Good morning. My name is Matthew, and I'll be your conference operator today. I would like to welcome everyone to the Insperity Fourth Quarter 2022 Earnings Conference Call. At this time, all participants have been placed on a listen-only mode and we will open the floor for your question and comments after the presentation. At this time, I'd like to introduce today's speakers. Joining us today are Paul Sarvadi, Chairman of the Board and Chief Executive Officer; and Douglas Sharp, Executive Vice President of Finance, Chief Financial Officer and Treasurer. At this time, I'd like to turn the call over to Douglas Sharp. Mr. Sharp, please go ahead.

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 of our fourth quarter and full year 2022 financial results. Paul will then recap the year and discuss our initiatives and outlook for 2023. I will return to provide our financial guidance. We will then end the call with a question-and-answer session. Now before we begin, I would like to remind you that Mr. Sarvadi 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 let's discuss our fourth quarter results in which we achieved $1.21 in adjusted EPS and $79 million of adjusted EBITDA, significantly above both our expectations in Q4 of 2021, a quarter which was negatively impacted by higher COVID costs. Paid worksite employee growth of 14.3% in Q4, which is slightly below the low end of our forecasted range as we experienced a greater than expected slowdown in hiring by our client base. As for the other two growth drivers, worksite employees paid from new client sales and client retention came in near our Q4 forecasted levels. In a few minutes, Paul and I will comment further on the outcome of our recent fall sales campaign and heavy client renewal period, leading to our 2023 outlook. Fourth quarter gross profit increased 41% on the 14% growth in paid worksite employees and a 24% improvement in gross…

Thank you, Doug, and thank you all for joining our call. Today, I'd like to start with comments on our excellent fourth quarter results and the dynamic we've seen in the marketplace as we entered the new year. Second, I'll discuss our record setting full year 2022 results in the context of our internal five-year plan and the key initiatives that are continuing our momentum. I'll follow this discussion with the key drivers of our outlook for continued success in 2023 and how this keeps us on track with our long-term goals. Our fourth quarter results capped off an excellent year in both growth and profitability. In addition, we executed a strong selling and retention campaign to continue growth into 2023 despite a slowdown in client hiring. New booked workforce optimization sales came in at 96% of our aggressive fall campaign forecast. The highlight was continued success in our mid-market book sales, up substantially over the prior year and exceeding the budget. Another highlight was continued sales success in our traditional employment Workforce Acceleration book sales, which came in well over budget and well ahead of the same period last year. Q4 is also our heavy renewal period, with over 40% of our client base renewing around the year end. These renewals flow into the starting point for paid worksite employees in January and this starting point is foundational for our unit growth expectations for the coming year in our recurring revenue business model. Our Q4 renewal results were strong and our expected attrition flowing into January and February is expected to be slightly better than the average of the last several years. Now this level was not as good as last year, but still solid results from a historical perspective. Another highlight of this heavy renewal period was continuing…

Thanks, Paul. As I'm sure you're aware by now, our worksite employee growth in 2022 was very strong and was significantly above our typical long-term targets. We are now entering a year with some economic uncertainty and a recent slowdown in the level of hiring by our clients. Therefore, we are beginning the year forecasting 2023's worksite employee growth in a wider range than normal, with the midpoint in the high-single digits rather than our typical target of double-digit growth. Our outperformance in 2022 was even stronger at the earnings line. While this will create challenges with the comparisons, our 2023 earnings outlook remains strong, particularly given the current macro environment. Now let me provide some details behind our 2023 guidance. Beginning with the results of our recent sales campaign and heavy client renewal period, and the possibility of less hiring by our clients, we are forecasting 10% to 11% worksite employee growth for Q1 of 2023. Subsequent to Q1, our growth is projected to be driven by an anticipated increase in the number of Business Performance Advisors and their sales efficiency. We expect client retention to remain strong, although at a slightly lower level than last year. And when combined with the possibility of less hiring by our clients over the balance of the year, we have forecasted a range of 7.5% to 10.5% growth for the full year. As for gross profit, we expect a strong performance last year to continue in 2023, although we are taking what we believe is a conservative approach to budgeting compared to our 2022 performance. We currently expect our direct cost programs to return to a more normalized environment in 2023 with less uncertainty in the benefits in payroll tax areas. In addition, we expect a benefit from growth based administrative cost…

Certainly, at this time, we will be conducting a question-and-answer session. [Operator Instructions] Your first question is coming from Andrew Nicholas from William Blair. Your line is live.

