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Text: We appreciate you joining us.
Let me begin outlining our plan for this evening's call.
First, I'm going to discuss the details behind our first quarter 2021 financial results.
Paul will then comment on the key drivers behind our Q1 results and our plan for 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.
In addition, some of our discussion may include non-GAAP financial measures.
Now let's discuss our first quarter results.
We achieved $1.82 in adjusted earnings per share, a 7% increase over Q1 of 2020.
Adjusted EBITDA increased 3% to $104 million.
These results reflect the average number of paid worksite employees in line with our expectation, pricing above targeted levels, upside in each of our direct cost programs and ongoing management of our operating costs.
As for our growth metrics, as expected, the average number of paid worksite employees in Q1 of 2021 declined by 2% compared to Q1 of 2020 and included the loss of one large enterprise account that we referred to in our previous earnings call.
Excluding this account, paid worksite employees would have been relatively flat sequentially from Q4 of 2020 to Q1 of this year.
It's also important to note that during the challenges of the pandemic over the past year, we've increased the number of clients by 8%.
This was however offset by a reduction in the average size of our clients due to pandemic-related layoffs.
Now, as most of you are aware, the year-end transition from 2020 to 2021 in which we enroll new clients from our fall sales campaign and renew approximately 45% of our existing clients is important to our 2021 starting point and, therefore, our full year growth expectations.
We are pleased to report a successful year-end transition.
Worksite employees paid from new client sales were in line with our budget and we're 93% of Q1 of 2020, a period prior to the onset of the pandemic.
First quarter client attrition also came in on budget, including the loss of the large enterprise account.
Excluding this one account, attrition totaled 9%, an improvement over Q1 of 2020's attrition of 11%.
As for the third component of our growth, the strength of our clients in the gradually improving operating environment helped drive net hiring by our existing clients above budgeted levels.
Now let's move on to gross profit, which increased by 7% over Q1 of 2020 on the 2% decline in worksite employees.
This increase included higher than expected contributions from each of the three primary direct cost programs as a result of both solid pricing and lower costs.
On the pricing side, we exceeded our targets on both the HR service fee component and each component of our direct cost pricing allocations.
As for the cost side beginning with benefits, we continue to see a gradual return to normal levels of healthcare utilization coming off of the earlier stages of the pandemic.
However, when combined with COVID-related vaccine, testing and treatment costs, overall cost came in slightly below our expectations.
Our workers' compensation program continues to perform well, due primarily to our client selection and ongoing management of safety practices and claims.
When combined with some favorable impact from the reduction of claims due to the work-from-home status of many of our clients' employees, Q1 workers' compensation costs also came in below budget.
As for the payroll tax area, you may recall that at the time of our previous earnings call in which we first provided 2021 guidance, we had not yet received all state unemployment tax rates.
This was not typical as the delay was due to various states still determining how pandemic-related unemployment would impact their 2021 employment rates.
During Q1, we received our tax rates from most states and collectively these rates came in below our projections.
This resulted in a higher than expected contribution to gross profit in the quarter.
In addition, the Q1 upside resulted from lower on -- Q1 upside resulting from the lower SUTA rates during the quarter, we received a $6 million federal payroll tax refund related to the prior year.
This also contributed to higher gross profit.
Now, as for operating expenses, we continue to balance managing costs relative to the ongoing pandemic, while also investing in our current and long-term growth plans.
We continue to grow our sales force at targeted levels with a 7% increase in the average number of trained business performance advisors.
We also increased our marketing spend related to lead generation activity and incurred costs related to our sales force implementation.
We upheld other corporate headcount relatively flat and managed other areas, including travel related costs and historically low levels as the economy and growth recovers from the pandemic.
In total, operating expenses increased 13% over Q1 of 2020, however were flat when excluding performance-based compensation.
Now, our financial position and liquidity remained strong as we continued with our investment in our growth and provide returns to our shareholders.
During the quarter, we repurchased 340,000 shares of stock at a cost of $30 million, paid out $15 million in cash dividends and invested $12 million in capital expenditures.
We ended Q1 with $197 million of adjusted cash and $370 million of debt.
Today, I'll start with some comments on our strong first quarter results and the momentum driving our outperformance leading us to raise our forecast for the year.
I'll follow with our view of the small and medium-sized business marketplace, including recent trends in hiring and business owner sentiment we're seeing in our client base.
I'll finish my comments with how we believe we are on a solid path for a return to double-digit growth and profitability.
We're pleased with our strong first quarter results and the excellent execution driving many key metrics in the business from sales and retention to pricing and direct cost.
