Good morning. My name is Jenny and I will be your conference operator today. I would like to welcome everyone to the Insperity Third Quarter 2022 Earnings Conference Call. All participants have been placed on a listen-only mode and the floor will be open for questions and comments after the presentation. At this time, I would like to introduce today's speakers. Joining us are Paul Sarvadi, Chairman of the Board and Chief Executive Officer, and Douglas Sharp, Executive Vice President, Finance, Chief Financial Officer and Treasurer. At this time, I'd like to turn the call over to Douglas Sharp. Doug, 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 behind our third quarter 2022 financial results. I will then comment on the key drivers behind our Q3 results and our plan over the remainder of the year. I will return to provide our financial guidance for the fourth quarter and an update to the full-year guidance and some high-level thoughts on 2023. 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 strong third quarter results in which we achieved a 38% increase in adjusted EPS and a 33% increase in adjusted EBITDA over Q3 of 2021 on 18% growth in the average number of paid worksite employees. Paid worksite employee growth was at the high end of our forecasted range and was driven by an improvement in both work site employees paid from new client sales and client retention coming in improved also compared to Q3 of the prior year. Net hiring in our client base continued, although as expected at lower levels than the prior year when many clients were rehiring employees as pandemic conditions improved. Third quarter gross profit increased 23% on the 18% growth in paid worksite employees and…

Thank you, Doug, and thank you all for joining our call. This morning, I'd like to cover three topics. First, I'll discuss the drivers of our excellent third quarter results in both growth and profitability. Second, I'll cover our recently launched fall selling and retention campaign and the expected effect on our strong finish to the year and starting point for 2023. And I'll finish with some comments about our long-term view in the face of macroeconomic uncertainty. Our outstanding Q3 performance was driven by solid sales and retention results and continued hiring in the client base, however, at a slower pace than the same period last year and the first half of this year. These drivers continued to be strong enough to generate an 18% increase in our year-over-year growth in our key metric of paid worksite employees. In addition to the continuing exceptional unit growth, our profitability increased more than 30% over the same period last year and adjusted EBITDA and EPS due to the combination of effective direct cost pricing and cost management and operating leverage in our business model. This quarter, new book workforce optimization sales increased 15% over 2021. This solid performance was accomplished by the combination of a 3% increase in trained BPAs and a greater than 11% improvement in sales efficiency. Mid-market sales of accounts with more than 150 worksite employees have been an excellent contributor this quarter and year-to-date. This is the third quarter in a row book to mid-market sales came in approximately 120% of our initial target – our internal target. This level of consistency reflects a strong relationship between our core sales team providing the lead flow and the mid-market sales team effectiveness closing accounts. The third important prong of our sales effort is the book sales of our…

Thanks, Paul. Now, let me update our guidance in which we are once again raising our 2022 earnings expectations based upon our recent outperformance and an improvement in our profitability outlook over the remainder of the year. As for worksite employee growth, as Paul just mentioned, we continued to experience nice momentum in both our sales and client retention. As for the third driver of growth, we continue to expect positive hiring in our client base, although, as anticipated, at a lower level than the robust hiring in Q4 of 2021. We have also considered the possible drag on hiring, given the current macroeconomic environment. This lower hiring in our base leads to a Q4 forecasts of average paid worksite employee growth in a range of 14.5% to 15.5%. And we combine with our performance over the previous three quarters, we expect full-year growth of about 18%. As for our earnings guidance, we now expect 2022 gross profit to be higher than that assumed in our prior forecast based upon our recent outperformance and positive trends in our pricing and direct costs. While we have recently experienced lower benefit costs associated with COVID-19, we continue to be somewhat cautious given the potential of further variants. We also continue to monitor utilization in our health plan, given not only the possible impact of the pandemic, but also some recent macro variables. These variables include any change in participant behavior, given the impact of the current economic environment and the possible inflationary impact on provider costs on our health care plan. As for our operating costs, we remain focused on investing in our sales, service capacity and technology as we position ourselves for growth in 2023 and beyond. So, when taking into account these factors, we have raised and narrowed our range…

[Operator Instructions]. Your first question is coming from Andrew Nicholas of William Blair.

A bunch of really good color there in the prepared remarks. I appreciate that. I wanted to hone in a little bit on the middle market. The mid-market momentum certainly seems like not only is that within your PEO business, but also Workforce Acceleration. Just wondering if there's anything that you're noticing that's changing structurally in terms of those clients and their willingness to outsource? Or if you would attribute more of that momentum to your own actions, your own sales motions and the like. Just trying to get a sense because it does certainly seem like that's picking up speed at a pretty good clip.