Hi, guys. Good morning. This is Daniel Maxwell on for Andrew. Just to get started, wondering what is assumed in guidance in terms of gross profit per worksite employee per month and then any puts and takes relative to the $286 million number you did in the full year 2022?

Yeah. I think as you're aware, we don't give that as a key metric in our guidance. We reported the $286 million last year. Obviously, that's a high mark for us, really contemplated the pricing strategy, long-term pricing strategy that we put in place from the outset of the pandemic through where we are today, and we've slightly exceeded those targets through that particular time period. And as you expect, there were fluctuations in benefit costs during the pandemic, post-pandemic, but we're exiting -- we exited 2022 in very good shape relative to our pricing in our benefit cost trend. We also obviously experienced some benefit from the remote work environment in our workers' comp and we managed the payroll taxes accordingly. So all that said, $286 million, if you look at our history is a high watermark for gross profit per employee. We're not going to go into a year. We go through our regular typical process of budgeting gross profit going into a year with the intent of managing to the upside in each of the direct cost program areas. So, you wouldn't expect us to go into 2023 budgeting at that same level. Now on the -- what we did mention in my prepared remarks was, we do expect to realize administrative cost savings in our UnitedHealthcare plan relative to the significant growth that we've experienced and that we're continuing to forecast. So that would be some upside in that particular area versus in previous years. So it gives you a little bit of a flavor there. So hopefully, that will help you some.

Yeah. That's helpful. And then as a follow-up, is there anything unique to call out from a healthcare activity or claims perspective? And in 2023, are you assuming any pent-up demand flushing through or is 2023 kind of looking like a more normal year?

No, I think we're looking at '23 as more of a normal year as it relates to benefit and benefit utilization. Obviously, we went through 2022 with declining COVID cost, but we didn't see a notable increase in utilization from care that was previously deferred when the pandemic was at its height. All that has -- seems to have settled down through the latter half of 2022. So we do think barring any significant new variants that we're entering 2023 in a more normalized environment, both from a benefit perspective but also from the unemployment tax area where that was also -- had a little bit of volatility in it relative to the pandemic and its impact on unemployment and on state unemployment tax rates.

Great. Thanks. And then maybe if I can just squeeze one more in on pricing. Are you seeing any noticeable change in the aggressiveness of competitors when it comes to price? And if so, is that something that's had any impact on new business generation or competitive win rates to this point?

No. We really haven't seen any of that. Our pricing strategy is really specific, and relative to every client's specific information throughout their organization and then how we're trending things for going forward and building in increases is based on all the underlying trends that we're seeing plus, like I mentioned, one of our key success factors in our five year plan was to also build in a reasonable level to deal with inflation that's going on in the marketplace. Obviously, wage inflation is significant and 60% of our operating costs are in personnel cost as a service company. So we've been really -- our team has done a really great job at meeting those targets, and so we're in good shape on that front, and it really hasn't affected us on the competitive landscape.

Great. Thanks a lot guys.

Thank you. Your next question is coming from Tobey Sommer from Truist Securities.

Thanks. I was wondering if you could give us some color on trends in the Workforce Acceleration area, sort of any kind of color about growth, et cetera? And where do you want to go in terms of the transition and the ability to shift customers from Optimization to Acceleration and back and forth? And how long might it take to get to sort of an end state where that's a relatively smooth and sort of automated process?

That's a very good question, Tobey. And we're really all over that front. I mentioned that last year, we had a 40% increase in our Workforce Acceleration growth. We also, over this year, made some of these incentive changes, commission changes in our organization that really have aligned everybody in the organization. With this other key success factor that we believe, which is really growing this Workforce Acceleration business, because of the benefits that I listed in my prepared remarks. So we see that where this is going for us, now that we've synced things up. I wanted to be really careful about that because we wanted to make sure that we weren't pulling away any from our Workforce Optimization sales through how we went about this. And we have done a beautiful job of that. But now we're ready to really see that all synced up, see that continue to grow faster and we believe that there'll be a significant effort now. We've already had customers go both directions from WX to WO from WO to WX. We had more this past year than we did the year before that. But what our effort will be going forward is to now make sure our customer base knows about these options earlier, so we don't have to have this discussion after a customer's thought about making a move or maybe like toward our year end transition. The numbers that we have in attrition every year, we want to see if we can address that. So we're going to go after that more aggressively this year on how we do that. And your question about how long you think it will take, I think it'll get a lot better this year, but it will take a couple of years before we really see that really happen. So that's -- hopefully, that helps you.

