we've been successful on that front. Now relative to client retention, these incentives that we've created also have been applied in our renewal process with clients. And so yes, we're well underway of having some success there. But you are also correct in your question; it’s kind of in the middle. So all the balls are in the air. So we still got to do a really effective job for the next couple of months. And the fact that we have a Workday relationship, we know has certainly created a different perception within our client base, especially in that mid-market space. It's kind of hard to tell at this stage, which type of factors are making the difference, these new incentives or the Workday relationship. But hey, all of it is helping and we're looking forward to doing our very best over these next couple of months.

For my follow-up, I wanted to discuss expenses. It appears you've done an excellent job managing the G&A line this quarter. Can you elaborate on where those savings originate from? You also mentioned your AI investments and the opportunities to improve efficiency. Are the efficiencies sufficient to offset the implementation costs in the near term? I'm trying to understand whether this impacts the cost structure as we look ahead to 2025.

For the recent quarter, our focus has been on maximizing efficiency in the general and administrative area, particularly during a time of slower growth in our worksite employee base. In the past quarter, most of our efforts were concentrated in this area. We're also investing in our partnership with Workday, which involves adding and reallocating personnel. While we are making these investments, we are simultaneously exploring other parts of the business to find additional efficiencies. We see substantial potential in utilizing AI for operational improvements, particularly within our sales and service teams, which we believe can help us achieve operating leverage in the future. However, I want to emphasize that we are still in the early stages of this initiative.

Let me add that the developments in AI are very exciting. What excites me the most is the extensive knowledge and data we have built over the years as the leading service provider in the market. This information will be highly usable to enhance our efficiency and effectiveness. We anticipate that our ability to expand our client base will not require a proportional increase in personnel, as our teams will be able to perform their tasks more efficiently. We are already seeing promising examples of this, but we remain in the careful development phase. We will invest time in testing to ensure everything operates smoothly because we believe this will enhance the experience for our clients and our corporate staff, making our communication more consistent and accurate. This focus will be significant for 2025. However, it is too early to determine how quickly this will positively impact our bottom line, but we definitely see it as part of our future strategy.

I wanted to start out on the corporate instance of Workday as well as the client facing. Has the timeline shifted at all, is it pushed out to the right? And if so, what might be the driver of that?

What we've done is not set a specific date yet. As we develop this project together, I want to avoid setting a date too early that could change or one that's too far in the future that might cause people to become complacent. We're making good progress at a detailed level, but our work to launch the corporate instance is part of a process that serves as a preliminary step before going live on the client side. There are many integrations and compliance aspects to consider for the client side. While it’s not exactly the same as the client site, it is crucial to our overall direction. The timing of these two launches being closely aligned is essential. We've planned for the corporate side to go live in the first half of the year, which could happen earlier or later, but it needs to fit perfectly into the entire process. I hope that clarifies things.

How do you view the challenges and opportunities this selling season, particularly regarding potential customers considering transitioning to your current HR platform and eventually to a Workday platform? Do you think that they might find it overwhelming to take on both changes in a short timeframe, compared to the potential benefits of retaining existing customers who are looking for additional features that you will soon be able to offer?

I believe the understanding and expectation surrounding our upcoming solution have been quite positive among both prospects and clients. We initially considered whether potential customers might hesitate, but it turns out that there are numerous factors influencing their decision to onboard. Importantly, clients recognize the substantial impact our system can have on their businesses, which they can observe. Transitioning to our platform takes a short time, and we haven't encountered any companies postponing their decision. Some may choose to join our system but wait before adopting the new features for their own reasons, which is completely acceptable. However, I’m not aware of any prospects who have opted to delay. In fact, it seems we are nearing a point where prospective clients who follow the typical process—generally taking 18 months—will be able to access our system within a much shorter timeframe. Therefore, we encourage prospects to evaluate their entire business to determine if they require a technology and service solution to effectively tackle scalability challenges, as we can provide that solution. I am enthusiastic about our go-to-market strategy for next year because we will engage with potential clients and assist them in finding the best way forward, whether that involves utilizing Workday separately, which can take significant time, or adopting our joint solution that offers a more comprehensive suite of options to support their business growth and development.

