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Text: We appreciate you joining us.
Let me begin by outlining our plan for this evening's call.
First, I'm going to discuss the details behind our second quarter 2020 financial results, which were strong considering the current economic environment brought upon by the pandemic.
Paul will then comment on the key drivers behind our Q2 results and our outlook for the remainder of the year.
I'll return to provide our financial guidance for the third quarter and an update to the full-year 2020 guidance.
We will then end the call with a question and answer session.
In addition, some of our discussion may include non-GAAP financial measures.
Now let's discuss our second quarter results, in which we achieved a $1.54 in adjusted EPS, an 86% increase over Q2 of 2019, and adjusted EBITDA of $92 million, an increase of 62%.
Average paid worksite employees declined by just 1.8% from Q2 of 2019 compared to our forecast of 1% to 5% decline that took into account the impact of the COVID-19 pandemic on our clients and prospects.
All three drivers including worksite employees paid from new sales, client retention and net losses in our client base from layoffs and hiring were better than expected.
Worksite employees paid from new client sales were approximately 20% above forecasted levels, driven by 15% increase in trained Business Performance Advisors and success in our mid-market segment.
Client retention held up at our historical high level of just over 99% during Q2.
This points to the financial strength and actions taken by our clients during the pandemic and our quick and effective response to assist our clients with our premium level of HR services.
Net losses in our client base in Q2 were lower than expected as the level of worksite employees laid off, returning to work from furlough and general hiring were all favorable.
This was particularly the case in the month of June.
In a few minutes, Paul will share the details on the actions we've taken recently to assist our clients and provide thoughts around more recent trends in our updated 2020 worksite employee outlook.
So let's move on to gross profit, which increased by 27% over Q2 of 2019.
These results included lower-than-forecasted benefits and workers' compensation costs partially offset by our decision to provide comprehensive service fee credits to our clients.
Lower benefit costs were primarily due to lower utilization, especially lower levels of elective healthcare procedures, some of which is expected to be offset in subsequent quarters with the resumption of deferred care and future COVID-19 costs.
Lower workers' compensation costs were primarily a result of the effective management of claims incurred in prior periods and largely unrelated to the pandemic.
Due to the structure of our workers' compensation program, any reduction in the number and severity of workers' compensation claims associated with the work from home status of many of our clients and employees would likely impact our cost in later periods as these claims develop over time.
During the quarter, we proactively engaged with our vendors in successfully negotiating savings to support our clients through this difficult period.
As a result, we provided a comprehensive service fee credit to our clients based upon their worksite employee levels at June 30.
These credits totaled approximately $12 million and were accrued in the second quarter.
Also, under the CARES Act and Family First Act, clients were able to take advantage of payroll tax deferrals and credits offered through government stimulus packages.
These deferrals and credits totaled approximately $45 million during Q2 and were reported as both a reduction to revenue and direct costs.
So in total, these two items reduced Q2 reported revenues by approximately $57 million and gross profit by approximately $12 million.
Second quarter operating expenses increased by 9% and included continued investments in our growth, including costs associated with the increase in the number of Business Performance Advisors.
Other corporate employee headcount has remained level over the first half of this year, even though HR demands have increased with the pandemic and its impact on the economy and a number of HR issues, including diversity and inclusion.
Second quarter compensation costs included an acceleration in the timing of a portion of our corporate employees' annual incentive compensation to reward them in a period of increased service demands.
Additionally, Q2 operating costs included an increased paid time off accrual associated with higher-than-normal unused vacation hours during the pandemic.
These expenditures were partially offset by cost savings in other areas, including travel, training and business promotion costs.
Our effective tax rate in Q2 came in at 27%, and we expect a similar rate over both the latter half of this year and for the full-year 2020.
Our strong financial position and liquidity continued to improve over the first half of 2020 in the face of the challenges and dynamics of the pandemic.
Adjusted cash totaled $269 million at June 30, up from $108 million at December 31, 2019, while borrowings totaled $370 million at the end of Q2, up from $270 million at December 31, 2019.
Over the first half of this year, we have repurchased 879,000 shares of stock at a cost of $61 million, paid $31 million in cash dividends and invested $39 million in capital expenditures.
Today, I'll begin with a discussion of our efforts over the recent quarter to support our small and medium-sized business clients throughout the historic disruption arising from the pandemic.
Secondly, I'll cover our view of the dynamics driving our expectations over the balance of the year for growth and profitability.
And I'll finish my remarks with some thoughts about the long-term effect on demand for Insperity services, which represents a silver lining in the cloud of COVID-19.
This quarter was an eye opener in many ways, including highlighting the absolute necessity and the tangible value of a sophisticated HR function for small to medium-sized businesses.
The unexpected events that played out over the course of the quarter cast a spotlight on the HR department, which, of course, is what Insperity is to our clients.
The sequence of events beginning with the health crisis evolved into economic disruption and the transformation to working from home, followed by the emotionally charged dynamic of prolonged stay-at-home orders and political and social unrest.