In addition, hiring momentum within the client base has accelerated and appears that small and medium size business community is primed for growth.
This quarter, our paid worksite employees from prior bookings reflected our solid fall campaign sales and came in at 93% at the same period in 2020, which was largely pre-pandemic.
As a reminder, sales booked in a given quarter generally become paid worksite employees in the subsequent quarter as new clients and their worksite employees are enrolled, paid and then flow into revenues.
Our sales team is off to an impressive start to the year achieving 102% of our budgeted bookings in this quarter.
The number of trained business performance advisors was up 7% and this team increased discovery calls by 16% and business profiles by 21%.
The number of new clients sold also increased 16% over the same period last year, which is notable since most of Q1 last year was pre-pandemic.
However, the average number of worksite employees per client was down, reflecting the pandemic-related downsizing that's occurred over the last year and also a light quarter for our mid-market sales.
First quarter booked sales in mid-market were below budget, largely due to a strong fourth quarter that exhausted the pipeline.
However, the pipeline is rebuilding rapidly with a 27% increase in leads and a 13% increase in proposal opportunities over last year.
Some of these have already converted to sold accounts, but it was too late for them to be in the first quarter.
So I'm particularly encouraged by recent activity and the strong workforce optimization sales pipeline across the board.
And we're also seeing an increase in activity related to WX, our workforce acceleration traditional employment solution initiative.
Over the last year, as we responded to the challenges of the pandemic, WX took somewhat of a backseat to our flagship workforce optimization co-employment offering due to our focus on transitioning to remote selling.
We took this opportunity in the fourth quarter to tweak the product and pricing and tested these changes in specific markets.
We reintroduced WX to the entire BPA team during our virtual sales convention early this year and impressive results followed.
WX proposals increased 90% over the same period last year and book sales more than doubled in both the number of accounts and employees sold.
Our WX initiative is an important long-term plan to increase sales efficiency, providing a traditional employment HR bundle alternative at a lower price point is designed to capitalize on the investment we've already made in our team of more than 650 BPAs across the country that are calling on more than 40,000 small businesses each year.
WX is an HR solution with excellent technology and a unique level of service intended to offer a starting point in improving the HR function for a company that's not quite ready for our comprehensive workforce optimization service.
Our goal over time is to convert some portion of the nine out of 10 prospects that we do not sell WO into WX clients and ultimately upgrade them to WO, increasing our sales efficiency.
We expect to build upon this new momentum and continue our progress over the balance of the year.
Our workforce optimization client retention was also a highlight this quarter, improving by 15% over last year, excluding the large client loss discussed last quarter.
The strong underlying trends in this metric across our segments during the year end transition and through the first quarter add to our confidence in our growth plans.
Our performance in the gross profit area has been excellent throughout the pandemic despite the many moving parts and changing dynamics.
The typical mix change in accounts that occurs from Q4 to Q1 during our heavy sales and renewal campaign added to our strong pricing performance, which has been a theme throughout this period.
The clients that left in this quarter were lower priced and contributed less to gross profit on average than the balance of our book of business, resulting in a slightly more favorable gross profit outlook.
We are in a good position to meet our objective of managing price and cost to earn an appropriate management fee for administering our direct cost programs and taking some risk, although there is still some continuing uncertainty around benefits and unemployment cost.
So, our first quarter established a strong start to the new year and we believe the underlying trends point toward growth acceleration and higher expectations for profitability for the full year.
Another reason for our confidence is in the momentum in client hiring driving a recent uptick in the average number of worksite employees per client.
As we entered the new year, our average size client was down approximately 8% in the number of worksite employees after trimming back during the pandemic.
We are now seeing a measurable recovery in this metric and a high degree of optimism from our small business client base.
Our client survey released today reflected small and medium-sized company owners and CEOs with a high rate of optimism and focused on driving growth in the near-term.
When asked how optimistic you are with the outlook for your business this year, 86% were very or somewhat optimistic compared to 48% late last year and 72% in late 2019.
Further, 81% of those surveyed expect organizational performance to be better than last year and 53% expect to add employees and 35% expect to increase compensation.
Only 3% expect to reduce staff and only 1% expect to decrease compensation.
This optimism and these expectations were not the result of coming off a bad year.
In fact, when asked about last year's results, 71% said they were better or as expected and only 10% said their results were worse than expected, which we believe reflects the quality of our client base and the success of our strategy to target the best, small and mid-sized businesses.
We also asked about top concerns and found driving growth to be the number one issue with external uncertainty around the economy, pandemic or political issues falling to second.
