Note: This report contains substantially new material. Subsequent reports will have new or revised materials highlighted.
Reason for Report: 1Q18 Flash Update
Prev. Ed.: Mar 28, 2018: Changes in Estimate
Flash News Update [Earnings Update in progress; to follow]
Insperity, Inc. reported first-quarter 2018 adjusted earnings of $1.41 per share that surpassed the Zacks Consensus Estimate by 27 cents and increased a massive 53% year over year.
Revenues came in at $1.04 billion exceeding the consensus mark by $26 million and improved 15% year over year.
Other Quarterly Numbers
Average number of worksite employees paid per month increased 12% to 195.7 million.
Insperity’s gross margin expanded 160 basis points (bps) from the year-ago quarter to 19.7%. Gross profit per worksite employee per month increased 11.5% to $340. The improvement was backed by strong pricing and decrease in primary direct costs.
Adjusted EBITDA was up 34% year over year to $83.8 million. Adjusted EBITDA per worksite employee per month increased 19% to $143.
Adjusted operating expenses increased 19% year over year to $125.7 million. Adjusted operating expenses per worksite employee per month grew 6% to $214.
Balance Sheet & Share Repurchase
Insperity exited the first quarter with adjusted cash, cash equivalents and marketable securities of $87.5 million compared with $61.1 million at the end of the fourth quarter of 2017. Long term debt was $104.4 million, in line with fourth-quarter figure. The company repurchased roughly 131,000 shares at $8.6 million and paid dividends totaling $8.4 million.
Guidance
For second-quarter 2018, Insperity projects adjusted earnings in the range of 59-63 cents per share, representing a year-over-year increase of 44-54%. The guided range is well above the Zacks Consensus Estimate, which is currently pegged at 52 cents.
Adjusted EBITDA is anticipated to increase 23-29%, in a range of $41-$43 million. Average worksite employees (WSEs) are expected in a range of 202,000 to 203,700, representing 12-13% growth.
Insperity raised its guidance for 2018. The company now projects adjusted earnings between $3.36 per share and $3.44 per share, implying growth of 37-40%, above the previously guided range of $2.96-$3.08 per share. The consensus estimate is pegged lower at $3.04.
Adjusted EBITDA is projected to grow 23-25%, in a range of $218-$223 million. The prior guided range was $197 million to $204 million. Average WSEs are expected to be in the 206,400 to 208,400 bracket, representing 13-14% growth. The earlier expected range was between 203,700 and 207,400.
MORE DETAILS WILL COME IN THE IMMINENT EDITIONS OF ZACKS RD REPORTS ON NSP.
Executive Summary [NOTE: Only highlighted material has been changed]
Insperity, Inc. (NSP), headquartered in Houston, TX, is a professional employer organization offering human resource services to small and medium-sized businesses. The company provides an array of human resources and business solutions designed to help improve business performance. Insperity’s business performance solutions support more than 100,000 businesses with over 2 million employees. The company operates over 61 offices across the United States.
Of the four firms covering the stock in the Zacks Digest group, two assigned a positive rating and the remaining two assigned a neutral rating. None of the firms provided any negative rating to the company. Target prices provided by the firms range from a low of $65.00 to a high of $71.00, with the average price being $67.67.
Bullish Stance (Buy or equivalent outlook) – 2 firms or 50.0% - The firms believe Insperity to be well poised to benefit from the booming professional employer organization (PEO) industry. Worksite employees (WSE) base is also expected to generate organic growth. Additionally, growth in midmarket customers and product offerings to address the other markets are tailwinds.
Neutral Stance (Neutral or equivalent outlook) – 2 firms or 50.0% - The firms are positive about the increase in WSE due to higher client sales driven by growth in Business Performance Advisors. Higher client retention and better expense management are the other positives. Further, improved capital allocation and higher dividend reflect the company’s commitment toward shareholder return. Plus revenues will benefit due to the newly launched HCM solution Premier, which is gaining traction. Despite these, a sluggish labor market, volatility in healthcare expenses and stiff competition keep the firms on the sidelines. Lower-than- expected growth of ancillary services is also a concern. Besides, the firms are apprehensive regarding the uncertainty related to the impact of US healthcare reform on core business.
