Insperity Cautiously Faces Clients' Optimism

Summary

• Insperity reported first quarter results on May 4th. Its top-line improved. Its bottom line declined. And, as a service provider to small-and-medium-sized businesses, its focus is pandemic.
• The company also shared results from a client survey focused on the COVID-19 pandemic. The data was somewhat optimistic, perhaps a result of Insperity's demographic targeting.
• Still, the company, cautiously, decreased its full-year guidance. The level of uncertainty surrounding the pandemic remains high.

During an economic shutdown with high unemployment specifically impacting small-to-medium-sized businesses, it's hardly a surprise to see the share price struggling for a company focused on servicing small-to-medium-sized businesses. Such is the case for Insperity (NYSE:NSP). The HR solutions provider is trading at only 35% of its 52-week high of over $144.

Insperity's troubles didn't actually start with the economic shutdown. It hit its 52-week high in July 2019 before reporting 2019 second quarter results. With each subsequent quarter's report, its share price stair-stepped lower. The culprit of the disappointments was an unusual number of occurrences of large medical claims (defined as $250,000 and above).

Source

In early February 2020, Insperity reported 2019 year-end results and shares, subsequently, traded in the low $70 range. Since that point, shares are down another 30%. However, when Insperity reported 2020 first quarter results on May 4th and updated its full-year guidance, the company adjusted its projections by less than half that rate.

Initial 2020 Guidance

Prior to the pandemic, Insperity expected to prove the fruitfulness of applying data science and analytics to its processes in 2020.

Because its 2019 fall sales campaign had stalled late in the year, it began 2020 with a lower-than-expected starting point in paid worksite employees. As a result of the fall slowdown, the company extended the sales campaign through January. Ultimately, sales recovered and even exceeded campaign goals. Obviously, the push didn't help the 2019 fourth quarter. But, the 2020 first quarter showed promise.

Remarkably, we also boosted future sales activity with a 28% increase in discovery calls and a 40% increase in business profiles.

For the entire year, Insperity projected adjusted EBITDA would fall in a range of $250 million to $274 million compared to $250 million in 2019. But, the bottom line was not expected to show the same growth potential. Net income was projected in a range of $128 million to $145 million compared to $151.1 million in 2019. Adjusted diluted earnings per share were projected in a range of $3.73 to $4.16 compared to $4.15 per share in 2019.

2020 First Quarter Results

In the first quarter, Insperity generated a 6.6% revenue increase from $1.15 billion in 2019 to $1.23 billion in 2020. The primary contributor to the revenue increase was worksite employee growth of 5.5%. The average number of worksite employees paid in the quarter was 238,014. In the 2019 fourth quarter, Insperity had projected the average number of paid worksite employees to fall in a range of 238,000 to 240,200. The revenue per average worksite employee also increased just over 1% from $1,704 in 2019 to $1,722 in 2020.

Unfortunately, Insperity's expenses grew faster than revenue in the quarter. Payroll taxes, payroll benefits, and workers' compensation costs increased 7.5%. Because its tax rate doubled from 12% in the 2019 first quarter to 27% in the 2020 first quarter, the income tax expense more than doubled. As a result, Insperity's net income declined 18.6% from $76.3 million in 2019 to $62.1 million in 2020. Adjusted earnings declined 14% from $1.98 per share in 2019 to $1.70 per share in 2020. The company had projected the adjusted earnings to fall in a range of $1.61 to $1.70. Adjusted EBITDA fell only slightly from $101.44 million in 2019 to $101.25 million in 2020. Insperity had projected the adjusted EBITDA to fall in a range of $98 million to $103 million.

Though the company met its first quarter projections, in the past, Insperity has suggested analyzing worksite employee data points for measuring productivity.

But as you all know, it isn't about our revenue anyway. It's about the gross profit and the contribution at the operating income line because every worksite employee is a unit of revenue and unit of risk.

In the first quarter, gross profit per WSEE declined 2.1% year-over-year from $335 in 2019 to $328 in 2020. The culprit in the comparison actually stemmed from favorable cost trends in 2019 regarding workers' compensation and benefit costs trends as well as stronger pricing.

Operating income per WSEE declined 5.6% from $126 in 2019 to $119 in 2020. The recent problem of the unusual number of occurrences of large medical claims was not a factor. Rather, one increased expense is directly related to future growth. Insperity continues to hire and train BPAs (Business Performance Advisors).

Historically, our unit growth follows the growth rate in the number of trained business performance advisors with an approximately two quarter lag as new trained sales personnel gain efficiency.