It does. Thank you. You talked about BPAs and some pretty good high-single digit growth. Could you refresh us and put that into context relative to the last couple of years, where you're able to hit pretty good rates of WSEE growth with more flattish BPAs by optimizing marketing and some other things? Maybe just give us some color on the go-forward strategy and the interplay between BPA growth and WSEE target growth?

Absolutely. In our big picture plan, in our five year plan, what is a key differentiator from previous years is that we believe that this sales efficiency improvement allows us to grow our units, our worksite employee growth at a rate faster than our growth in BPAs. Historically, over the 37 years I've been at this, most of the time, it was when we grew the BPAs at 12%, within 18 months, you'd be growing worksite employees at 12%. That's kind of the way things work. But we believe we're really at a different -- the biggest difference in this five year plan is we're very confident about sales efficiency improvement. We're confident about the demand in the marketplace. We're doing things in a way that are optimizing. You also have the big change in being able to do discovery calls on Zoom calls instead of the whole -- how people use their time. There's so many things that can contribute towards sales efficiency. So in our five year plan, we talked about, hey, we believe now we can actually look at a program where we're growing the BPAs in the high-single digits and growing the worksite employees in double-digits between that 10% to 15% range. So that's the objective, and that's what we're targeting. And the beauty of that is how that adds to our operating leverage. We've had excellent operating leverage in our business on the service side, because we haven't had to grow the service organization as fast as the unit growth. We also have, obviously, our other areas of the business, G&A, other areas that don't have to grow as fast as the number of clients, et cetera. But we've always had to grow the Business Performance Advisors and invest ahead of the growth. And this is going to change the calculation and allow more to drop to the bottom line, provided we're successful at this.

Perfect. My last question is, could you remind us what normative historical fee and healthcare benefit expense growth is and juxtapose that with what you're seeing or are able to achieve for this year?

Well, I think if you look, one of the slides we put out there on the benefit cost trend, you looked at it over a five year period and look at a CAGR of less than 3.5% on our benefit cost per employee. So that's sort of the cost side of the picture over the past three years, which included the pandemic. If you remember, going into the pandemic, we made the decision to price -- to stick with our long-term pricing strategy and not swing it back and forth from year-to-year, but with the intent of matching price and cost. If we fell behind a little in one year, I think maybe in 2021, we added a percentage or two on the pricing side to accommodate that. But at the end, we're exiting -- we feel very comfortable with the exit that we are properly matching price and costs going forward.

Thank you. Your next question is coming from Mark Marcon from Robert Baird & Company. Your line is live.

Good morning, Paul and Doug. Great results here for the full year. I'm wondering, can you talk a little bit about -- just the benefit cost increase that you ended up seeing this quarter? And in terms of enrollments, when we listen to ADP or Paychex, they basically ended up saying that fewer of their clients were signing up for the full benefit package on a go-forward basis. Are you seeing anything similar to that just in terms of the number of eligible WSEE taking on health benefits on a go-forward basis?

No, Mark. We really haven't seen any of that. And I'll tell you the reason I would suggest that, that wouldn't be happening in our case, is our target customer base, of course, we call the best, small and medium-sized businesses in the country, and they're a lot of times fast growing and a lot of times, just they're really after an environment that really, are they people-centric and how they think about their business. And so benefits is really important there and they're -- they want to make sure what we're able to do it. So we've always had kind of in the industry, the highest percentage participation and highest kind of percentage rates of what customers are contributing toward the cost. So we don't really see that. Now we do have sometimes mix changes that affect the overall numbers that you see because sometimes mid-market customers or customers that have more part-timers, of course, those people aren't eligible for the coverage. So we have some moving around on that number to some degree, but it's not reflecting any change in what people are signing up for.

Great. And that the benefit cost expectation for this year and what it was actually in the fourth quarter in terms of year-over-year increase?

So for this year -- every year when we look ahead, we trend every component of the cost, and we compare, obviously, to our pricing. Good news, we feel super strong about how effective we were on the pricing front. When we look at trends going forward, you have years that offset certain parts of the trend. In the marketplace, you're seeing 7% to 8% of trend in cost and then we have things that offset, and that's why you look at our history, as Doug just mentioned 3.5%. This year, we would expect more like 4% to 5% because you've got demographic changes, things of that nature that play in. This particularly, we don't have -- we did introduce a couple of new benefit plans that will lower cost when people choose those new options, but we didn't make any planned design changes that would offset the cost of this particular year. And we knew that, of course, last year, and that's why our pricing was done in a way to make sure that, that all matched up. So that's kind of what we're looking at for this year. I hope that helps you.