When you add in federal, state and local legislative and regulatory responses, with new obligations and opportunities for businesses, you have a monumental challenge and opportunity for an HR services provider to demonstrate value to clients.
Insperity Workforce Optimization has long been the most comprehensive business service offered in the marketplace and our competitive distinction is the breadth and the depth of our services and the level of care of our service providers.
Our clients were relying on us to help them work through decisions that directly affected the livelihood of their businesses, employees and families.
Our service teams continue to serve our clients and worksite employees with genuine care and excellence in an unprecedented time of need and constant change.
In more than 30 years, I've never seen a quarter where clients experienced more of what we are designed to offer in such a compressed time period.
The effort put forth was exceptional and could have only been delivered by the combination of an amazing team and an incredible culture like we have at Insperity.
The workload across the company escalated substantially with call volumes and length doubled, service interactions tripled and a long list of other services spiking.
HR solutions were required for the myriad issues businesses were facing, including layoffs and staffing strategies, PPP loan application forgiveness and reporting, work from home, return to work, FICA deferral, and diversity and inclusion, just to name a few.
Allow me to say we could not be prouder of our staff across the board the way they stepped up and delivered on our mission to help businesses succeed so communities prosper through a very challenging period.
Now in addition to passing this service stress test with flying colors, we also were able to see our business model perform well under the pressure of these unprecedented events.
We were pleased with the dynamics across the business from sales and retention to pricing, direct cost and operating expenses.
On our last call, we indicated our objective in new account sales operating in this virtual selling environment would be to fall within a range of 60% to 80% of our original 2020 pre-COVID sales budget.
As you may recall, the sales budget is the internal metric we use to monitor and track performance in our sales organization.
Our entire sales organization, both core and mid-market performed remarkably well, achieving total booked sales above 70% of our original 2020 pre-COVID sales budget and in the higher end of our own revised targeted range.
As a reminder, once the sales booked, our service teams worked to onboard those clients and actually generate revenue as paid worksite employees.
In this environment, client retention may also be a concern due to an increase in the business failure rate in the marketplace at large.
As Doug mentioned, our client retention has remained solid, reflecting the strong client base we have, and demonstrating the benefit of our strategy of targeting the best small and mid-sized businesses onto our premium services platform.
Another stress test during a period like this was around pricing of our services on both new and renewing accounts.
It is certainly another credit to our staff and further validation of the value of our services that our standard pricing on our book of business did not reflect unusual pricing pressure in this environment.
We were also very responsive to the immediate financial needs of our clients in providing a COVID-19 related service fee credit.
During the quarter, we worked with vendors and negotiated $12 million in fee reductions to pass along to clients.
We felt it was important to act quickly in this regard and get the funds to clients as soon as possible, and clients will begin seeing this credit on invoices starting this week.
Another area to evaluate during this unusual time was the matching of price and cost on our primary direct cost items, including payroll taxes, workers' compensation and employee benefits.
As I mentioned, pricing has remained on track.
And although our quarterly direct cost pattern has changed, we anticipate a strong year overall at the gross profit line.
So we have navigated the disruption and the immediate aftermath of the pandemic and related events of Q2 successfully, and our business model demonstrated substantial resiliency.
Now in order to determine our expectation for the balance of the year, we need to zero in on the most recent behavior of our clients, particularly in layoffs and new or rehires in the base and consider the economic outlook for small business.
Now in the second quarter, layoffs due to COVID drove a 6% reduction in paid worksite employees from March, reaching a low point at the end of May.
Now since then, we've recovered approximately 40% of this reduction, primarily due to the return to work of just over 50% of furloughed employees.
At the same time, approximately 17% of furloughed or temporarily laid off employees have been reclassified to permanent layoffs, so the number of potential rehires has been reduced by two-thirds.
At this point, the rate of both layoffs and furloughed employees returning to work have moderated considerably.
So determining what happens in the near term and that change in employment in our client base is somewhat of a toss-up.
On one hand, it seems the small to medium-sized business community is adapting and dealing well with the new realities they're facing.
We believe our client base has been particularly impressive in this regard.
However, the continuing spread of the virus and the corresponding economic uncertainty may temper the rebound we have seen recently.
Also, in our experience, there is sometimes a pause or hesitancy in decision-making with the uncertainty of an upcoming election, which may weigh in over the second half of the year.
We do expect new account sales to ramp up over the last half of the year.
However, most of the booked sales in Q4 typically do not become paid worksite employees until Q1 of the following year.
These sales would contribute to growth in 2021, but not contribute significantly to this year's results.
With this backdrop, our guidance [Phonetic] for growth is somewhat conservative over the balance of the year.
Although the pandemic-driven circumstances make us appropriately cautious about the near term, recent events have made us even more bullish about the long-term prospects for Insperity.
Our outlook for profitability over the last half of the year also has an appropriate measure of conservatism built in.
