Good afternoon, everyone. My name is Erica, and I will be your conference operator for today. I would like to welcome everyone to the Insperity Second Quarter 2021 Earnings Conference Call. At this time, all participant lines are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. [Operator Instructions]. Please be advised that today's conference is being recorded. [Operator Instructions]. I would like to introduce today's speakers. Joining us are Paul Sarvadi, Chairman of the Board and Chief Executive Officer; and Douglas Sharp, Senior Vice President of Finance, Chief Financial Officer and Treasurer. 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 evening's call. First, I'm going to discuss the details behind our second quarter 2021 financial results. Paul will then comment on the key drivers behind our Q2 results and our plan over the remainder of the year. I will return to provide our financial guidance for the third quarter and an update to the full year 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 second quarter results. We achieved $0.91 in adjusted earnings per share and $60 million of adjusted EBITDA, with our growth rebounding ahead of plan from the pandemic lows a year ago. As for our growth metric, the average number of paid worksite employees increased by 7% over Q2 of 2020, above the high end of our forecasted range of 5% to 6%, and this was a sequential increase of 4.3% over Q1 of 2021. Both worksite employees paid from new client sales and net gains from hiring in our client base exceeded our targets. And second quarter client retention came in at our historical high level of 99%. Now along with worksite employee growth, our revenue per worksite employee, which included a 6% increase in pricing…

Thank you, Doug, and thank you all for joining our call today. Let me begin by providing some color around our strong second quarter and first half results and the solid execution driving our growth acceleration. I'll follow these comments with the discussion of priorities for the balance of this year. And I'll finish with some thoughts about the exciting market opportunity we see ahead for Insperity, the PEO industry and the overall HR services sector. We've had an excellent first half of 2021 in the face of considerable uncertainty from the ongoing effects of the pandemic. Our priority as we entered this year was to accelerate our growth momentum and return to double-digit growth in paid worksite employees as soon as possible while managing through the uncertainty. As the year began, we were optimistic we would achieve this growth rate by year-end or early 2022 despite the loss of our largest client, which represented just under 3% of our worksite employee base. Our confidence was based upon our solid sales momentum, underlying client retention improvement and steady hiring in the client base. Our guidance provided today indicates we now expect to return to double-digit unit growth in the third quarter, well ahead of schedule, building off our strong recent trends in all 3 of our growth drivers. Outperformance in paid worksite employees from previous booked sales, combined with stronger-than-expected hiring within the client base and historically high client retention to produce a rapid acceleration in our unit growth. In fact, paid worksite employees were up 9% in 4 months by the end of June over our low point of the year in February. New sales in the second quarter met our targets with booked sales for new clients and worksite employees up 39% and 30%, respectively, over last year.…

Thanks, Paul. Now let me provide our guidance for the third quarter and an update for the full year 2021. We're now forecasting 5.5% to 6.5% worksite employee growth for the full year, an improvement over our previous guidance of 4% to 6% growth. This increase is based upon our outperformance during the first half of the year, leading to a higher starting point going into Q3, continuing momentum in sales and client retention and some continued hiring by our clients. We are forecasting Q3 paid worksite employee growth of 9.5% to 10.5% over Q3 of 2020. This is coming off the 7% year-over-year growth in the prior quarter. As we approach our annual fall sales campaign, we have taken a portion of the upside in earnings created during the first half of this year and invested it in initiatives designed to build upon our strong sales momentum. These initiatives include the continued hiring of business performance advisors, increased investment in advertising and reinstituting our corporate sales and client retention fall campaign event. Also, as I mentioned a few minutes ago, as a result of the 2021 SUTA rates coming in lower than anticipated, we have taken the opportunity to pass savings to our renewing clients and prospects through lower SUTA pricing allocations over the latter half of 2021 to further support our sales and retention goals. Now there does seem to be continued uncertainty surrounding the pandemic and its impact on our direct cost programs, particularly in our benefits area where COVID-related costs, potential deferred care, higher acuity and the Delta variant are potential factors. Therefore, we continue to take the approach of adopting a wider-than-usual range around our earnings expectations. When considering this factor and the investment of a portion of the earnings upside for the first half of the year, we are now forecasting adjusted EBITDA in a range of $258 million to $288 million. This is up from our previous guidance of $250 million to $280 million. As for full year 2021 adjusted EPS, we are now forecasting a range of $4 to $4.59, up from our previous guidance of $3.83 to $4.40. As for Q3, we are forecasting adjusted EBITDA in a range of $52 million to $62 million and adjusted EPS from $0.74 to $0.93. Now at this time, I'd like to open up the call for questions.