General Outlook
The firms believe that Insperity’s long-term outlook remains positive driven by heavy investments to drive growth. The company appears to be well positioned to grow through end-market expansion and return value to shareholders through dividends and share buybacks. However, the bearish firms believe that the company is influenced by economic cycles, which expose it to risks like economic meltdown that may affect long-term growth.
Mar 28, 2018
Overview [NOTE: Only highlighted material has been changed]
Based in Texas, Insperity is an integrated human resources and business solutions provider. The company primarily offers this solution through its professional employer organization (PEO) services, which include Workforce Optimization and Workforce Synchronization solutions. Insperity’s main offerings include employee recruiting and training support, personnel records management, employer liability, insurance programs and performance management. The company also offers solutions for payroll administration and assistance with compliance of employer-related government laws. Among ancillary HR solutions, the company provides employment screening, recruiting, retirement, human capital management, payroll services, performance management, organizational planning, financial and expense management services. Insperity is offering these solutions via both desktop applications and software as a service delivery models.
Key investment considerations as identified by the firms are as follows:
Key Positive Arguments / Key Negative Arguments· Insperity’s human resources service growth is favorable.
· High dividend yields should improve shareholders’ value which, in turn, will drive EPS.
· Third-party companies, such as Insperity, have solid growth potential due to increasing complexity and legal liability of administering human resources. / · The macroeconomic headwinds pose some risks in the near term.
· As the company derives a significant portion of its revenues internationally, the business may be impacted by regulations and change in economic conditions.
· Changes in laws for the regulation of labor, taxes, insurance and employee benefits could cause disruptions in services and restrain growth.
Note: The company’s fiscal references coincide with the calendar year.
To know more, please visit the company’s website http://www.insperity.com/.
Mar 28, 2018
Long-Term Growth [NOTE: Only highlighted material has been changed]
Insperity’s long-term strategy is to provide specialized human resources services to small and medium-sized businesses in the United States. The firms believe that the company has a decent reputation in the marketplace, serving almost 180K WSEs. In addition, advertising efforts have helped the company differentiate its service model, featuring a broad offering, enhanced benefit plans along with the best technological support in the industry. Further, the company promises significant long-term growth potential by targeting the under-penetrated PEO industry. Long-term growth for the company is currently projected to be 18%.
Insperity targets to expand its market share in the PEO industry through increased focus on growth and productivity of small and medium-sized businesses, utilizing outsourcing to concentrate on core competencies, competitive health care and related benefits to attract and retain employees, focusing on health and workers’ compensation insurance coverage, workplace safety programs, employee-related complaints and litigation and complex regulation of employment issues and the related costs of compliance.
Further, Insperity is expanding its portfolio of ancillary HR solutions, including pre-employment screening, performance management, expense reporting, time & attendance, organizational charts/workforce analysis, etc. These products allow the company to tap the clients who do not require its full PEO/Workforce Optimization solution, thus opening up avenues for cross-selling later on. The company has been strategically expanding its products and services.
In addition, Insperity has taken dedicated efforts to improve its client retention rates, which have resulted in the creation of a sizeable recurring revenue base. Insperity has especially designed solutions catering to the requirement of each of its client segment (small, emerging gross and mid-market clients). This has enabled the company to adopt a targeted strategy for each segment to minimize client attrition. In 2015, 2016 and 2017, retention rates were 84%, 86% and 85%, respectively, much better than its long-term average of 80%.
Overall, the firms believe that the company’s fundamental growth factors translate into attractive business model coupled with solid revenue and margin growth opportunities. Historically, the company has generated annual double-digit WSE growth and currently, its long-term target is approximately 10% of the overall small and medium-sized business community. In the recent years, Insperity has fallen well short of its goals due to a mix of macroeconomic, competitive and company-specific issues. However, the company is likely to witness stronger growth in 2018 and beyond as the number of tenured business process automations (BPAs) increase and confusion surrounding the Affordable Care Act (ACA) drives some smaller companies to seek outside help for managing the complex regulations. In addition, the company is also undertaking a number of operational and management changes to get back on the growth trajectory.
