Insperity Q4 2023 Earnings Call Transcript

Quartr
Provided by Quartr
February 8, 2024

There are 7 speakers on the call.

Operator

Good morning. My name is Paul, and I will be your conference operator today. I would like to welcome everyone to the Insperity 4th 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

Conference call. 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.

Operator

Sharp, please go ahead.

Speaker 1

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 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.

Speaker 1

Sarvadi or I may make forward looking statements during today's call, which are subject to risks, For a more detailed discussion of the risks and uncertainties that could cause actual results to differ materially from any forward looking statements slide. Now let's discuss our 4th quarter results in which we achieved $0.75 in adjusted EPS Our growth in paid worksite employees continue to be impacted by macroeconomic headwinds, particularly the significant decline in our hiring base over the past year. To 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.

Speaker 1

4th quarter gross profit exceeded our expectations on higher pricing and lower benefit costs and payroll taxes. The Q4 year over year comparison Operating expenses increased 5% over Q4 of the prior year, in line with our forecast and included a planned increase in business performance advisors and service personnel and continued investment in our technology. Net interest income was consistent with the prior year. Our Q4 effective income tax rate Now let me recap our full year 2023 results. We earned $354,000,000 of adjusted EBITDA And adjusted EPS of $5.52 As for the drivers, we achieved 6% growth in average paid worksite employees, Despite the significant decline in net hiring in our client base due to macroeconomic headwinds, The same headwinds contributed to declines in client retention to an annual rate of 83% Gross profit per worksite employee per month, our Key pricing and direct cost metric was $2.77 in 20.23, just slightly below our budget Despite elevated healthcare costs in Q2, these results demonstrated our ability to effectively execute our pricing strategy, While managing our direct costs over the full year, operating expenses increased 7.5% over 2022 And included key investments in our long term growth plans.

Speaker 1

In addition to a 12% increase in the number of business performance advisors, We increased our service capacity and continue to invest in our technology, including the implementation of sales force across both our sales and service organizations. The current inflationary environment drove higher compensation of our corporate employees and other operating expenses such as travel costs. We continue to produce strong cash flow and ended the year with a solid balance sheet while We repurchased a total of 1,300,000 shares at a cost of $132,000,000 We also paid out $84,000,000 in cash dividends, which includes a 10% increase in And continue to have $370,000,000 outstanding under our credit facility. Now at this time, I'd like to turn the call over to Paul.

Speaker 2

Thank you, Doug, and thank you all for joining our call. Today is a pivotal day in the 38 year history of Insperity 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. Insperity performance in the business economic environment.

Speaker 2

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 midsized companies in the marketplace. Through this strategic partnership, Insperity are committed to jointly developing, marketing, selling and supporting the preeminent solution exclusive Insperity PEO offering. We expect to offer this unique combined solution to the target market For 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 midsized businesses with as few as 100 employees with a new scalable capability Firms directed toward this target market creates a powerful opportunity.

Speaker 2

Historically, Workday disrupted the marketplace by providing a best in class HCM Tremendously successful and we believe they are the industry leader and premium brand in the space. Now as Workday has expanded down market, The reality is the smaller the company, the more they need HR services to implement and get the full value from their solution and be successful. This is where we believe Insperity is an excellent fit for Workday. Now, Insperity disrupted the marketplace by providing a best in class HR service solution and began at the other end of the market, serving companies with as few as 10 employees. We have also been tremendously successful and we believe we are the industry leader in the premium brand in our space.

Speaker 2

As Insperity's expanded up market, the reality is the larger the company, the more they need more sophisticated technology to get the full value Inspire solution and be successful. This is where we believe Workday is an excellent fit for Insperity. Now over our history, we have built a deeply integrated and highly effective system to manage a PEO and comply with the unique legislative, regulatory and industry specific requirements. We have historically used our proprietary HR technology platform For all our clients from the smallest to the largest. Now the process over the last couple of months evaluating the feasibility of developing this new solution highlighted the sophistication and quality of our own Asperity PEO HCM platform.