It does. And then you mentioned, I didn't catch the retention for the full year. So I'm wondering what that is. And then also, in terms of the slower hiring among the client base, to what extent did you see variances? Were there any clients that were actually reducing headcount or are there any regional differences or industry vertical differences that are discernible?

Thank you for the question. So our retention last year was exceptional. It actually went up from 82% in the prior year in 2021 to 85% last year. And of course, that's benefited by a really strong year-end transition last year where we had kind of record low attrition. This year was a little bit higher than that, but even better than our average over the last few years. So we expect a good year on the retention front for this year. But the issue about net hiring in the client base, it's interesting, we obviously have dug in very deeply on this and then did our survey to try to understand what's happening out there with our customer base specifically. And I will say that in the fourth quarter, the slight increase in net hiring really was an issue kind of across the board. It wasn't like we could pinpoint one area, one group. Previous in the year, we did have customers by industry category, the mortgage business, some other companies that were hitting more obstacles and lowering staff. But in the fourth quarter, it was more kind of across the board. Some of that is a seasonality effect. You don't have as much hiring typically in the holiday season. But as we look forward, we see the optimism there. And as far as customers expecting staff reductions, it's interesting because 54% are expected to add employees and then only 4% expected staff reduction. So that's the sentiment and their plan. We're in a situation, we thought it was prudent for us to weigh what happened last quarter with that optimism and with the potential for a tougher economic environment. And so we're just being prudent to start the year, and we think that's the right thing to do.

That's really helpful. Thanks a lot and congrats again on a great year.

Thank you.

Your next question is coming from Jeff Martin from ROTH Capital Partners. Your line is live.

Thanks. Good morning, fellas. Paul, I wanted to get a sense of the renewals. January is a big month for renewals, but also there's some into February. Can you characterize renewals on the traditional Workforce Optimization versus Workforce Acceleration? And then also on the mid-market and wanted to dig in a little deeper in terms of where you're seeing the biggest growth potential in the business, is it mid-market? Is it Workforce Acceleration or the traditional offering?

Yeah. That's a great question. We always talk internally about a three pronged growth effort. So it is our core Workforce Optimization, sales and retention, our mid-market efforts and then also our Workforce Acceleration. And we, man, we had all three gen in beautifully last year. We have optimized, like I mentioned, about the commission to make all that work together. We've really tweaked it to where we believe, we really have a great focus on the quarterly production with quarterly bonuses, people earned for hitting their objectives on both sides, whether it's -- on all three of those actually, whether it's mid-market, core or Workforce Acceleration. So we're really excited about where that's going, and we think we're in great shape on that front.

Great. And then other question was in terms of lead flow, maybe segment how you're -- how strategically you're doing things differently now versus several years ago? I know digital marketing has been a key component in conversion of those leads. Maybe give us some color on the sales and marketing initiatives?

Yeah. What we've done, the marketing efforts really been effective because we continue to localize what we're doing. So different markets you're able to reach our target customer base with different approaches. And that takes a lot of work to go market by market and figure it out and work with our local folks. But when you have a good overarching marketing program, including the digital and everything from radio or TV to billboards, different markets have different ways that it works best to hit our target market. So having localized campaigns has really helped a lot, having them multiple times within a year, timing it right to boost activity. And then coupling that with our two other things that have really made a huge difference, and that is our partnering programs that we have with different folks who refer people to us and that's been very effective. And what we call our loyalty events. Even through the COVID period, we did them online and all kinds of people got very creative this past year, everybody wanted to see each other again and get back in person. So we did a lot of that. That's been very effective. So we have -- the marketing effort hit its all-time high in how it supported the organization, and we intend to continue to do that.

Great. Thanks for your time.

Thank you. That concludes our Q&A session. I will now hand the conference back to Paul Sarvadi for closing remarks. Please go ahead.

Once again, we want to thank everybody for participating with us today. We're excited about having a record year last year and very excited about this year too, and our five year plan and the return to shareholders we intend to produce. So thank you for participating, and we look forward to discussing these things with you more.

Thank you. This concludes today's event. You may disconnect at this time, and have a wonderful day. Thank you for your participation.