The company also continued to repurchase shares. Year-over-year, the outstanding share count has declined by over 4%. In the 2020 first quarter, Insperity repurchased 878,000 shares for $61 million.

It ended the quarter with $424.2 million in cash and securities. Accounting for amounts due for payroll taxes and deductions, its adjusted cash equates to $167 million. Insperity also has $130 million available under its credit facility.

Insperity's Target Demographic

Insperity initially operated as a PEO (professional employer organization), a business model where the employee is "co-employed" by an administrative employer, such as Insperity, and the worksite employer. Under its PEO umbrella, the company offers Workforce Optimization - human resource and business solutions including recruiting, training, employee management, payroll, benefits administration, workman's compensation administration, and retirement benefits management.

With only Workforce Optimization, the company left companies not interested in or not ready for a PEO unserved. In early 2017, Insperity expanded its solutions to include a traditional HR service. Workforce Acceleration was tested, refined, and modified for several quarters. It is now defined as a self-service, human capital management software bundle with as-needed professional HR support.

In 2018, Insperity also developed a focused offering for a mid-market demographic. The company honed in on companies with 150 to 5,000 employees needing customized solutions.

With each new solution, the company continued to target healthy and thriving companies.

Source

This focus should serve Insperity well as the company assists its clients in facing the COVID-19 pandemic. The company described the benefit of but one of its initiatives in the earnings call. By participating in the development of the CARES Act through the provision of information, the company was uniquely positioned to ready its clients. It was able to prep the necessary reports for clients that jump-started their loan application process.

The CARES Act was signed into law by the President on Friday, March 27th. And, on Sunday the 29th, I was reviewing the first version of these complicated reports. Two days later, these reports became available on Insperity Premier. And by Friday, the first day the banks began accepting applications, over 67% of Insperity clients had run the necessary reports to submit their applications.

Of Insperity's clients applying for funds, 59% received funds as compared to the national average of only 20%.

COVID-19 Pandemic Impact Survey

In the 2020 first quarter earnings call, Insperity reiterated its mission, especially in the context of the coronavirus.

Our mission to help them succeed, so communities prosper, has never been more critical to these clients, their employees and families.

The company conducted a survey of its clients in the last week of April. Nearly 9 of every 10 respondents acknowledged the pandemic was negatively impacting business. Nearly 4 of every 10 classified the impact as significant. Over 80% of the respondents expected to apply for federal aid via the Paycheck Protection Loans program.

Fortunately, less than 15% of respondents had been forced to close one or more physical locations. Over 3 of every 4 respondents had employees working from home. At least 2 of every 10 had employees working fewer hours. Nearly 3 of every 10 respondents had reduced staffing levels. Yet, only 35% considered the reductions permanent. Only 15% had lowered pay.

The majority of respondents were still optimistic about the future. Only 11% expected to reduce staffing levels while 70% expected to either maintain or increase the number of employees. And, 72% expected to maintain their employees' compensation rates.

Through the end of April, Insperity had not yet experienced a materially-significant increase in either client terminations or bad debts from financial defaults.

Though the survey results reflect optimism, Insperity formulated guidance changes for the remainder of 2020 with caution. The level of uncertainty surrounding the pandemic is still high.

Updated 2020 Guidance

Insperity's first adjustment to guidance was a decrease in the average number of worksite employees paid. Initially, the company expected a range of 249,700 to 254,400 with a midpoint of 252,050. The updated range is 221,400 to 233,200 with a midpoint of 227,300, a decline of nearly 10% by the midpoints.

Financial projections subsequently decreased 7% to 20%. Adjusted EBITDA decreased 9% to 14% from a range of $250 million to $274 million to a range of $215 million to $250 million. Net income declined 12% to 20% from a range of $128 million to $145 million to a range of $102 million to $127 million. Adjusted diluted earnings dropped 7% to 14% from a range of $3.73 to $4.16 per share to a range of $3.19 to $3.86 per share.

Takeaway

My investment club first invested in Insperity in 2013. Our investment doubled so we've recouped our original investment. Thus, our investment cost on this position is next to nothing and our yield on cost is quite healthy. There's little chance we'll divest our Insperity position.

At some point, investors may judge companies by their corporate stewardship during this pandemic. I fully expect my investment club to do such. In that regard, I suspect Insperity will pass scrutiny as it is uniquely positioned to not only support but even kindle America's small and medium-sized business community.

Analyst’s Disclosure: I am/we are long NSP. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

I belong to an investment club that owns shares of NSP.