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Text: We appreciate you joining us.
First, I'm going to discuss the details behind our third quarter 2020 financial results.
Paul will then comment on the key drivers behind our Q3 results, our outlook for the remainder of 2020 and some general comments on 2021.
I will return to provide our financial guidance for the fourth quarter and an update to the full year 2020 guidance.
We'll 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 third quarter results in which we achieved $0.91 in adjusted earnings per share, a 21% increase over Q3 of 2019 and adjusted EBITDA of $58 million, a 13% increase.
These results reflect outperformance in worksite employee growth and pricing relative to our expectations in this uncertain and challenging business environment and upside in our direct cost programs brought about by the dynamics of the pandemic and the structure and ongoing management of these programs.
As for our growth metric, the average number of paid worksite employees in Q3 of 2020 increased by 1.7% sequentially over the Q2 period to 231,750, which was above the high-end of our expected range.
Now you may recall that employee layoffs in our client base drove a 6% reduction in paid worksite employees from the outset of the pandemic in March through the low point in May of this year.
Since then, worksite employees have grown sequentially as employees returning to work and being hired by our clients have outpaced any further layoffs.
Additionally, client retention for both Q2 and Q3 has remained at our historical level of 99% and worksite employees continue to be added from new client sales.
Given these recent positive trends, we now expect paid worksite employees to return to near pre-pandemic levels by the end of this year.
Now let's move on to gross profit, which increased by 8% over Q3 of 2019.
Worksite employee volume and pricing above target levels, combined with upside in our benefit and workers' compensation programs, resulted in significantly higher-than-expected gross profit.
This quarter's benefit costs included some favorable development from Q2, a period of highly unusual claim activity due to the impact of the shutdown orders.
In addition, healthcare utilization began trending toward more normalized levels in the third quarter, although not to the degree of our expectations.
Going forward, we expect further normalization along with the resumption of some deferred care in COVID-19 testing and treatment costs, the extent and timing of which is still uncertain.
Our workers' compensation program continues to perform well due to ongoing management of safety practices and claims.
Recent favorable claims development has been associated primarily with periods prior to the pandemic.
And any favorable impact from the reduction in severity of workers' compensation claims associated with the work-from-home status of many of our clients' employees would likely favorably impact our costs in future periods as this claim experience develops over time.
As for our pricing, we charge our clients a comprehensive service fee, inclusive of our HR services and direct cost programs.
We entered 2020 with certain pricing targets set prior to the offset of the pandemic.
And we continued to manage toward these budgeted targets.
As you may recall, certain savings resulting from the disruption caused by the pandemic were negotiated with our vendors and were passed along to our clients in the form of a comprehensive service fee credit as reflected in our Q2 financials.
Now turning to operating expenses, Q3 operating expenses included continued investment in our growth, including costs associated with a 10% increase in the average number of trained business performance advisors.
Other corporate employee head count has remained level over the past three quarters due to the effort and effectiveness of our staff in the face of increased HR service demands from within our client base.
Cost savings have been realized in other areas of the business, including travel, training and other G&A costs, as we manage through the current business environment.
The Q3 year-over-year increase in total operating expenses of 15% was impacted by increased stock-based compensation costs.
Now this increase was driven by a few items: first, our outperformance in the level of paid worksite employees and earnings during the pandemic; second, the shift in the weighting to performance stock awards from the performance cash awards for 2020 to further align our employees' interest with shareholders during these challenging times; third, the acceleration of expense for employees meeting retirement eligibility requirements under recent modifications to our plan; and fourth, a comparison to prior year's quarter in which earnings and related performance-based compensation were adversely impacted by large healthcare claim activity.
Now operating expenses excluding stock-based compensation and depreciation and amortization increased just 4.6% over Q3 of 2019.
Now, as far as our financial position and liquidity, it remains strong as we manage through the pandemic conditions, continue investments in our growth and provide returns to our shareholders.
Adjusted cash has increased from $108 million at December 31, 2019 to $213 million at September 30th, while repurchasing 1.3 million shares of stock at a cost of $91 million, paying now $47 million in cash dividends and investing $69 million in capital expenditures to-date during 2020.
Borrowings increased by $100 million over the nine months and $130 million remains available under our credit facility.
Today, I'll provide comments on three topics, starting with some thoughts on our significant outperformance in the recent quarter.
I will then discuss how the primary drivers to our business model reacted to the pandemic, resulting in the opportunity implied by the guidance we are providing today to attain double-digit growth in adjusted EBITDA this year.
I'll finish with some comments on our view of these factors going forward, which will ultimately drive our outlook for 2021.
