Good morning. My name is Jenny, and I will be your conference operator today. I would like to welcome everyone to the Insperity First Quarter 2024 Earnings Conference Call. [Operator Instructions] Please note conference is being recorded. 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 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 behind our first quarter 2024 financial results. Paul will then comment on our recent accomplishments, including the progress we have made in implementing our Workday strategic partnership solution. I will return to provide our financial guidance for the second 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 more detailed discussions 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 first quarter results in which we reported earnings above the high end of our guidance. We reported Q1 adjusted EBITDA of $142 million and adjusted earnings per share of $2.27. These results reflect the average number of paid worksite employees within the range of our forecast, continued strong pricing, lower-than-expected benefit costs and operating expenses in line with our budget. As for our growth metric, the average number of paid worksite employees in Q1 was approximately 304,000, a decline of less than 1% when compared to Q1 of 2023. As you may recall from our prior earnings call, this slight decline was expected due to net layoffs in our client base over the second half of 2023 into January of 2024 and the loss of a handful…

Thank you, Doug, and thank you all for joining our call. Today, I'll begin with comments on our solid first quarter performance, including initiatives supporting our plans for future growth. Second, I'll provide insights from our view of the economic climate and the reactions within the small and midsized business community. Third, I'll provide an update on the initiation of our new strategic partnership with Workday and provide a glimpse into our upcoming Investor Day. Overall, we had an excellent quarter, exceeding the high end of our adjusted EBITDA range against the backdrop of an economic slowdown. Our fundamentals are solid, and we expect our plan for the balance of the year will help mitigate the effects of the economic climate on our target small- to medium-sized business clients. New book sales for Workforce Optimization solution were strong in the first quarter. We experienced a double-digit increase over the same period last year, reflecting the growth of our BPA team and an improvement in closing rates driving sales efficiency. This improvement reflects the experience gained over the last year by business performance advisers and effective incentives for prospective clients and the sales team. Booked sales by our mid-market Business Performance Consultants was the highlight of the quarter. They continued their excellent performance since the last half of last year, exceeding budget. Sales of our larger accounts have become more consistent over the last year. The steady flow from BPA's funneling qualified leads into this process and our growing number of BPCs is the reason for this improvement. This is well timed for our new Workday strategic partnership I will discuss in a few minutes. We also had a strong quarter in our traditional Employment Workforce Acceleration business as our WX employee count on this service increased 21% over the same…

Thanks, Paul. Now let me provide our Q2 guidance and an update to our full year 2024 guidance. While we outperformed our earnings guidance in Q1. We are forecasting adjusted EBITDA over the remainder of the year consistent with our initial guidance. We are now thinking uncertainty and weakness in the macroeconomic environment could persist over the remainder of the year. Based upon these factors and our starting point going into Q2, we have reduced our 2024 outlook for worksite employee growth to a range of flat to 2%. However, we expect the impact of this lower growth rate on our full year earnings to be mostly offset by continued strong pricing and slightly lower direct costs and operating expenses. We're now forecasting full year 2024 adjusted EBITDA in a range of $254 million to $293 million. While we have lowered our overall operating expenses from our initial budget, we expect 2024 operating costs relating to our Workday strategic partnership to remain in the neighborhood of $60 million. As for adjusted EPS, we are now forecasting full year 2024 in a range of $3.17 to $3.90. This revised guidance assumes an increase in our 2024 effective income tax rate from 26% to 29% primarily due to less tax benefit on employee stock awards vesting in Q1, as I have previously mentioned. As for Q2, we are forecasting paid worksite employees to remain down by about 1% compared to Q2 of 2023. As for Q2 earnings, we are forecasting adjusted EBITDA in a range of $53 million to $66 million and adjusted EPS from $0.61 to $0.83. This guidance considers our typical quarterly earnings pattern where our Q1 results are typically higher than subsequent quarters as we are in a higher level of payroll tax surplus prior to worksite employees reaching their taxable wage limits, and benefit costs typically are lower in Q1 and step over -- over step up over the remainder of the year as deductibles are met. Now at this time, I'd like to open up the call for questions.

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

Great. I wanted to start with a couple of questions on the Workday partnership. Paul, a lot of really good color here as you work through that partnership for the first couple of months. I guess two questions specifically. One, are there any kind of early signs on the productivity or opportunity around the sales leads that Workday is funneling your way? And then second, and I apologize if I missed it in your prepared remarks, but do you have any additional insight or detail on the expected time line? Now that you've done, it sounds like, a pretty considerable amount of planning work and some implementation and integration conversations.

