Good morning. My name is Paul and I will be your conference operator today. I would like to welcome everyone to the Insperity Fourth Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] Please note this conference is being recorded. At this time, I would like to introduce today's speakers. Joining us are Paul Sarvadi, chair of the board -- 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. I'm sure you've seen the exciting news announcing our strategic partnership with Workday released this morning. Our call today will be largely focused on the strategic partnership and how it fits into our long-term plan. However, we will begin by discussing the results of our fourth quarter and full-year 2023 results and end the call with a discussion of our outlook for 2024, which includes the strategic partnership with Workday. Now, before I 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 reconciliation 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 $0.75 in adjusted EPS and $56 million of adjusted EBITDA, both above our expectations. our growth in paid worksite employees continued to be impacted by macroeconomic headwinds, particularly the significant decline in our hiring base over the past year. In fact, minimal hiring in our clients -- client base experienced over the first half of 2023 turned into a low level of net reductions in the latter half. This contributed to paid worksite employee growth in Q4 of 2.5%, slightly below the low end of our forecasted range. In a few minutes, Paul and I will comment further on the outcome of our recent sales campaign and heavy client renewal period leading into our 2024 growth outlook. Fourth quarter gross profit exceeded our expectations on…

Thank you, Doug and thank you all for joining our call. Today is a pivotal day in the 38-year history of Insperity with the announcement of our exclusive strategic partnership with Workday. In my view, this could be a game changer in the marketplace, and at the same time, significantly elevate the potential trajectory of our company driving long-term growth, profitability and value creation for Insperity. The focus of my comments today will be to explain the nature of this agreement, including how and why I believe this is so monumental. I'll also provide context around how this relationship plays into our long-term strategy and our outlook for 2024 based upon our 2023 performance and the business economic environment. Let's begin with the nature of this strategic partnership and why it has the potential to be so significant for Insperity and Workday, and most importantly, small and mid-sized companies in the marketplace. Through this strategic partnership, Workday and Insperity are committed to jointly developing marketing, selling and supporting the preeminent solution for targeted small and medium-sized businesses that combines Workday's HR technology with Insperity's HR services into a new exclusive Insperity PEO offering. we expect to offer this unique combined solution to the target market for a significantly less upfront capital cost, ongoing expense, complexity and implementation time than currently available to those businesses. By addressing these issues, we believe this new solution has the potential to be competitively disruptive. We believe that our joint solution will provide the target market of growing small and mid-sized businesses with as few as 100 employees with a new scalable capability with the potential to greatly enhance their likelihood, degree and speed of success. The complementary strength of both firms directed toward this target market creates a powerful opportunity. Historically, Workday disrupted the…

Thanks, Paul. Now, before I provide the specifics behind our 2024 guidance, be aware that this guidance reflects both the expected performance of our core operations, as well as our estimated costs associated with the Workday strategic partnership. As Paul mentioned over the course of 2024, we will be performing significant development work to offer a preeminent technology and service solution to our mid-market clients. Most costs associated with these development efforts will be reflected as expense and not -- and therefore not capitalize. This will obviously have a significant impact on our forecasted 2024 earnings as we collaborate with Workday through the first quarter to further solidify the scope of the effort for this strategic partnership. our preliminary estimate of the cost that we use for this guidance may be revised. Any impact of the partnership on revenues in 2024 would primarily be related to the lead flow of our Workforce Optimization sales in the back half of the year. Now, as for the details of our guidance, our worksite employee growth is largely dictated by our January 2024 starting point. As Paul just mentioned, our client retention rate was similar to 2023 during our heavy client renewal period, excluding the impact of a small number of large accounts. Additionally, the current macroeconomic factors and generally uncertainty in the marketplace led to our client base experiencing net reduction in employees over the second half of 2023 continuing into January 2024. these factors were the primary contributors to a lower starting point going into the year and reduced our full-year 2024 growth rate by about 4%, which is about $40 million in gross profit. As for the remainder of the year, we are assuming gradual improvement and more certainty in the macroeconomic environment, and when combined with the higher average…

Thank you. [Operator Instructions] And the first question today is coming from Andrew Nicholas from William Blair. Andrew, your line is live.

Hi, good morning. Thanks Doug and Paul for taking my questions. I'll start with the Workday partnership, a ton of detail in the prepared remarks. So admittedly, still digesting a lot of it. but just for a point of clarification, in terms of the target market, you mentioned the target market a couple of times there, is it -- are we to take this to mean it applies to clients that are over a certain size? I think at some point you said a hundred employees, or can you just kind of flesh out where like the legacy Workforce Optimization product is expected to end and where the new Workday collaboration is expected to begin realizing that it's not an explicit number, but conceptually just help us kind of bifurcate the opportunities?