Mar 28, 2018
Target Price/Valuation [NOTE: Only highlighted material has been changed]
Provided below is a summary of target price and ratings as compiled by Zacks Digest:
Rating DistributionPositive / 50.0%
Neutral / 50.0%
Negative / 0.0%
Digest High Target Price / $71.00
Digest Low Target Price / $65.00
Avg. Target Price / $67.67
No. of Firms with Target Price/Total / 3/4
According to the firms, potential risks to the target price include weakness in the U.S. economic environment, declining interest rate trend, and Insperity’s failure to deliver margin expansion.
Recent Events [NOTE: Only highlighted material has been changed]
On Feb 22, 2018, Insperity announced Board Member’s approval of a 33% increase in quarterly regular cash dividend from 15 cents to 20 cents per share payable on Mar 22, 2018 to all stockholders of record as of Mar 8, 2018.
On Feb 12, 2018, Insperity reported 4Q17 results. Highlights are as follows:
· EPS increased 89.7% y/y to 55 cents.
· Revenues of $826.5 million increased 13.4% y/y.
· Cash, cash equivalents and marketable securitieswere $688.2 million.
On Feb 9, 2018, Insperity announced that it will use $9 million of tax reform benefit to pay one-time bonuses ranging from $1,000-$4,000 to employees depending on their tenure.
On Jan 18, 2018, Insperity announced the opening of an office in Milwaukee having sales and service capabilities.
Revenue [NOTE: Only highlighted material has been changed]
Insperity’s revenues of $826.5 million increased 13.4% y/y. Top-line growth can be attributed to 9.8% increase in average number of worksite employees paid per month.
Revenue per worksite employee per month was up 3.3% to $1,454.
The increase in worksite employee can be attributed to new client sales that were driven by a 13% jump in the average number of trained business performance advisors. Client retention averaged 99% in the fourth quarter.
Outlook
According to the firms, the company’s revenue growth is attributable to two key factors, which include higher allocations due to good execution in client retention and the company’s focus on optimizing sales process.
Margins [NOTE: Only highlighted material has been changed]
Insperity’s gross margin in 4Q17 expanded 210 basis points (bps) from the year-ago quarter to 17.3%. Gross profit per worksite employee per month increased 17.3% to $251.
Adjusted EBITDA soared 67% y/y to $38.5 million. EBITDA per worksite employee per month surged 40.5% to $52, primarily driven by efficient price management and improved performance in benefits, workers’ compensation and payroll tax areas.
Adjusted operating expenses increased 23.2% y/y to $118.4 million. Adjusted operating expenses per worksite employee per month grew 11.8% to $208.
Operating income per worksite employee per month plunged 50% on a year-over-year basis to $42.
Guidance
For 1Q18, adjusted EBITDA is anticipated to increase 10-13% to the range of $69-$71 million. Average worksite employees (WSEs) are expected in the range of 193,500 to 195,300, representing growth of 11-12%.
For FY18, adjusted EBITDA is projected to grow 11-15% to a range of $197-$204 million. Average WSEs are expected to be in the 203,700 to 207,400 bracket, representing growth of 11.5-13.5%.
Earnings per Share [NOTE: Only highlighted material has been changed]
Insperity reported 4Q17 adjusted EPS of 55 cents, which improved 89.7% y/y.
Guidance
For 1Q18, Insperity projects adjusted EPS in the range of $1.12-$1.16, representing a y/y increase of 22-26%.
For FY18, Insperity projects adjusted EPS between $2.96 and $3.08, implying growth of 21-26%.
Research Analyst / Shuvra Shankar DeyCopy Editor
Content Ed.
Reason for Update / 1Q18 Flash Update
Lead Analyst
QCA / Aniruddha Ganguly