I really would say that the answer is kind of a combination of those two things. I do believe that the mid-market, as a result of going through the pandemic period, that class of business, size of the company has been an underserved part of the community. And the need for sophisticated HR solutions in the environment that they went through was really dramatic and very painful. And I also would say that it was obvious to those who are behind a lot of these mid-market companies, private equity firms, venture capitalists, board members, et cetera, and I really do believe there's been an awareness raised at the importance of having a sophisticated HR function and making sure that you have a people strategy in place for a company that size. So, that's kind of the market-based issue. Now, behind that, you have then our things we're doing specifically addressing that market. And we believe that we have, in terms of our offerings, both in the Workforce Optimization and Workforce Synchronization offerings to mid-market and then also what we call Workforce Acceleration, a traditional employment solution, we have great options for companies of this size to come on, to stay as a customer for life. We also, of course, in mid-market, a lot of our clients flow into that space because we're sophisticated helping companies grow. If you look back at our history, a lot of companies, significant companies started with us when they were small and left us eventually, but we were part of them growing from 20 or 30 employees to over 1,000 employees, like Netflix and HelloFresh and others on the list, BuzzFeed and others. So, we have a history of really understanding mid-market needs and how to help them grow as they hit the walls that you run into as you grow through that size. So it is a combination of the two things, the marketplace, reaction post-pandemic, and how we have really honed in and how we're serving those clients. Also, I would say, as I mentioned in my script, our core market of BPAs is in the marketplace are doing a great job of targeting the right mid-market customers and bringing lead flow into our mid-market sales team, our business performance consultants, and it's a more complicated sale and takes longer. So, those get passed off to our BPCs, and they're doing just a fantastic job of helping move these prospects through the process and evaluating how this will fit for them. And so, the last three quarters, having that consistent performance, well above our budget, is a good sign.

For my follow-up, I just wanted to ask about the competitiveness of the market broadly. Are you running into competitors more frequently today than you were a couple of years ago in terms of those sales conversations? Do you still feel like that there's a good amount of whitespace for adding new clients, and if there's any comments you could make, from a competitive perspective, on pricing, that would be helpful as well.

We've continued to see competition in most of the sales interactions that we have, but we also continue to see that, when a customer fits our client profile, it's such a good fit and it's easier for us to win those situations. And so, customers that are really connected to the role that people play in the business, and they have a definitive getting better agenda and they're trying to take the company to the next level, we're that complete outsourced solution, a premium service offering, that brings in a lot of capability for them to accomplish what they want to accomplish. So, I'm actually glad that there's more awareness of the PEO industry at large. I think the demand and receptivity is higher than I've ever seen it out there. But there's still a tremendous amount of greenfield open space. And the whole industry is still under 10% of the total marketplace. So, we've got a long way to go, and we're in a great position in the competitive environment.

Your next question is coming from Mark Marcon of Robert W. Baird & Company.

Paul and Doug, congratulations on a strong quarter. And obviously, a strong year and multiple years. I'm wondering, can you talk a little bit about your expectations with regards to benefit cost trends? And what did you see this quarter, both in terms of utilization of the health benefits and the inflation rate? And then, how are you thinking about that for next year? What's UNH telling you?

Let me give big picture, and I'll let Doug fill in there. But, obviously, we're still in the post COVID period, who knows exactly what phase we're in. And so, we've been conservative in possibility of variants, et cetera. The results were better, so we've seen a little less of a trend rate than what we had budgeted in and conservatively and appropriately. But I also think, as you look in the future, we still have to be conservative because the inflation will also run through the health care world as contracts are renewed by carriers, when they renew contracts over the coming year. So, again, as you may know, we keep track of the ongoing cost on a rolling 12-month basis every month, evaluating the trend, direction and all the pieces of it. So, we keep very close track on it and we also have a lot of communication with United and our other carriers and keep track of it. So, we're happy that this year is working out a little better than expected. And if you look back at our whole history now for, I don't know how many years, we're still under 4% annual increase in our fees to clients in this area, our allocations and so that really demonstrates the effectiveness of trying to keep an eye on this for clients and keeping it as shallow as possible without a lot of volatility to it. And our teams have been able to do that to this point. Doug, do you have other comments?

Yeah, I think as I just mentioned in Q3, we saw a low utilization, including COVID costs, particularly related to the prior year. As we moved to Q4, we still, I think, are somewhat cautious relative to any further variants that may occur. But also, as I mentioned, in this type of macroenvironment, where people are being pressured a little bit on their discretionary income, where they try to take care of things before in this fourth quarter before they hit your deductibles going into next year. So, we've also contemplated that occurring. And increased costs in provider costs, although, as Paul mentioned, that those contracts come up for renewal, they're usually multi-year contracts. So we'll be looking at that going forward. I think one thing to point out in our Q4, relative to Q4 of the prior year, Q4 of the prior year included fairly significant COVID costs because you had delta winding off, which had more hospitalizations associated with it, you also had Omicron coming on, you had more testings and vaccines during then. So, fourth quarter had a very high level. And when you make the comparisons to this year's fourth quarter, you would expect it to go down, although I would repeat, we're still continuing to be cautious.

One last thing I'd like to add is just – the other thing we look at going forward always on our benefit programs is just any tweaking of the plan to plan design changes, we always follow what's happening on the demographics in our organization and how that drives the trends. But we also have a very – announced earlier this year, a new contract with UnitedHealthcare. And we're able to also gain some administrative efficiencies as we get larger and some lower costs. So with the solid growth we're having, that also plays into our outlook in the coming years.