Yes, absolutely. That's a great question and let me provide some clarification there. As you're aware today, our target market is clients with as few as 10 employees, and we've had clients with as many as 5,000. And what we have experienced, as I mentioned about our success penalty is when clients are either fast growing and/or grow to a certain size, our HCM technology is tremendous, but it's really more designed for small businesses at the lower end of the scale, really for the -- maybe 100 or less or up to 200 or 300. it's still great, but when companies get to a certain point are growing in a certain way, they actually need more workflow and other elements, more features and functionality that Workday provides better than anyone else in the world. And so putting our incredible service, which is also critical for those companies all the way up to thousands of employees, they need a sophisticated HR department helping them not only use the software, but helping them use the output from the software to run the company better and more effectively. So, we believe that this is going to be an excellent solution for growing companies as small as a 100 employees that fit that profile, and then all the way up to the very high end of whatever we've developed before into the thousands of employees. So, that's a great target market for this. And what it really means is that from our perspective, we're actually going to have a product that fits better for the higher end of our market, even opens us up a little bit and for our partner Workday has now an opportunity to go to a new market down market from anything they've ever gone before. And clients in this target market are going to have that opportunity beyond this service and have the best of both worlds at a very earlier stage in their process and journey of growing their business.

Got it. And I think Paul, you outlined the potential for this partnership to improve all three of the financial drivers of the key financial drivers, new sales, client retention pricing, I recognize the benefits. How should we think about the potential for this to cannibalize some of the mid-market business? And if that's how that went into your decision to come to this agreement?

Yes, I really don't see that as an issue kind of in any way, shape or form. Obviously, a part of our success penalty is companies moving to a different technology solution and this stems that tied in a huge way or -- and at least for sure delays it for a significant length of time. And as I mentioned in the script, even if at some point if they do want their own instance, we're more than happy to make sure that that's the correct move for them. But in the future, we'll be able to provide services to that company. It will just change our relationship with them. They'll still be a customer for life, customer of ours provided they want us to provide the enablement and deployment services and ongoing support and they possibly maybe want other HR services as well that they've been using with us. So, this definitely extends that retention in a dramatic way.

Yes, I guess, I guess what I'm trying to get at is if -- I realize on retention, like from a client retention percentage perspective, that would be helpful. but I'm wondering if someone transitioning maybe a little bit earlier than they previously had credit [ph] retention from like a revenue retention perspective. I realize that we're still pretty early in getting this all set up, but that was the genesis of my question.

No, when they go on this new solution, it actually increases our revenues. So, we have our customers now, in fact, we'll be going out to our customer base explaining this the new solution that's coming, help them figure out the comparison between what they're using today and what they have the potential to use. And we will prioritize who will be in the queue to be moving from one service to the other. But when someone goes from our current service to the new service, it will increase revenues and retain the business.

All right, that, that's helpful to understand. I didn't know how much of that increased revenue would go workday's way. Thanks a lot.

Thank you. The next question is coming from Mark Marcon from Baird. Mark, your line is live.

Hey, Paul and Doug. I mean, really exciting announcement. In terms of the venture, when do you anticipate that you would actually be able to actually market and actually get this joint venture installed with clients? Is this like two years out, three years out? How should we think about that just in terms of the timing?

Yes. We don't have the precise time calculated at this point. We do have the milestones that have to be achieved to get to that point. Over this first quarter, our development teams on both sides will be working diligently to detail out and complete statements of work et cetera to figure out the launch date. Now, I have a range of that expectations not near the three-year time period you just referred to. but we don't have it locked down yet. And therefore, we're going to have the work the investor and Analyst Day in May and hopefully have a lot more information about that at this point -- at that point. However, we need to understand that the effect of this partnership starts today, well before that launch date. Because simply, I believe that first of all, our ability to have -- through the relationship, as I mentioned about the lead flow. This is going to be a dramatic increase in the number of opportunities we have for our sales team to sell what we have today and put people in line for what's coming on that launch date. I believe companies of the mid-market size are going to look at this and say, wow, man, I can come on to this solution today and be in line to even step up to the other solution once the launch date comes on. And we will prioritize current customers to make that move.

Okay, great. And then with regards to -- so you mentioned three years is far too long. Can you give us a sense for like -- and I fully appreciate the lead generation's going to start right away? The marketing is going to start away right away. The halo effect is going to start right away. But what's an outside, like what's the longest that you would anticipate before you could actually bring it to market?