Speaker 2

We intend to continue using this platform For smaller clients and those that otherwise are not ready or don't fit the new joint solution. So Insperity and Workday are becoming strategic partners focused on 3 major objectives. First, we'll be developing and embedding an instance of Workday as the client facing HR technology within our workforce optimization offering to create the new joint solution for the target market. 2nd, we are establishing a deployment and enablement team within the Insperity service organization with the help of Workday. We believe our speed of implementation for our PEO clients distinguishes us compared to the HCM space.

Speaker 2

Our goal for this team is to provide implementations and support for the new solution in a similar efficient and effective manner as we do today. 3rd, we are initiating a go to market strategic plan for Insperity and Workday to address this target market, including co branding, Co marketing and co selling. We believe there are opportunities for each company to benefit from these aspects of our strategic partnership Even before the new solution is launched. Now let me focus on how and why this strategic partnership could be such a game changer for Insperity. This partnership has the potential to dramatically improve all three of our most significant drivers of our financial model: new sales, client retention and pricing of our services.

Speaker 2

Importantly, this is an exclusive agreement with Workday within the PEO industry. The The exclusivity extends for at least 5 years beyond the launch of the joint solution. I believe this provides Insperity with a significant new competitive advantage and influences all three of these key drivers of our business. I believe the effect on sales can begin immediately primarily to upgrade to Workday HCM once the new solution is launched. Workday currently makes a substantial marketing investment to attract potential customers interested in improving their HR technology.

Speaker 2

Their successful marketing programs generate a substantial number qualified leads for their target market of larger firms, but as is typical in significant marketing programs, This means that Workday can optimize their marketing spend by passing these leads off to Insperity, creating a pipeline for potential new business for Workday in the future. Our initial high level view of these potential referrals indicates the possibility of increasing the number of qualified leads substantially 7 50 Business Performance Advisors. Another important aspect of this strategic partnership is focused Inspire on helping customers select the right solution to help them succeed. Insperity will reciprocate referring the larger prospects to Workday That fit their solution best at the time we first interact with them in our sales process or once the current clients' needs Our Beyond Our solution. Ultimately, the second potential driver for sales would be the new solution once launched With the full force of the strategic partnership go to market plan.

Speaker 2

However, we also anticipate prioritizing current clients upgrading to the new solution. Therefore, coming on to our current workforce optimization service now is a step to get in line for being on Workday more efficiently and cost effectively once the new solution is available. The second driver to our financial model that we believe What will be enhanced by this strategic partnership is client retention. The Workday features and functionality in this new jointly developed solution Significantly, as our success penalty, many times we have brought small companies on our workforce optimization solution and help them grow from 20 or 30 employees to 1,000 or more on their way to being highly successful firms. Examples of this are HelloFresh, Netflix and believe it or not, Workday.

Speaker 2

When a client grows to this level and they terminate the relationship, we could need 50 or more of our typical new small business clients to replace them. We experienced this success penalty to agree this year, which I will discuss in a few minutes. We expect the new solution will better position us to meet the needs of our larger insights, which we believe will allow us to retain these clients for a longer period that is more in line with Workday's exceptional retention track record. We anticipate in the future when we ultimately graduate a current client on the new solution to their own instance of Workday, Our new enablement and implementation team may also facilitate the transition and provide ongoing support, and Insperity may even continue to provide other HR solutions. So we believe our customer for life strategy will be enhanced by this strategic partnership by providing a solution that Should reduce large client terminations and better position us to capitalize on our historical success penalty in the future by continuing to provide services even after a client leaves our workforce optimization solution.

Speaker 2

Now in addition to a potential improvement in new sales and client retention, I believe this strategic partnership may have a meaningful effect on our 3rd key driver to our business model pricing our services. The ability to increase pricing to match the enhanced value of the new solution is a significant opportunity As our prospects often compare their own future expected costs as an employer to our comprehensive service fee to make their buying decision. We've identified several potential improvements in this area made possible by this new strategic partnership. However, they are preliminary and proprietary, So I will not go into detail today. So the power of this strategic partnership with Workday for Insperity is the long term potential to significantly drive 3 of our most important key success factors, new sales, client retention Now both companies are investing in our strategic partnership.