We are certainly pleased with our execution in the third quarter, which resulted in a variety of factors contributing to better-than-expected results.
The resiliency of our client base supported by our dedicated service providers combined with solid sales and retention to drive a nice rebound in sequential growth in our key metric paid worksite employees.
Net gain in worksite employees from within our client base exceeded our expectation as client hiring of furloughed and new employees occurred sooner and at a faster pace.
As Doug mentioned, client retention continued at historical levels of 99%, despite the economic pressure on small businesses in the current environment.
In addition, our booked sales since the pandemic have been approximately 70% of our pre-pandemic sales budget, which we believe is solid performance in a virtual selling environment.
In the third quarter, paid worksite employees from previously booked sales was 92% compared to the same period last year, demonstrating continued demand for our services and strong execution in enrolling new clients.
Another highlight of the quarter was our strong pricing of both new and renewing accounts in service fees and allocations for direct costs, including our benefit programs.
The matching of price and direct cost is critical to our model and exceeding our targets in this area is important as direct cost affected by the pandemic normalize.
We've also been able to continue to grow and develop our BPA team through this quarter.
During this period, we virtually trained over 350 BPAs in our Level 1, 2 and 3 and our certified Business Performance Advisor programs.
Our trained BPA count increased 10% over the same period last year, positioning us well for our fall selling season.
This quarter, we were also able to divert some operating expense savings to develop client testimonial videos and increase advertising to support our fall selling season and our retention campaign.
These videos captured the emotion we were hoping for demonstrating the value of a sophisticated HR function in a crisis.
We were also able to continue important technology development beyond responding to the many compliance needs that emerged earlier this year.
We are extending our People Analytics platform, which has been very well-received by our mid-market and enterprise clients to our emerging growth segment just in time for our critical renewal period.
We are continuing to make strides improving in Insperity Premier, our proprietary human capital management system, rolling out a new time and attendance user interface and using new behavioral analytics tool to guide road maps making premier easier and more efficient for clients.
The bottom line for the third quarter was that we experienced the ideal combination of higher volume and pricing and lower direct and operating costs.
Each of these elements contributed to our strong outperformance in the quarter.
So we have responded quickly and effectively to the unusual events we've experienced in 2020 meeting client needs and achieving better-than-expected growth and profitability.
We've also kept our eye on the long-term making progress on many important initiatives.
Now that we have three quarters under our belt and our estimate for Q4, we can evaluate how our business model has reacted during the pandemic.
When the pandemic hit, we did not expect our business model would have the potential to generate double-digit growth in adjusted EBITDA that we have within the guidance we're providing today.
The effects for the pandemic on our business model ran the full gamut from obvious expected negatives to completely unexpected positives.
It's worth taking a moment to summarize these factors that drive the model since, as we all know too well, this pandemic is not over and it appears the effects will carry into 2021.
For example, one would think the pandemic a health issue would increase health costs.
However, what we've seen is that rising COVID cases created the need to protect hospital capacity and limit elective procedures, which combined with people's behavioral tendency to avoid hospitals as much as possible, healthcare expenses have actually declined significantly in the short-term.
Longer-term healthcare costs may be elevated due to the deferral of [Phonetic]care or cost associated with treatment of COVID or vaccines.
To this point, we have not seen these cost increases to actually increase the overall trend as other offsets like telemedicine and some level of deferral of care [Phonetic] continues.
In addition, many experts, including the CDC, are anticipating that the precautions currently being taken to reduce the spread of COVID could substantially reduce the incidence of flu this year.
An obvious negative factor we experienced from the pandemic related to lockdowns was the economic effect on small and medium-sized businesses, which affects us in the form of layoffs in our client base.
We saw a drop in paid worksite employees of approximately 6% in two months, followed by a steady rebound over the following four months, supported by fiscal stimulus and easing restrictions.
In retrospect, the CARES Act and specifically the Paycheck Protection Program was effective in mitigating some level of layoffs.
Further, we believe our quick and effective support of our clients to take advantage of these programs played a role in fewer layoffs occurring and a faster rebound.
The effects of the shutdown also highlighted one specific advantage in our business model, which is our client selection strategy.
Due to our risk-based client selection process, we have a very small percentage of our client base in industries most affected by the pandemic and shutdowns such as entertainment, hospitality, travel and restaurants.
Another surprise somewhat due to our client selection strategy has been the nominal business closings we have experienced in our client base.
Although we expected to see an increase, our strategy of targeting the best small and mid-sized businesses across a wide range of industries proved to provide some insulation from this factor as we saw no significant increase in business failures.
Another dramatic effect we experienced was the increased workload as many issues arising from the pandemic landed in the HR department.