Yes. Thank you for the question. That's great. We -- I'll start with your second question first. But we are not ready yet to actually pin down a detailed launch date, if you will. But we are certainly well down the road in terms of looking at all the elements of what has to happen for the launch to occur, and are comfortable that it's within an acceptable time frame within the range that we had anticipated when we put the deal down. So we -- again, this is the kind of thing that gets more and more clear literally on a week-to-week basis. And the teams are really working super together, and they're making great progress at a really appropriate rate, that I think it's important that both of our companies are looking at this as a product launch. So it's a different frame of reference on how we're approaching getting to the finish line. And so making sure that we do that in a product that fully fits what we're designing, but getting there as quickly as possible to take advantage of the market opportunity that's out there. So I can't give you a time frame yet, but we will go into more detail about what we're doing here in just a couple of weeks at our Investor Day meeting, and you'll have a better sense of that when we get to that. Now also, it's very exciting on the lead front. As I mentioned last quarter, our go-to-market efforts would start with a whole planning process around lead flow back and forth between the two companies. The focus has really been on the process and what it takes to make sure that these are not just dumping a bunch of names from one group to the other, but rather a warm handoff. So keep in mind that, just lead flow, I'd put that in the co-marketing category. But we want people to land on a site that as some co-branding in it. We want to make sure that, as leads are handled by both firms, if there's a co-selling component where there's dialogue between companies about specific accounts, and appropriate warm handoffs going on. So we're well down that road. There's also technology work that has been advanced to get to the point where we can literally flip the switch and have this stuff going. So our original plan was for this to get planned out in that first quarter or so, get implemented within that second period in a way that those leads flow and we start to see -- literally start to see sales results in the last half of the year. And I feel very good that we're on target for that.

Great. That's really helpful. And then I guess for my second question, I wanted to revert back to the core business. It does sound like net hiring expectations have come in a bit versus maybe what you expected at the beginning of the year with your initial guidance. If you could just kind of clarify or quantify that, that would be helpful. And then also, what is the assumption now on the worksite employee front in terms of the back half of the year? I think even at the low end of your revised worksite employee growth guidance, there's a decent amount of sequential improvement baked in, in the second half. So is that a function of some of those warm leads converting from Workday? Is it an expectation that the macro environment stabilizes or even improved some? Any additional context on kind of macro assumptions embedded in the worksite employee guidance would be super helpful.

Thank you for that question. It really is more the simple fact of the way the business model at actually works in terms of how sales flow throughout the year. Each quarter, our sales -- our budget and what we sell every quarter goes up. And the retention goes up throughout the year once you get past that first quarter, which we already got passed. So we have really built in this outlook that I discussed that we're seeing in the client base, where even though they're optimistic on the sentiment side, they are not doing what aligns with that optimism. They have battened down the hatches. So we built that into our going forward, that we're not expecting to see, in an election year, with that as a backdrop. So we're not assuming any benefit to speak of from the net change in existing, in the client base. And actually, I'm not really budgeting a huge upside from even the lead flow because I just don't think it's prudent to take a new strategy like that and build stuff in when you don't -- really haven't done it yet. I'm optimistic about that. But this forecast is really based on some benefit from that, but more just the continued execution of this BPA team that is further down on their effectiveness that's already evidenced in the sales efficiency in the first quarter, and the work that we're doing to make sure we have good lead flow. Our leads, I mentioned from our own marketing efforts, were strong in the quarter. Some of that backdrop of the economic climate affected some of the appointment setting. So we're working in other ways to make sure we are effective in that area, especially that [ ABX ] system, that we've got to actually assign specific accounts and work specific relationships to target high-value accounts that are more likely to be more ready to visit and to potentially define a solution. So that should help you with that approach. What happens in our business model, if sales increase throughout the year, retention is low the balance of the year. So that's what's really driving the quarter-to-quarter growth.

Your next question is coming from Tobey Sommer of Truist.

How do you compare and contrast the seemingly mixed signals you made about higher mid-market client turnover around the year-end transition with what you described to sort of enhance new sales momentum in that category over the last few quarters?

Yes. I think if you go back to kind of our discussion from last quarter, it was 7 large accounts that moved at the end of the year. 4 of those moved specifically for technology reasons, and so it's our success penalty. And another 2 of those were due to just the business is being sold. So your question of contrasting the two don't really connect that well. We know that we're providing a powerfully good service to an underserved community now. And we believe that once we have this new option for -- this new solution is a new option for these clients in this category, it's going to secure them for a much longer period of time. And in fact, I really have this mindset around ultimate scalability in both technology and service. That's what we're about to bring to the market. And even the dialogue with all these customers over the first quarter, we've got prospects in the pipeline that are, already, their -- not only their interest is elevated. But we'll talk more about this in a couple of weeks, some of the interaction with not just the business owner or the chief financial officer, but even the technology people and the HR people within these larger accounts. Their energy around the potential of this solution is very high. And so I know we've piqued the interest, even just among the few that we've gotten now to put this in front of. But I see this as a really dramatic change in our ultimate issue around both sales and retention of accounts in that target.

