Insperity – 2021 Q2 Earnings Results
Insperity released its earnings for 2021 Q2 on 2 August 2021. The average number of paid worksite employees (WSEEs) increased by 7% y/y driving the revenue up 19% y/y. However, the gross profit and net income dropped 9% and 52% y/y, respectively, due mainly to increase in health care benefit costs relative to the depressed level last year. Paul Sarvadi, the CEO, was pleased with the results of the first half of 2021 in the face of considerable uncertainty from the ongoing effects of the pandemic. He expected growth rate to return to double digit from 2021 Q3 onwards, raising the 2021 full year revenue and adjusted EBITDA guidance. He also believed there was a huge and long runway for Insperity and the PEO industry in the years ahead, saying that “my optimism for the long-term future is rooted in a different dynamic than I have seen in the 35 years building our company and industry. At the core of this optimism is the recognition of the importance of the HR function and the need for consultative HR support to achieve business objectives.”
Here are our 12 key points from the earnings results and earnings call for 2021 Q2!
In 2021 Q2, the average number of paid WSEEs per month increased 7% y/y to 243,270 WSEEs. The growth in paid WSEEs was above the high end of the previously forecasted range of 5% to 6%. This growth was driven by both WSEEs paid from new client sales, and net gains from hiring in their client base, which both exceeded their targets. Additionally, client retention remained at their historical high levels, averaging 99% for 2021 Q2.New sales in 2021 Q2 met their targets with booked sales from new clients and worksite employees up 39% and 30% y/y respectively. This positioned them well to fuel third quarter growth, since booked sales from a given quarter typically become paid worksite employees in the following quarter.Another highlight was booked sales for their traditional employment solution, Workforce Acceleration (a lower tier product that does not include the high-touch HR services launched in 2018) which achieved 94% of forecast. The management began to see decent traction with this offering, with gross profit contribution in 2021 Q2 from this offering increased significantly over the same period last year. Although the numbers are still small relative to other contributors to gross profit, the management believed this trend bodes well for the future since the potential for this offering is substantial.
Total revenue in 2021 Q2 increased by 19% (or $0.2 billion) y/y to $1.2 billion, driven by a 7% increase in paid WSEEs and a 12% increase in revenue per WSEE. The increase in revenue per WSEE included a 6% increase in pricing, and the non-recurrence of the 2020 FICA deferral credits and customer comprehensive service fee credits.
Gross profit for 2021 Q2 was $200 million, a decrease of 9% (or $20 million) y/y primarily attributable to unusually low benefit costs in 2020 Q2 due to the deferral of healthcare utilization at the onset of the COVID-19 pandemic. This increase in benefit costs compared to 2020 Q2 led to the direct costs (i.e. payroll taxes, benefits and workers’ compensation costs) increasing by 28% y/y.In 2021 Q2, higher benefit costs were driven by increased utilization of their health plan, including care previously deferred during the height of the pandemic and COVID-19 related vaccination, testing and treatment costs along with changes in claims payment processing by their carrier associated with these claims. The higher benefit costs were offset by improved results in their payroll tax area, as state unemployment tax rates received during 2021 Q2 came in lower than their estimates and also included the receipt of $11 million of federal payroll tax refunds related to prior years.The management planned to pass savings from their payroll tax area to their renewing clients and prospects through lower state unemployment tax pricing allocations over the latter half of 2021 to further support their sales and retention goals. The management continued to expect an ongoing uncertainty surrounding the pandemic and its impact on their direct cost programs, particularly in their benefits area where COVID related costs, potential deferred care, higher acuity and the Delta variant are potential factors.
Operating expenses increased by 12% y/y, from $147 million in 2020 Q2 to $164 million in 2021 Q2. Excluding performance-based compensation, operating expenses increased by a lower 8% y/y. The higher operating expenses reflected continued growth investments, including an increase in marketing costs associated with lead generation activity, and their SalesForce implementation.Other corporate employee headcount has remained relatively flat through the first half of 2021. The management expected to ramp up the number of Business Performance Advisors (BPAs) at around 10 per month, and go into 2022 at around 700 BPAs across the country. These investments in new BPAs are investments for their 2023 growth, as it generally takes 12 to 18 months to train BPAs. In the mean time, they are also investing more to help support the success that their current trained BPAs are having with the clients.
Adjusted earnings before interest, tax, depreciation and amortization (adjusted EBITDA) for 2021 Q2 was $60 million, or a 35% decrease y/y. This lower adjusted EBITDA reflected unusually low benefits costs in 2020 Q2 due to low utilization of their health plan during the pandemic onset and higher operating expenses. Of note, adjusted EBITDA is EBITDA with non-cash stock-based compensation (SBC) expenses added back.
For the remaining points, check them out at our Multibagger Research Series at the link below.
For our summary analysis of the company, check out the video below.
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