Speaker 2

I would like to explain the disparity investment necessary to launch this partnership Insperity and create this new PEO solution combining Workday HCM technology with Insperity Workforce Optimization Services. Our new investment is currently expected to be approximately $150,000,000 over a 5 year period, more heavily weighted in the 1st 2 years. The investment includes Workday subscriptions for a certain number of worksite employees on this new solution over the term of the contract, Insights and Sales Support staff. The investment also includes Insperity becoming a Workday customer for our corporate staff, which is ideal for our 4,300 employee company with dynamic future growth. We believe it's an important foundational step to have our entire staff on Workday to be ready to support our clients as we launch our new solution.

Speaker 2

We expect this investment will cause a drag on adjusted EBITDA and earnings per share for a couple of years. However, we believe the potential to capitalize on the opportunity to elevate the trajectory for long term growth and profitability in the future is significant. I personally weighed this decision heavily Insperity with the appropriate level of consideration. As I sit here today as Chairman, CEO, Co Founder and a significant shareholder of Insperity, I am convinced this is the right decision. For the next couple of years, adjusted EBITDA and earnings per share may not be the most important measures As they have been in the past, the progress and milestones achieved in developing, launching and implementing our strategic partnership Now let me put this decision into context with our 2023 results and our outlook for 2024.

Speaker 2

We had a solid year last year in a more difficult economic climate in the small business community. This was reflected most noticeably in the net change in employment within our client base, slowing from a solid net gain in the first half of the year to net reductions over the last half and into January. Another factor that weighs into our starting point for paid worksite employees as we move into 2024 is the year end transition, including client retention From our heavy renewal period, our retention was strong except for our mid market client attrition, which included Our success penalty on 7 of our large accounts. This economic backdrop in our target market also affected decision making in the sales process, Which was most apparent in the Q3. We reacted well to this dynamic and had significantly stronger 4th quarter book sales.

Speaker 2

The full year was not as strong in our core BPA sales as we had originally expected. However, we exceeded our target in mid market sales. After a thorough evaluation of last year, there are two areas that we believe would have made the year significantly stronger The second area we believe would make a significant difference is a systemic change beyond the level we could achieve on our own. Even without the new partnership, we believe our progress last year, including growing the sales organization, Validating new marketing efforts and staffing up our service team positions the company well for growth acceleration over the coming year. One last point I'd like to make relative to this significant investment decision is our historical use of capital commitment that has provided an exceptional return to shareholders.

Speaker 2

Over the last 10 years, our significant growth combined with our highly capital efficient business model Generated sufficient cash to allow us to repurchase approximately 20,000,000 shares for just under $1,000,000,000 As Doug mentioned, last year alone, we repurchased 1,300,000 shares at a cost of $132,000,000 Making this investment of an estimated $150,000,000 in this context does not represent any change in our prioritization of return to shareholders. Rather, it represents our view of the opportunity to significantly increase returns over the long term. I would like to thank Insperity and Workday teams that made this strategic partnership happen. The ability of our 2 teams to evaluate the opportunity And expediently and effectively reach agreement on the strategic partnership is evidence of the line corporate culture connection between the two firms. This adds to my confidence in the strategic partnership, delivering this solution with the potential to greatly enhance the likelihood, degree and speed of success Enhancing the likelihood degree and speed of success for this dynamic Workday Insperity strategic partnership.

Speaker 2

This investment represents an incredible opportunity to elevate the long term trajectory for growth, profitability and value creation for Insperity and our ultimate return to shareholders into the future. At this point, I would like to pass the call back to Doug.

Speaker 1

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 expensed And therefore not capitalize. This will obviously have a significant impact on our forecasted 2024 earnings.

Speaker 1

As we collaborate with Workday through the Q1 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 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 twenty twenty three 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 We are assuming gradual improvement and more certainty in the macroeconomic environment.

Speaker 1

And when combined with the higher average tenure of our BPAs and an expected increase in lead flow, we are budgeting for an improvement in sales Insulation and the Insulation and the Company's efficiency over the course of 2024. We continue to expect minimal hiring by our clients when compared to historical levels. So, considering these factors, we are forecasting worksite employee growth for Q1 of 2024 to be in a range of a 1% decline to expected sequential improvement over the course of 2024 with our forecast ending the year with a paid work employee count that is 8% higher than December 2023. As for gross profit we have considered the pricing achieved over 2023 and during our recent sales and client renewal period. We intend to continue focus on pricing given the expected impact of an ongoing inflationary environment on both our direct costs, Including healthcare costs and our operating expenses.