The wildcard here is in our direct costs, and particularly our health plan where some portion of lower cost experienced in Q2 is expected to shift to Q3 and Q4.
This creates an unusual quarterly pattern to our profitability for 2020 shifting more of the profits to the first half than usual.
With this in mind, I believe it's very important for investors to look at the range of expectations for the full-year 2020 in context of the pandemic and focus on how we are positioned for 2021.
Our full year guidance for 2020 implies a range of minus 1% to minus 3% unit growth in paid worksite employees.
We expect a range of adjusted EBITDA growth that straddles to the level we achieved last year at minus 6% to plus 2%.
So the big picture for the full-year 2020 is layoffs due to COVID and the economic shutdown, are expected to be partially offset by higher gross profit per worksite employee and lower operating expenses than our original budget.
So while we're continuing to focus on meeting the intense need of our client base in the current environment, we are also looking to the longer term and the straightest path to regaining our growth momentum in 2021 as COVID-19 moves further into the rearview mirror.
We believe we are very well positioned for growth as we look ahead to next year.
The front of our growth engine is the number of trained Business Performance Advisors, which is currently at the highest level in our history.
We have deliberately continued to invest in this team throughout this economic disruption due to the likelihood of a quicker and stronger growth surge once the uncertainty diminishes.
We also believe we have an opportunity to hone our marketing message, utilizing the recent positive client experiences, and we intend to increase our marketing spend in the fall to drive leads and test this new messaging.
In many ways, the unexpected and unusual developments of the last quarter validated the need for our services and the distinct advantage we provide to improve the success equation for small and medium-sized companies.
Even though the pandemic has been quite a challenge, over the long term, we believe this experience will serve to increase demand within the small to medium-sized business community for Insperity services in the years ahead.
At this time, I'd like to pass the call back to Doug.
Now let me provide our guidance for the third quarter and an update to the full-year 2020.
With the first half of the year behind us, we have more visibility as to the impact of the pandemic on our business and have seen signs of gradual improvement as businesses have started to reopen and employees have gradually returned to work.
However, a high level of uncertainty associated with the pandemic, its impact on the economy and any further government stimulus packages continues to exist.
The current political environment and upcoming election adds another element of uncertainty.
Our guidance intends to take this into account and continues to reflect a wider range of possibilities than that provided in the past.
Based upon the details that Paul just shared on our expected worksite employee levels, we are now forecasting a 1% to 3% decrease in the average number of paid worksite employees for the full-year 2020.
This is a substantial improvement over our previous guidance of a 1% to 6% decrease and reflects the more favorable starting point for the second half of the year.
The low end of this guidance assumes a persistent level of pandemic cases, continued economic disruption and ultimately, a recurrence of layoffs in our client base, exceeding both new hires and furloughed employees returning to work.
The high end of our paid worksite employee guidance assumes a gradual improvement in conditions associated with the pandemic and its impact on the economy, and therefore, a nominal level of growth in our client base through both furloughed employees returning to work and general hiring.
For the full-year 2020, we are raising our earnings guidance and now forecasting adjusted EBITDA of $235 million to $255 million, ranging from a decrease of 6% to an increase of 2% when compared to 2019.
This compares to our previous guidance, which ranged from a decrease of 14% to flat with 2019.
A component of this revised guidance is a further shift in the expected timing of healthcare utilization during the pandemic.
As I mentioned a moment ago, the level of Q2 benefit cost savings largely tied to lower utilization and fewer non-essential procedures came in significantly better than our previous expectations.
We expect that a portion of these non-essential procedures were deferred and some will shift into the latter half of the year, including costs associated with participants with chronic conditions that miss treatments.
We also continue to expect ongoing COVID-related testing and treatment costs.
As for our operating costs, we expect continued cost savings in various areas while operating in the current pandemic environment.
As we are ahead of plan on the growth in Business Performance Advisors, we intend to grow BPAs modestly over the remainder of 2020, while we intend to continue to hold our other corporate headcount flat.
We are forecasting for an increase in marketing costs associated with the upcoming 2020 fall sales campaign as we promote our premier HR services in this period of increasing demand.
Finally, our updated earnings guidance assumes a reduction of approximately $3 million in net interest income from our previous guidance due to the recent decline in interest rates.
As for the full year 2020 adjusted EPS, we are now forecasting a range of $3.67 to $4.04, up from our previous guidance of $3.19 to $3.86.
Now as for Q3, we are forecasting average paid worksite employees in a range of 227,500 to 230,000, which is a small sequential increase over Q2.
We are forecasting adjusted EBITDA in a range of $29 million to $38 million and adjusted earnings per share in a range of $0.37 to $0.54.

user
compname posts q2 adjusted earnings per share of $1.54.
q2 adjusted earnings per share $1.54.
q2 revenue $993.4 million versus refinitiv ibes estimate of $1 billion.
sees q3 adjusted earnings per share $0.37 - $0.54, fy adjusted earnings per share $3.67 - $4.04.

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