[Operator Instructions]. Your first question comes from the line of Anthony Nicholas (sic) [Andrew Nicholas] from William Blair.

My first one, and I apologize if I missed this in the prepared remarks, but I just was hoping you could provide an update on the mid-market. Specifically, any color on sales momentum there, commentary on the pipeline, conversion rates, et cetera.

Sure, no problem. I didn't really mention mid-market this quarter. They're, of course, embedded into the total sales growth numbers. And I mentioned last quarter that we had really wrung out the mid-market sales pipeline toward the end of the year and it's built really strong over the course of this year. And we're looking forward to a good fall in mid-market but not much else to report on that front at this time.

Got it. And then in terms of the guidance, specifically around worksite employees, obviously, a pretty big increase there. Is there any way to kind of dimensionalize how much of that is a consequence of better hiring from the base versus new sales? Just trying to understand the change in and how much is a function of the stronger end market?

Yes. Well, certainly, we -- I mentioned in the prepared remarks that we generally have a range that we use for net gain of hiring in the client base over the course of a full year. And we had budgeted in for this year to be at the low end of our range, which would be in the -- around or maybe less than 4% or so. And the high end of our range would be typically, over the course of the year, in the 6% to 7% range. So that gives you a little bit of color going from the low end to the high end over the -- in terms of our estimate for the full year. But as you look back over the first half, certainly, you had outperformance in sales. You had incredible retention at historically high levels, which form the base for the net change from the clients to be upside for you, which is exactly what happened. So very good for this part of the year. We haven't really budgeted in that for the balance of the year at these kind of rates we've seen simply because we know the labor market's tightening up some. Be nice if that could continue like that but that's not what we're building in our expectations.

Your next question comes from the line of Tobey Sommer from Truist Securities.

I was wondering if you could dig into the pricing. I think you said up 6% but then maybe some sort of reaction to the payroll situation being better in alleviating some of that to your customers. How should we think about pricing if we kind of net out those 2 pieces on a go-forward basis?

Yes. Thanks for the question, Tobey. So we are continuing to move price appropriately with underlying trends we're seeing in the marketplace. And so that what you've seen in the total revenue per employee increase going up does reflect strong pricing in what we're doing. And of course, we manage each of the allocations for each of the ultimate costs that come out. So relative to the unemployment tax, we had boosted rates early in the year, anticipating additional costs that would be passed on from the layoffs during the pandemic. A lot of that did not come through. And so we have opted to reduce the allocation rates for the balance of the year and then take another look as we get some insight into next year's potential cost. But this is the ongoing aspect of managing price and cost within each of the buckets that we manage that contribute to gross profit.

From a BPA perspective, where would 700 puts you year-over-year in terms of growth at the year-end? And then you talked about some incremental sort of investments and upside you're investing to help stimulate growth. Could you give us some color about what areas you're applying the increased investments?

Yes, absolutely. We've had a great first half with the maturing of our sales staff, allowing for us to hit our sales targets without a lot of growth in the net number of BPAs, which was the plan as the year began. As we ramp up the number of BPAs, the 700 number, which should put us around 5% ahead of the year prior, so we'll be continuing to benefit from some of the sales efficiency gain. But we're investing, over the last half of the year, additional marketing dollars in both digital and also radio advertising that's proven to be effective in helping us get in front of qualified leads. So that investment is a little bit of insurance policy on hitting those sales targets over the balance of the year and continuing to build on the strong sales momentum we have in the company as we sit today. So it makes sense to both starting -- go head back to increasing the number of BPAs. That's your investment really in 2023 growth because it takes 12 to 18 months to train BPAs. So we'll be ramping up over the back half of this year and in the first half of next year, moving that BPA count up to the right number. And in the meantime, we're investing more to help support the success that our current trained BPAs are having.