It's also telling that the top three HR issues on their minds were maintaining or building a strong culture, recruiting and retaining talent and employee wellbeing.
We also monitor many HR data points that demonstrate whether clients are acting on or are justified in their optimism, including actual hiring, compensation changes, over time and commissions we pay on behalf of clients giving us some insight into recent client sales trends.
Most notable this quarter was commission up over 11% from the same period last year, a double-digit increase for the second consecutive quarter.
We generally see when commissions are up over 6% from the prior year, hiring and compensation increases subsequently trend upwards.
Nothing brings out optimism in business owners more than strong sales momentum.
Anecdotally, I can also further validate the client/owner sentiment for many opportunities I had recently interacting directly with our clients.
The theme of these interactions was somewhat surprised and relieved with strong performance last year, optimism about 2021 and gratitude for how Insperity supported them through the pandemic.
One of the many interesting outcomes from the intense period of HR needs from our clients last year was their discovery of the breadth and depth of our services and the level of care from our dedicated employees that has been there all along.
The results of this increase in awareness and understanding of how we can help their businesses succeed has been a continuation of an elevated level of service interactions directly with owners and top leaders in our client companies and the heightened appreciation for our services.
We are capitalizing on this with an emphasis on referrals and new advertising and marketing messages to drive sales.
So as we look ahead to the balance of this year and into next, considering our strong start to this year and trends we have seen so far, we believe we are on a solid path to return to double-digit growth and profitability.
Current trends in sales retention and hiring in the client base, combined with the comparison to Q2 2020 shutdown-related layoffs, has us on track to move from minus 2% year-over-year growth in the first quarter to 5% to 6% growth in the second quarter.
Our guidance for the full year implies the back half of 2021 growth rates in the high single-digits, which positions us to return to double-digit growth in 2022 with an effective fall campaign.
On a final note, during the first quarter, we announced the retirement of Jay Mincks, our Executive Vice President of Sales and Marketing, after an inspiring 31-year career with Insperity.
Jay played a pivotal role in the growth and development of Insperity and his deep commitment to the success of the sales organization and the company will leave a tremendous legacy.
On behalf of the Board of Directors, I want to extend our deep appreciation to Jay for his dedication and contributions to the success of Insperity over these many years, and we wish him the very best in his well-earned retirement.
At this point, I'd like to pass the call back to Doug.
And let me provide our guidance for the second quarter and an update for the full year 2021.
Based upon the details that Paul just shared, including our successful start to the year and some improvement in the overall level of uncertainty, we have raised and narrowed our range of growth and earning expectations for 2021.
We are now forecasting 4% to 6% worksite employee growth for the full year, an improvement over our initial guidance of 2% to 6% growth.
This increase is based upon a higher starting point going into Q2, the recent improvement in hiring trends and continuing momentum in sales and client retention.
We are forecasting Q2 paid worksite employee growth of 5% to 6% over Q2 of 2020, a period which was significantly impacted by the onset of the pandemic.
We now expect 2021 gross profit to be considerably higher than our initial budget based upon our Q1 outperformance and the recent positive trends in both pricing and direct costs, although there continues to be some uncertainty as we come out of the pandemic.
Our forecast in these areas includes a slight improvement in our workers' compensation cost trend, lower unemployment tax costs upon the receipt of lower than estimated rates in Q1 and the benefit cost trend consistent with our initial budget.
Our operating costs continue to reflect our 2021 plan of balancing our growth initiatives with the ongoing management of costs as our growth accelerates.
So when taking into account these factors, we are forecasting adjusted EBITDA in a range of $250 million to $280 million, up from our initial guidance of $225 million to $275 million.
As for full year 2021 adjusted EPS, we are now forecasting a range of $3.83 to $4.40, up from our previous guidance of $3.27 to $4.20.
As for Q2, we are forecasting adjusted EBITDA in a range of $44 million to $49 million and adjusted earnings per share from $0.60 to $0.70.
As a reminder, our historical earnings pattern generally results in the decline from Q1 to Q2.
As Q1 results are typically higher than subsequent quarters as we are in a higher level of payroll tax surplus prior to employees reaching their taxable wage limits and benefit costs are lower in Q1 and step up over the remainder of the year as deductibles are met.
Additionally, the Q2 year-over-year comparison is impacted by the onset of the pandemic in Q2 of 2020 and its favorable impact in our benefit plan in the prior year's period.

user
compname posts q1 adjusted earnings per share $1.82.
q1 adjusted earnings per share $1.82.
sees q2 adjusted earnings per share $0.60-$0.70.
sees fy 2021 adjusted earnings per share $3.83-$4.40.

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