Makes a lot of sense. So is it fair to say that the customers that churned were probably larger than the new sales achieved in recent quarters? Is it kind of a size difference?

Yes, on average, of course, these were accounts that we brought on at a smaller size and grew them substantially over half a dozen years or more. And they ended up -- 2 of them actually went to a Workday solution and 2 went to, I guess it was UKG. But the very interesting part, when I went out to talk to other clients that are large that have also fit that description and ran into some of that, had actually evaluated those two, and it was very interesting. We'll talk more about this in a couple of weeks. But their view of having to choose between this significant investment to deal with the scalable technology solution. And they thought that having to give up some important service capability that they have with us. So the new solution marries those two together, and those customers don't have to make that decision. So I feel good about it at this point, even from -- although it's anecdotal feedback, but it is among those types of customers that are a good sample of those that we want to understand their thinking.

Terrific. I just have two more questions. Could you sort of dimensionalize the change in your assumption for health care expenses throughout the year as a result of Change, whatever that commentary you could give? And then, Paul, from a strategic standpoint, I wanted to ask how significant could Insperity's Workday implementation be in a handful of years? And do you envision the company performing implementations for non-PEO customers? So I'm trying to get a sense for the TAM.

Yes, that's a great question that we're going to spend a little more time on in a couple of weeks. So I won't steal some thunder out there, but I will just tell you that there's no question in my mind that, when we look at that total addressable market of these mid-market accounts, 40 million worksite employees or more. We've always said, hey, we can attack some of that market with what we're already been doing. But it's an appreciable percentage of that market now, that this will be the best solution in the marketplace and no one else will have anything like it. So because it's -- like I say, it's the ultimate scalable solution in both technology and services. Now some clients will get to a size where they want their own more customized version of Workday. But at that point, we will already have been their support infrastructure. And it's going to be a very natural progression for us to lead that team that not only helps them implement their new solution, which will be much more readily definable and developed because they've already been on it and we're the ones who've been servicing them. So for us to continue to be their service provider going forward is a very natural progression. And so will we go out to the market to be an implementer for those kinds of -- that's not really the strategy. We don't -- could we do that? We would have that capability, but that's not the plan. The plan is to bring them on to our service and then be able to keep them much longer, and have a little different version of the service when they're ready to go out into their own instance of Workday, and us remain that service support that they need, even though they've grown to that size. [ Doug will say some stuff about the ] benefits side.

Yes...

Our next question is coming from Jeff Martin of ROTH MKM.

Doug, I'll let you answer the question and then I'll ask mine.

Appreciate that.

Sorry.

Okay. No problem. So what we saw on the health care side specific to Q1 was the upside in that particular area not only had to do with the cost side, but the pricing side. So the pricing side, it's been a focus of ours because of recent experience on cost trends. And we've been able to exceed our pricing targets. So that's a part of the equation. On the cost side, the upside that we got from the first quarter, you got to look at it really in two different pieces. The upside for the first quarter really had to do with our reserves at the end of last year, in hindsight, being conservative. And we have reasons for doing that because of some of the volatility we've experienced in 2023. And then we look at subsequent claim runoffs to measure against those reserves. And yes, at the end of the day, the claim runoff was favorable relative to those reserves that were set up. And a lot of that -- if you're looking at claim runoff through the end of February for that. We all know that in March, there was a breach of Change Healthcare, which is sort of the intermediary between the providers and the insurance companies, and therefore would expect some sort of disruption in the claim payment pattern. We did a deep dive into details of that. We've also had conversations with the insurance carriers. And because of that, we felt it appropriate to provide some incremental reserve at the end of the first quarter for claims that were incurred but not reported yet as a result of that cybersecurity breach. Now I'll tell you that we feel like we again have made a conservative IBNR adjustment as a result of that event, ending the quarter with what is our largest IBNR level over the course of our history, and even on a per participant basis, being a larger number. So at the end of the day, we feel like we have appropriately handled the issue with the breach at Change Healthcare. And again, the upside is really coming from the reserves that, in hindsight, were conservative that were set up at the end of 2023.

Good. I'll follow up with that. Yes, so in terms of the benefit cost trend for 2024, is that unchanged versus your last commentary in Q4?

For the most part, yes. I mean, I think we talked, going into the year in my last prepared remarks, a benefit cost trend of 4.5% to 6%. And so it's still sort of near the midpoint. Still within the range, but probably a little bit down based upon our Q1 experience. But still within that range.

Great. And then with respect to the Workday relationship, is it still the expectation that, initially, you'd be doing a lot of conversions of existing clients prior to taking on new clients? Or will you be able to straddle both? And then secondly, how do clients perceive the value in your view, I know it's still early, of doing the combined solution versus doing Workday independently and going without the services that you provide?