Your next question comes from the line of Josh Vogel from Sidoti.

My first question, you've talked about increasing the client count. Last quarter, it was offset a little bit by a reduction in the average size of clients. So I was just curious, when we're looking at your wins and prospects pipeline today, what does the average client profile look like relative to the existing base?

Yes. So both the -- we saw, over the course of last year, about an 8% decline in the average coming out of COVID. And we've seen about half of that come back. And it's been interesting to watch how it's pretty consistent between the average size of the customer base and the prospect base. So I would say we're half to maybe 60% back on average size, both in the base, and it seems to be flowing through also in the prospect base. That means, to me, there's still some more to be gained there before we're back at that level. So there may be some more room there. But also, you often have to consider that businesses may have just kind of tightened their belt a little bit and found other efficiencies. So may not get back to that level. It would take new growth for new -- growth within their company to go beyond that.

Great, I appreciate those insights. And looking at how the state unemployment rates have come in below expectations you had at the beginning of the year, and now you're using these lower rates to pass along savings, to further support sales and retention. And this may be silly and I apologize, but if we see some lockdowns or extended stimulus efforts, can states change those tax rates on the fly, which could potentially squeeze you? Or can that only be done once a year at this point and any changes would be a 2022 event?

Yes. It would be highly unusual for there to be some kind of unemployment change midyear. It's not impossible but I would -- that'd be highly unusual. And so this is really, at this point, more about just looking ahead to 2022, adjusting for what we prepared for that didn't occur this year. We've adjusted for that in pricing. And we'll have a look at pricing going into 2022 with more insight into what's happening on the cost side. And the good news about unemployment tax is when you change the rates in the system, both on the pricing and cost side, those changes flow right through. So it's much easier to match the pricing and cost in the unemployment tax area.

Your next question comes from the line of Jeffrey Martin from ROTH Capital Partners.

Wanted to get a sense on the revenue per worksite employee, up pretty significantly, both on -- well, year-over-year, $175 or so. Could you help us kind of parse out what the sources of that are? Is it Workforce Acceleration being -- contribute within the gross profit dollars but it's not in the worksite employee count versus wage inflation and higher commissions versus maybe some additional ancillary features like your Software-as-a-Service platforms offer?

Yes. So if you're looking at the year-over-year increase for Q2 in that revenue per employee number, well, first, in total revenues, I think, it's about 19%. And then 7%, obviously, is the increase in worksite employee volumes so you're left with a 12% number. And we talked about the fact that 6% of that 12% was increase in pricing that we've been passing through, and the other 6% or so has to do with what was happening back in 2020 with the government stimulus and deferral of FICA payments. So you had a comparison issue, so you didn't have that money flowing through your revenue per employee last year and that has since been lessened significantly. And so -- and then we gave customer service fee credits back in Q2 of last year. And so that's the other piece of that revenue per employee number.

Okay, great. And then could you also speak to your client retention efforts? Are there any unique things you're doing today that you maybe weren't doing 1.5 years, 2 years ago pre pandemic?

Well, there are quite a few things down in more subtleties in the way that the processes that are going on there and the interactions with clients like I've mentioned. But as we look forward to this year in terms of the year-end transition, I'm really excited about it. I think we're in a good place right now in terms of how those processes have and continue to work. And this year, we don't have the kind of large or jumbo clients that could affect that type of retention or attrition like we had in the last couple of year-ends. So it's early but we feel good about the way retention is going to this point and optimistic about the balance of the year.

The next question that we have is from Mark Marcon from Baird.

Just wondering if you could talk a little bit about what you're seeing on a couple of gross cost elements. One, just the healthcare cost. How did that trend over the course of the quarter? I know there's a lag between when the costs are incurred and when you become fully aware of them. But what are you seeing just in terms of the sequential trends and particularly as it relates to those elective procedures and how you're thinking about it as the year unfolds? That's one aspect of it. And then the second aspect of it is, can you talk a little bit about the service infrastructure and what you're seeing in terms of interactions and length of interactions and how we should think about the service group expanding.