As I mentioned last quarter, client interactions increased 300% and the average length of time of these interactions doubled.
This five-fold increase in workload has diminished somewhat, but remains elevated.
On the flip side, lockdowns led to working from home.
In our case, this resulted in improved productivity and our dedicated staff performed heroically in response to the increased demand for our services.
Our experience leads us to believe working from home is effective for ongoing routine activities.
However, innovation and collaboration may suffer in the longer-term.
A hybrid scenario of working from home and coming into the office may provide optimal productivity, efficiency and innovation going forward.
Another upside in our model from the lockdowns and work-from-home environment across our client base is a substantial decrease in the incident rate of workers' compensation claims.
This impact is yet to be reflected in our cost, but -- and should benefit future periods to some degree.
However, these lower costs may be offset by COVID-related claims that may be covered by workers' compensation in some states.
An additional upside surprise to me has been our effectiveness, continuing to sell in a virtual environment with a service offering as comprehensive and complex as ours.
We now know the range of sales efficiency under these conditions.
And as we integrate face-to-face meetings back into the mix, we could see a longer-term efficiency gain.
One final observation is the success we've had during the pandemic in retaining clients even as financial considerations prevailed on our client base.
Our services simply were invaluable and clients have continued our premium services despite the need to tighten their belts.
So now that we have a better understanding of the factors driving our business model during a pandemic, what does that mean as we look ahead to 2021?
Well, first, it means planning will be dependent on these factors and drivers that are likely to ebb and flow based upon the state of the pandemic.
We will be monitoring these new inputs very closely and we'll finalize a budget later than usual to include the most recent information.
Making estimates at an early stage makes little sense in view of the number and range of possibilities, especially when considering the timing and degree of severity of the pandemic or the actions that may occur to mitigate its effects.
For example, COVID cases are on the rise now, but one or more vaccines may be available by 2021 or an anticipated economic downturn from additional lockdowns may occur.
Additionally, small businesses may be bolstered by additional fiscal stimulus.
What we have learned is there are many moving parts and offsets in our business model in this environment.
If the pandemic intensifies, our direct costs may be below our historical trends as we experienced this year, but growth may suffer.
Conversely, if the pandemic is mitigated or under control, direct costs may be elevated, but growth may accelerate as an offset.
What I do know with the degree of certainty today is, we have an amazing organization with the necessary curiosity and brainpower to provide the agility and capability to manage through a crisis and come out with impressive results for shareholders clients and other stakeholders.
This year we have demonstrated the depth and breadth of our competence and level of care for our clients to execute on matters within our control, along with inspiring ingenuity and resourcefulness to respond to unexpected events.
We are certainly pleased with our 2020 results today and our outlook for the balance of the year and we look ahead with confidence in the future whatever we face next year.
At this time, I'd like to pass the call back to Doug.
Now let me provide our guidance for the fourth quarter and an update for the full year of 2020.
As you're aware, there continues to be uncertainty as to duration and the conditions of the pandemic and the trajectory of the economy.
The current political environment and the timing and details of any further government stimulus add to this uncertainty.
We have taken this into account when providing our financial guidance over the remainder of 2020 and we will be considering these factors in our budgeting process for the upcoming year.
We typically do not provide formal guidance for the upcoming year at this time and, therefore, we'll consider any further developments in these areas and the outcome of our year-end selling and renewal season [Phonetic] when providing 2021 guidance in our next earnings call.
Now based upon the details that Paul just shared, we continue to expect sequential worksite employee growth over the remainder of 2020.
For the fourth quarter, we are forecasting average paid worksite employees in a range of 236,500 to 238,500, a sequential increase of 2% to 3% over Q3 of 2020.
This equates to an expected decrease in average paid worksite employees of only 1% for the full year 2020 in the face of significant challenges for the small business community caused by the pandemic and its impact on the economy.
With an improved outlook for Q4 worksite employee growth, our current pricing strength and a range around expectations in our direct cost programs, particularly our benefits program, we're now forecasting Q4 adjusted EBITDA of $21 million to $30 million and adjusted earnings per share of $0.20 to $0.38.
When combined with our Q3 outperformance, we're raising our full year 2020 earnings guidance and now forecasting adjusted EBITDA of $271 million to $281 million, an increase of 8% to 12% when compared to 2019.
As for full year 2020 adjusted EPS, we are now forecasting a range of $4.35 to $4.53, up from our previous guidance of $3.67 to $4.04.

user
q3 adjusted earnings per share $0.91.
share repurchase authorization expanded by one million shares.
sees fy adjusted earnings per share $4.35 — $4.53.
sees fy adjusted ebitda $271 million — $281 million.

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