Speaker 1

We expect a generally stable environment in our payroll tax in workers' compensation areas. As for the benefits component of our direct costs, we anticipate a cost trend of 4 point And our 2024 plan is based on matching or exceeding expected changes in our direct costs. When considering these factors, we expect the full year and Q1 of 2024 gross profit per worksite employee to be similar to that achieved in the 2023 periods. Subsequent to Q1, we expect this metric to step down Now our operating expenses include costs associated with our both our core operations and the Workday strategic partnership. We are roughly estimating that costs related to the partnership will be in the ballpark of $60,000,000 in 20.24, Primarily in the back half of the year when including the incremental costs that Paul just mentioned, plus our internal redeployed resources.

Speaker 1

As for our course of operations, our budgeted 2024 operating costs include the full year impact 18% worksite employee growth in 2022. Now this puts us in a position for minimal hiring in our core operation in 2024, including the hiring of fewer business performance advisors. We are forecasting to end the year with a 6% increase in BPAs over 2023 to just over 800. As for our interest income and expense, our 2024 budget assumes the current interest rates And a run rate slightly above 2023. We are estimating a tax rate of 26% for Q1 the full year 2024.

Speaker 1

So after putting together all of the pieces, including our current estimate of costs Insights and Company's financial results associated with the Workday partnership. We are forecasting 2024 adjusted EBITDA in a range of $241,000,000 to the the midpoint of this range is about $90,000,000 below the prior year, of which Approximately $60,000,000 is related to the partnership with Workday. The remainder is primarily related to the lower starting point unpaid worksite employees. We are forecasting a full year adjusted EPS in a range of $3.02 to $3.88 With the strategic partnership development kicking off in the Q1, we are forecasting Q1 adjusted EBITDA in to $2.24 Now before we open up the call for questions, we'd like to announce our intentions to hold an Investor and Analyst Investor Day in the second half of May this year to further discuss our exciting strategic partnership with Workday and how it fits into our long term plans. We will announce the specific date at a later time.

Speaker 1

Now let's open up the question and answers.

Operator

And the first question today is coming from Andrew Nicholas from William Blair. Andrew, your line is live.

Speaker 3

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.

Speaker 3

I think at some point you said 100 employees or can you just kind of flush 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 opportunity set.

Speaker 2

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 is, I mentioned about our success penalty, 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.

Speaker 2

But when companies get to a certain point or 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 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.

Speaker 2

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

Speaker 3

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

Speaker 2

Yes. I really don't see that as an issue of Kind of in any way, shape or form. Obviously, part of our success penalty is companies moving to A different technology solution and this stems that tide in a huge way or at least for sure delays it And as I mentioned in the script, even 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.

Speaker 2

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.

Speaker 3

Yes, 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 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.

Speaker 2

No. When they go on this new solution, it actually increases our revenues. So, we have Our customers now, in fact, will be going out to our customer base, explaining 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.

Speaker 3

All right. That's helpful to understand. I

Operator

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

Speaker 4

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 2 years out, 3 years out? How should we think about that just in terms of the timing?

Speaker 2

Development teams on both sides will be working diligently to detail out and complete statements of work, etcetera, to Figure out the launch date. Now I have a range of that expectations, not near the 3 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 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 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.

Speaker 4

Okay, great. And then with regards So you mentioned 3 years is far too long. Can you give us a sense for like and I fully appreciate the lead generation is going start right away. The marketing is going to start away, right away. The halo effect is going to start right away.

Speaker 4

But what's an outside like What's the longest that you would anticipate before you could actually bring it to market?

Speaker 2

I'd love to have that conversation specifically, but between our two partners, we want to have it locked 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.

Speaker 4

And Paul, for what it's worth, I mean, Baird's a Workday shop, so we I was part of that whole implementation process and understand it, 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 are servicing?

Speaker 2

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.

Speaker 2

We got to we want to get this one right, launched And especially deployed and enabled properly, because that It's a huge competitive advantage and a disruptor provided we get that right. We bring on our customers Today, with our implementation team, it takes 2 months or less to bring on large clients. Bringing them on is more like adding the 1,000 employees to our system than it is like doing a full implementation A year or more to plan and then and also a significant amount of time to actually configure. It's a 18 month or more process to go on to what we'll be offering And our goal is what we've learned from how we do it and how that 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.