I'd love to have that conversation specifically. but between our two partners, we want to have it locked down. let's realize this is a significant development effort. To do something late this year would be a crazy possibility. Another year after that, that would be highly more likely. So, somewhere in between is the most likely, but we're going to lock that down.

Got it. And Paul, for what it's worth, I mean, Baird's a Workday shop. So, we -- I think, as part of that whole implementation process and understand it, and, and I do follow Workday formally. So, appreciate what a great partnership they could be. With regards to the solutions that you're going to end up offering and the pricing; from a solution perspective, could you actually take the partnership to an even higher level in terms of offering the full suite? There's obviously all sorts of different modules that Workday offers above and beyond purely HCM modules. Could this become a really comprehensive business solution for these fast-growing companies that you were servicing?

That's a great question also. Workday has an incredible financial services offering in the marketplace as well. That is very perfectly integrated with the HCM solution. We have talked about the long term. I think both of our companies believe that the smaller firms that fit the target market for our new solution are also very, very good candidates for their other solution. But we got to crawl before we walk. We got to -- we want to get this one right launched and especially deployed, and enabled properly, because that is a huge competitive advantage and a disruptor, provided we get that right. We bring on our customers today with our implementation team. It takes two months or less to bring on large clients. Bringing them on is more like adding the thousand employees to our system than it is like doing a full implementation of a new technology. As you know, since you just said you have been involved in that, typically it takes a year or more to plan and then -- and also a significant amount of time to actually configure it's an 18-month or more process to go onto what we'll be offering. And our goal is what we've learned from how we do it and how the system works, how we're going to build this interface between the two to make it work well. We want to be able to bring those customers on for a lot less of capital cost, a lot less time, a lot less complexity and similar to how we bring on customers now. that is powerful and I believe will make an incredible the incredible benefit to the target market.

Thank you. The next question is coming from Tobey Sommer from Truist. Tobey, your line is live.

Thank you, a lot to digest today. So, exciting a second day for you at Insperity. Could you talk about the genesis of how you came together with Workday and arrived at this conclusion? And maybe, what it means for you, Paul, it sounds like, you've been a clearly a lifer at Insperity, and this is the equivalent of signing up for another big chunk of years to keep going to get to the other side of this and see sort of experience all the benefits that it can drive. I'll pause there and let you address that.

Yes. I could tell you that I've had this on my mind for a number of years, many years. But I waited for the right time to have this conversation at the very highest level of workday. And what I waited for was for us to be in a position to be absolutely ready for us to become a client for our 4,300-employee company. And I have to say that my first phone call to them was, I think back in late October, early November, another couple phone calls. We had our first face-to-face meeting in the middle of December. But we had -- we already had work groups that worked issues about feasibility before we even had that mid-December meeting. at that meeting, it was obvious the cultural connection and fit, and the potential advantage to both firms, and even more so both companies with the customer focus to understand what a powerful solution we could provide for these underserved companies in this space. And from that day forward, it has been 24/7 to get to the point, where we know we can do this, and we have worked through and even ended up signing an agreement. It's been an incredible thing. And it does, as you mentioned it is a powerful new starting point for what I believe has been an incredible run already for Insperity. We're a great company with a great business model, great foundation, but what this really does is leverage the strengths of both companies in a powerful way for clients. What that means to me as a founder, as a large investor of this company, this guy's the limit here. And I'm sorry, I'm being hit a little bit dramatic here, but this is so powerful and I'm -- I can't wait to work on it day by day to get us where it can take us.

And if we pull back the aperture and sort of look at once you've got this up and running, does it open up new customer sets to Insperity? Or when you get to the other side, do you envision remaining a premium service provider focused on primarily white collar, small and medium-sized businesses?

No, I do believe it does expand the market for both firms, both sides of company. But what's really interesting also is that both of these companies are premium brands in their space. And the target customer, not only fits a demographic profile, of course, theirs is at the high end of the -- or at the larger companies. Ours is the smaller companies in the middle is the target for this joint solution. But oh man, I lost my thought. What did I say? What's that? Oh, but yes, so the demographic profile is not the end of the game. What's really interesting is the psychographic profile of our target market, the way we both go to market and who we're trying to target as our customers. That psychographic profile is also a tight fit. So, we are both premium services and this we believe is going to be the preeminent solution in the space. And so again, this does -- this expands the target market for both firms.

If I could turn it to get a sneak one in here just on '24, in terms of healthcare trends pricing and opportunity. What are you seeing unfolding, because we've heard an awful lot of moving parts from managed care companies and hospitals with activity levels running, running pretty high?