Sure. If we want to talk about the benefit side first, this was -- it's really interesting to watch the dynamics of the pandemic as they play out because as you know, there have been moving parts, a lot of moving parts and components that you have to really dig down on and monitor. And so you have some -- obviously, if you have deferral of care, that lowers your cost. If you have -- early in the pandemic, we had pharmacy costs go up dramatically because they were allowing people to buy more for extended periods, then you have COVID actual claim costs start to come through and testing costs. And of course, this year, you had the addition of vaccine costs. And then you have the potential for a deferral of care coming in or chronic care that was deferred. So we really dug in this quarter to look at the detail. And certainly, COVID costs were higher. If you remember, the peak of the COVID hospitalizations being early in the year and that plays out over -- as you mentioned, plays out over time, so certainly part of the first half story. We started to see some higher levels of things that relate to possible deferral of care like lab work and MRIs and things of that nature. But it's interesting because all of -- it's just little bits and pieces all over the map inside the benefit plan. So all in, a little higher than we would have expected or that we did expect but not outside of the range of our expectations. So for the full year, I think we've continued to be appropriately conservative, and that's why we continue to have a wider range around our earnings targets. So that's the benefit side. Now on the service side, it is definitely time to invest in service capacity based on the way service needs have continued at a high level, and our growth has accelerated faster than we originally budgeted. So it's important to make sure that we staff up effectively and make sure we maintain our unique service model with our clients, the unique level of care that we provide and the breadth, depth, breadth of services, depth of our services and the level of care is our distinguishing factor in the marketplace. And so that's definitely something that you've got to always manage when you make the investment to make sure that you're ready and maintain those service levels.

That's great. And then with regards to a couple of revenue factors, both in terms of what's occurred so far and then in addition to that going forward, can you talk a little bit about two dynamics? One, just the contribution and the expectations from Workforce Acceleration and the successes that you're seeing in Workforce Acceleration, particularly in certain regions where it might be working better and gaining a lot of traction. And then how should we factor in the lower tax rates with regards to pricing in the second half stimulus efforts, can states change of the year? In other words, when we can obviously see the worksite employee growth, but what sort of decline should we see from a pricing perspective in total relative to the first half as we model out the second half?

Yes. So on the unemployment tax, remember, most of your unemployment taxes are really incurred in the first quarter and second quarter. And it's -- even though we've adjusted the rates for the balance of the year, it will have a minimal effect on the actual collected allocations because a lot of people hit their limits for many of these taxes. But -- so it will also, though, lower the rates we'll be building in for next year, which will help us add new business. So that's -- we don't see that, that's going to have a dramatic effect on lowering our revenue for the balance of the year. Now the other part of your question is interesting because on the Workforce Administration, I felt like I needed to mention this quarter because what I'm really seeing is more of the Workforce Acceleration being an ingrained part of the sales process, and it's just more routinely becoming an option that is being presented and people are taking when they're not ready for the full Workforce Optimization step. That's what we were hoping for and it's beginning to happen. It's happening at a more acceptable rate. I think we'll continue to get adoption across our BPA base. And on a year-over-year basis, when I look at the total gross profit contribution, even though it's a small number, it has such potential. I felt like I needed to mention it because it really increased a lot in 12 months, and it has the potential to do that for a long time. We continue to see the same trends of adoption in the base. So it is a bright spot for the future and allows us to continue to drive these key factors like gross profit per worksite employee. And in our business, adjusted EBITDA per worksite employee is really the primary key metric about what we're -- what the business is about because that worksite employees are unit revenue, unit expense and unit of risk, so it's really how much cash flow you make per unit of risk that you take. So anything that drives that equation, we think has tremendous potential for the future.

Thank you. The Q&A is now closed. I would like to turn the call over back to back to Mr. Sarvadi. Please go ahead, sir.

Well, once again, I'd like to thank everybody for joining the call today. We appreciate your interest in the company and look forward to any follow-up questions for Doug in the coming days. And we look forward to seeing you at some point this fall. Thank you again, and we'll see you next quarter.

This concludes today's conference call. Thank you all for joining and you may now disconnect.