First of all, Doug, it's been a pleasure working with you for 20 years. So really appreciate all of the help over the years and look forward to working with Jim. With regards to the quarter and the guide for the fourth quarter, can you talk just a little bit more about what you're seeing with regards to healthcare trends? Obviously, TriNet ended up reporting that severity was up. When you take a look at your gross profit per worksite employee, are you seeing an increase in terms of the number of claims, is it severity, is it general inflation? How are you thinking about that with regards to the fourth quarter? And then for next year and how we should think about pricing and what sort of impact could that end up having with regards to retention as well as new bookings in the core selling season?

I think the first thing I would say is that there is a normal range of benefits trend that kind of exists in history. Right now, we're probably seeing the trend is running a little bit towards the higher end of that historical range. Probably the biggest driver there are a lot of the specialty drugs that are out on the marketplace now. The GLP-1s being that the most recent example of that. But there are also a fair number of new high-cost treatments, different kinds of cancer treatments and things like that that continue to come to market. So those are the things that are kind of driving a little towards the top end of the range. From our perspective, we went into 2024 and also 2025, expecting that we're going to have some level of elevated healthcare cost trends and put in a pricing strategy for that. I would say that things have come in a little bit better than our expectations, particularly in the first half of this year. And from a severity standpoint, things are pretty much in line with where we expected them to be. We did see just a little bit more utilization in the third quarter of 2024 than we had seen in the first half. So it's a little bit more utilization, not a significant change in severity at this point.

Regarding the Workday partnership, do you believe that by the time we enter the selling season for late 2025 into 2026, everything will be fully established? I understand it's early, but I'm curious if you think the setup will be smooth by that time, considering that Workday implementations can sometimes take a while. Also, what indications do you have about referrals from the Workday pipeline?

So let's discuss the overall outlook as we approach the next year. Development is crucial, especially as we move towards launching the joint solution. It's important to note that our go-to-market efforts will continue. When considering that fall period in 2025, I believe we'll be fully prepared, allowing us to effectively inform prospects about what's upcoming, provide demonstrations, and enable customers to make informed decisions to join us. While I can't specify an exact product launch date, I am confident we will be on track, and selling will commence within a timeframe that aligns with our goals. Additionally, regarding the go-to-market strategy and the exchange of leads, that process has started. The success of this initiative, as I mentioned earlier, relies on having a cohesive go-to-market plan included in both companies' business strategies, rather than being treated as an afterthought. This year’s timing made it challenging to integrate it as a core component of our incentives. We've sorted through those issues and are convening a significant go-to-market strategy team meeting to finalize what will be included in the 2025 business plans for both companies. I expect we'll see meaningful progress and acceleration over time in this regard.

I wanted to dig in a little bit more. It sounds like you're expecting year-end transition to be favorable coming out of Q1 to be relatively consistent with Q1. Just curious if you could confirm that. And if there's anything specific to that, that you expect to be different from years past that would drive a positive transition?

I expect the year-end transition to be favorable. We're in the midst of our efforts, and compared to last year, we lost seven customers, which resulted in a reduction of 8,000 employees and a $40 million decrease in adjusted EBITDA. It's important to note that even a small number of clients from the Workday solution can significantly impact our model. We are optimistic about retaining larger customers moving forward. However, there's still considerable work ahead. For growth acceleration, we need to ensure that the number of worksite employees shifts from a decline to a positive increase. Achieving a stable end-of-year figure and maintaining consistent payments from the fourth quarter to the first quarter will be crucial. Our current sales strategies and a more tailored approach to each product should also enhance our effectiveness next year. Although this year has posed challenges, we are determined to learn and adapt, positioning ourselves for a strong performance in 2025. Well, thank you again to all of you for being with us today. And once again, I just want to say a final thank you last call with our CFO, Doug Sharp with us, and once again, really thankful for a great job done all these years and hoping for all the best for you, Doug, going forward. And Jim looking forward to getting on the road together and getting the chance to meet a lot of great people out there that are our investors in the business. So thank you, once again, everybody, for being here and we look forward to seeing you out on the growth.

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.