Sure. So we are doing a tremendous amount of research and even working with some outside consultants to evaluate different aspects of this approach. And again, treating this as a new product launch. So appropriately gathering information from both prospects and current clients, and again, looking at value perceived-pricing relationships. And so I think we're on a very good track to gather the appropriate information, sets it properly and determine these launch dynamics. At this stage, I think there's going to be a nice mix between both current clients or even new clients coming on this year that want to upgrade once that is ready to go. The current clients, we're already heard, like I said, had great conversations. And yes, several on that list already. So more than happy to be our even beta test-type customers. We have a number of clients that are going to be involved in literally the configuration, design effort to make sure that we've got how much is pre-configured for all the -- for the whole base versus how much is customized -- customizable for clients. So we're doing those things properly. But yes, there will be a mix. And I think there will also be a backlog of customers that are signed up to come on the service on the new offering. So our launch time for the offering, timed with when it's actually coming out and having more of a pipeline for these accounts to come on, that's kind of the mindset that we are in today. There's a lot of work to get to that point and make sure that's effective, but we're on that track.

Great. And then one more, if I could. The $60 million of planned incremental spend in 2024. How might that progress as we move through the quarters? And then how much support staff are you anticipating hiring in advance of that?

So there's a process going on there now also. And we -- basically, we're on track in that, or very early first quarter, which is when we had not very much information to try to estimate this. And it came out very good. We're still very comfortable with that number for the year. And you do have to weigh in also the hiring people versus contracting out for certain components depending on whether it's just a surge of need for a short time or whether it's part of the ongoing picture. So there's a lot of that type of thing going on as well. But I think the mindset between launching a new product effectively in a timely fashion and managing the investment side and the ongoing expense side has really been impressive to me already in a short time. So we feel good about how we have looked at this. And then conservative in those kind of estimates, but there's a lot yet to go on. So we're not giving that much detail about that yet.

[Operator Instructions] And we have a final question in from Andre Childress who is on for Mark Marcon of Baird & Company.

My first question is just, as you look back at the key selling and enrollment period, what did you see from a competitive perspective, particularly on the pricing front?

Yes. We saw through this period, like I mentioned in the last quarter, where when the climate is more difficult, you see more competitive approaches. And so I think a lot of that was more in the fall of this year, kind of peaked. It's still out there. But I think the way we have looked at it and responded. And has been effective this first quarter, having a strong quarter like we did, significantly double-digit up from last year was evidence of that. And I mentioned that was a combination of the experience factor and the growth in the numbers of BPAs, but then also the right incentives for both clients and the sales team. So we're in good shape on that front. But I would expect it to stay pretty competitive out there. I do -- as you talked about the Workday comparison, that's a different animal because it's an exclusive relationship. No one will be able to even have that. And I think that frames our offering really, really well against others. So that's more of the long-term view on that front. But for this year, we expect it to remain competitive. And we like our winning the right clients that we're after, we're in great shape on that front.

Great. And then as a follow-up, in your prepared remarks, you talked about various initiatives to drive BPA productivity. Could you provide an update on just how you are leveraging AI or how you plan to leverage AI across both the sales service and maybe even the R&D organization?

Yes, absolutely. I think the main point to take away on that front is we are really structured and staffed and organized and working through processes, and even the technology investments we've already made, have put us in a very strong position to flesh out all these possibilities. And there are so many possibilities. And certain things are pretty obvious. And like I mentioned in the prepared remarks, we're talking about things that drive efficiency or provide insights and things of that nature. And we're on a great track to bring those forward. Now we also believe that a lot of this is not there yet. We've fleshed out certain areas we've looked and we said, "Wow, that's going to be really good." It's not really that good yet. But we're in a good position to capitalize on these things as they happen. And it was great timing for us to put Salesforce in place, which was significant to making sure that all our internal data is in one place. That's powerful for this. And we've done a tremendous amount of work relative to implementation of modern data engineering and other analytics technologies. And I just think we're in a great position to do this, but it's not time to go into a lot of detail about that. But that's coming soon.

Thank you very much. That appears to be the end of our question-and-answer session. I will now turn the conference back over to Mr. Sarvadi for any closing remarks.

Well, once again, I'd like to thank everyone for being with us today for this update. And I'd like to have a special invite to all of you on to be a part of our Investor Day coming up later this month. There is also an opportunity for you to be here in person and a way to go through that process on our website. There's also a link within our announcement that we put out today. But we'd love to have as many as possible, either in person or remotely. And look forward to answering a lot more questions not only about the status of our current business model and the drivers, but how those are linked to this new strategic partnership and our expectations about how that will directly affect our likelihood, degree and speed of success going forward here in Insperity in delivering shareholder value. So thank you again for your participation today. We look forward to seeing you soon.

Thank you very much, everyone. This does conclude today's conference. You may now disconnect your phone lines at this time, and have a wonderful day. Thank you for your participation.