Yes. I mean, obviously, drug costs that are increasing quite a bit, particularly those specialty drugs. Obviously as part of our budgeting, we have constant conversation with UnitedHealthcare and seeing what they're looking at both in, on the drug side and the medical side. As you would expect, we also have to contemplate large claim activity. So, sort of start at the top, we talked about in my prepared remarks, a trend of 4.5% to 6% trend. Well, remember that trend is on top of what we would feel was probably an elevated trend in 2023 with that Q2 significant level of large claim activity. As far as large claims, we expect them to still be somewhat elevated relative to history prior to 2023. So not quite as high. We don't expect as 2023, but still we expect an elevated level of large claims in that forecast of 4.5% to 6% trend. Okay? But we have definitely also considered the more utilization of the specialty drugs along with the increased cost in those drugs. But I think the other thing to point out is we exited '23, even with the Q2 elevated costs with pricing and costs aligned. That's what our objective is all about. We're in a good position going into this year to maintain that for all of our direct costs. So, we let them feel like we're in good shape there. And I think that's one of the reasons why in the guidance sections of my script and my prepared remarks, we think our budget for this year for '24 at a total gross profit per employee level, we're starting a year looking somewhat similar to 2023.

Thank you. And the next question is coming from Jeff Martin from Roth MKM. Jeff, your line is live. Jeff, your line is live.

You're hearing me okay.

Yes, go ahead, Jeff.

All right. I was on mute there. Okay, great. Good morning, Doug and Paul. Congratulations on the exclusive partnership. Obviously, a lot going on here as everyone's echoed. But just was curious if this replaces your current technology stack and as a result, you lead to lower future capital expenditure?

That's a good question. also now, keep in mind I mentioned in the remarks that our current system, which involves what we call AIMS, which is our PEO enterprise system and then what we call Premier, which is the client-facing component. Both of those that we have today is what serves all of our customers. But in the future, we expect many of our smallest customers and the small end of our client base, that solution will continue to be for them. I'm not saying that could never have some interaction in this -- the way we are planning this new solution, but for the foreseeable future, we should think of that entire system being continuing on the way it is for the smaller end of our client base and for all the base until we have the new solution launched. However, I think over the long run, it also means that if you look at our development, for example, on the client facing, we have a huge list of what we would like to add. but no matter how long we spend doing it, we would never catch up to Workday's solution. And so what will happen is we will be able to divert resources once this is out there, we'll have some resources on the joint solution and our -- but our resources that can be diverted back or more staying focused on our other solutions. I do think it's going to much more efficient for us and allow us to not have to continually be chasing that those features and functionality.

Okay, great. And then I'm going to ask a three-part question here. It's all intertwined, but just curious, you give the low end of the spectrum in terms of client size. What is the upper band of that? Two, what is the -- what do you see as the biggest value proposition for clients? And then three, will clients have the option to use the traditional Workforce Optimization versus the combined offering with Workday?

Some of those questions we're going to be thinking through and talking through with our clients, with our prospects to further lock down some of these. And I'm sure we'll be addressing some of that feedback at our investor-analyst day in May. But I can tell you that the four companies that for whichever reason the size that they are now, or their growth rate, even if they're down to in the 100-employee range, but they are destined to be larger. those customers will have an opportunity to have Workforce Optimization at a new level with Workday HCM as the client facing technology. And what happens for those clients is they will literally get the best of both worlds. They get the leading technology and the leading HR service experience in one package, and that optimizes their ability to their likelihood, degree and speed of success. So, I think that's the way they'll see it is a powerful combination. So, but the other thing they will be weighing out is if there's someone who wants and knows their need more technology to have a more effective people strategy, they will be able to see that going this way for a smaller firm, many times the capital commitment, the ongoing expense and the length of time to get there. And this is important to understand some, many times companies that are smaller don't literally have the HR expertise to even envision how they want to configure their solution most effectively. And so a lot of times it misses the mark for the company. In our case, we will be bringing that expertise to the table in a fashion, where they won't have near the upfront cost, won't have the same level of ongoing subscription type costs. And because again, this is,…

Thank you. And that does conclude today's Q&A. I will now like to turn the call back over to Mr. Sarvadi for closing remarks.

Well, once again, I just want to say how much we appreciate everybody joining us today. As I said at the beginning, it's a monumental day for us and we're just excited about the potential to elevate the trajectory of our company driving long-term growth, profitability, and of course, value creation for all of us. So, thank you for participating today. We look forward to our next quarterly update to give you more discussion of the milestones and also the Investor-Analyst Day, which will happen in the last half of May. Thank you, again.

Thank you. This does conclude today's conference. You may disconnect your lines at this time. Thank you for your participation.