Speaker 2

That is powerful and I believe will make an incredible

Speaker 1

the incredible

Operator

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

Speaker 5

Thank you. Lot to digest today, so exciting day for you at Insperity. Could you talk about the genesis And maybe what it means for you, Paul, it sounds like you've been 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.

Speaker 2

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 And I have to say that my first phone call to them was, I think, back in late October, early November, another couple of 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 that 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 the underserved companies in this space.

Speaker 2

And from that day forward, it has been 20 fourseven to get to the point where we know we can do this and we Work 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 Insperity. For Insperity, we're a great company with a great business model, great foundation. But what this really does is leverage the strengths As a large investor of this company, the sky is the limit here.

Speaker 2

And I'm sorry, I'm being a little bit Dramatic here, but this is so powerful and I can't wait to work on it day by day to get us where it can take us.

Speaker 5

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? Well, 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.

Speaker 2

No, I do believe it does expand the market for both firms, both sides of the 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 the demographic profile, of course, theirs is at the high end the or 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?

Speaker 2

Oh, but yes. So the demographic profile It's 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 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.

Speaker 5

If I could turn it to get a sneak 1 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 level is running pretty high.

Speaker 1

Yes. I mean, obviously, you got drug costs that are increasing Quite

Speaker 2

a bit, particularly those specialty drugs.

Speaker 1

Obviously, as part of our budgeting, we have constant conversation with UnitedHealthcare and seeing what they're looking at both on the drug side and the medical side. As you would expect, we also have to contemplate large claim activity. So you 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. We as far as large claims, We expect them to still be somewhat elevated relative to history prior to 2023.

Speaker 1

So not quite as high. We don't expect this 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. I think the other thing to point out is we exited 2023 even with the Q2 elevated costs with pricing and costs aligned. That's what our objective is all about.

Speaker 1

We're in a good position going into this year to maintain that For all of our direct costs, so we 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 in my prepared remarks. We think our budget for this year, for 2024 at a total gross profit per employee level, We're starting the year looking somewhat similar to 2023.

Operator

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

Speaker 6

Okay, great. Good morning, Doug and Paul. Congratulations on the Flusive 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

Speaker 2

And 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 in 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.

Speaker 2

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 More staying focused on our other solutions. I do think it's going to be much more efficient for us and allow us You know to not have to continually be chasing those features and functionality.

Speaker 6

Okay, great. And then I'm going to ask a 3 part question here. It's all intertwined. But just curious, can you give the low end of the spectrum in terms Client type, what is the upper band of that? 2, what is the what do you see as the biggest value proposition for clients?

Speaker 6

And then 3, will clients have the option to use the traditional workforce optimization versus the combined offering with Workday?

Speaker 2

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 4 companies that for whichever reason, the The size that they are now or their growth rate, even if they're down to in the 100 employee range, but they are optimization at a new level with Workday HCM as the client facing Technology. And what happens for those clients is they 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.

Speaker 2

It is a powerful combination. So but the other thing they will be weighing out is if there is someone who wants And those that 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, 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 We won't have near the upfront cost, won't have the same level of ongoing subscription type cost and because again, this is remember, we're embedding Workday into our PEO solution.

Speaker 2

And so our subscription fees are based on the quantity we have, and we're able to Build that into our pricing with an appropriate markup for our part of what we're delivering here in that new solution. So that pricing will also be embedded in the total service fee. That customer gets to be on this on a Workday solution a lot earlier, more affordably and more quickly. Now they also though there may be a day because we are pre configuring a lot of the system to be able to bring people on fast. There's going to be quite a bit of customization from configuring for specific clients who will be more like tenants on this instance of workday, but they won't have the full flexibility and there may be other things they need in the future.

Speaker 2

So when customers get to that point, we believe we'll be helping them Get on to their own instance of Workday and continuing to be able to serve them after in many cases. But that we want what's right for the customer And we have that happen now, only it happens sooner than it will in the future and we're not involved in it and don't have a chance to Maintain a relationship with the customer. Does that help you on those questions, Jeff?

Operator

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

Speaker 2

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.

Speaker 2

Thank you again.

Operator

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

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Earnings Conference Call
ICICI Bank Q4 2023
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