Can you just mention what percentage of the worksite employees are actually signing up and how that has trended? And then, lastly, any differences from a regional perspective, just in terms of the WSEE growth? Are you seeing increased adoption of the PEO concept in some of the less developed markets?

As far as the adoption, we're seeing strong demand across the board. And I think that's more about the backdrop of this realization of how you have to take care of your people to make sure your company is successful. And so, we've seen good growth across. If we look at our different markets that we've established, and again, added a number of markets this year, we'll do that the same next year. It's really the same model we put in place, we go after the same target customers. And so, we haven't seen a lot of variation market by market. We did during the downturn during the pandemic because of some places being shut down, some not and things of that nature. But just as the big picture, it really comes down to execution in every market, and the great managers that we have to get the job done, and you have the right BPAs, it all works well.

I think your other question was on the participation of our benefit participants as a percentage of the worksite employees. If you compare to where we were in 2021, it's just a couple of percent down from that. A lot of it has to do with client mix and how many seasonal health do we have at a particular time or part time, helping out at a particular time, which influences that participation on benefits, but it's come down some. But I wouldn't say by any material amount.

Your next question is coming from Tobey Sommer of Truist Securities.

One of the benefits of your business model and focused customer, the dynamism that the small business brings you, you get a direct benefit through the model as they add employees. Could you speak to sort of the range of contribution to worksite employee growth that you've gotten from your customers' job growth? And maybe I'm assuming that the first half of this year would have been towards some sort of high end of historic range, at least in recent memory? And how does that compare to what you assume in the fourth quarter? And if I'm right, like, in the early part of the pandemic, you said down 6% in a couple months? If you can kind of frame that for us, that'd be helpful.

If you think about kind of a net effect from client hiring in a normal year, we would look at around 4%, 5%, maybe 6% – 4% to 6%, depending on the economic climate. What you had in the shutdown from the pandemic and then the rehiring effect, we had to go all the way up to 10% in periods. Now, what we're looking at is if things have slowed down or normalized more, you've had the tight labor market, that also kind of is somewhat of a drag, but that's actually an advantage for our clients because when you have sophisticated HR functions, you're able to recruit more effectively. So, we've been able to support our clients in that way. But we're looking at that slowdown, at this point, to where the fourth quarter will be about half of what it was, say, the fourth quarter last year when you had the rapid growth from both kind of coming out of the pandemic and the rehiring that was going on. So, hopefully, that gives you a little bit more flavor.

Your next question is coming from Jeff Martin of ROTH Capital.

Wanted to get a sense in terms of gross profit per worksite employee next year? What are some of the things that could impact, whether that's up or down relative to this year? I know state unemployment taxes was a tailwind this year. You've got health care that probably was a bit of a tailwind, as well as workers' comp. But just if you could give us some high level year-over-year comparison, things to consider when we're modeling out that for next year.

Let me just give, generally speaking, kind of how we look at it. I don't think we're ready to give any detailed discussion about that. But we always start the year out more conservatively because a lot of what we have developed over the course of the year, like I mentioned in my script, this year, when you manage the costs throughout the year, for example, in the workers' comp area, we're closing claims and that turns into positive adjustments in our financial picture. And the other things that we do to manage the cost, even on the unemployment side and even on the benefits side. So, I would say, as I sit here today, we will be conservative as the year begins. But we have things kind of going both directions for next year. I mentioned that we've grown a lot. So we'll have some positives on the benefit side, from the administrative cost side. We've been doing a good job of our pricing on all of the allocations to stay in touch with what we've seen out there as the inflation rate. So, I would say we're comfortable, but we always start out conservatively. I don't know of a year where we budgeted a number that was where we ended up the prior year. It's always lower because that's the appropriate way to do it in this business.

My second question is on lead generation. It sounds like you're getting the effectiveness out of your out advertising spend. I was curious if you could elaborate on the decision to continue to invest there over the near future.

We did invest a considerable amount this year, more than we originally budgeted. As the year progressed, we invested heavily in the spring and we were so successful there in producing leads for the BPAs that we decided to pile on again in the fall, and that has gone well. We're seeing double-digit growth in both discovery calls coming out of the marketing and in our business promotion efforts. And we also have seen double-digit growth in the closed worksite employees from that deal. We also see the closing rate is significantly better. And so, when a customer has raised their hand with interest, that makes sense that it's more likely they're going to close. So we will continue at these rates. It makes sense because you're basically fueling the growth through providing enough leads to BPAs. We know that the BPAs' best time use is in front of a client, not sitting there trying to get an appointment. So, the more we can get for them, the better they still have to do. Some of that on their own, of course, but the more we can do, the better.

Thank you very much. We appear to have no further questions in the queue. I will now hand back over to Paul Sarvadi for any closing remarks.

Very good. Well, thank you all for participating in our call today. We really appreciate it. We're in a great position right now to look at finishing the year strong and getting in a position for double-digit growth next year. That's our focus in our fall selling and retention campaign. And we look forward to continuing to produce solid results for our stakeholders and, of course, our shareholders. So thank you all once again, and we'll talk to you next time.

Thank you, ladies and gentlemen. This does conclude today's conference call. You may disconnect your phone lines at this time and have a wonderful day. Thank you for your participation.