Insperity (NSP) Misses Q1 Earnings & Revenue Estimates

Insperity Inc. (NYSE:NSP) reported disappointing first-quarter 2017 numbers with both earnings and revenues lagging expectations. Adjusted earnings (including stock-based compensation) of $1.69 a share missed the Zacks Consensus Estimate by a penny but increased 10.5% from the year-ago quarter.

The earnings per share (EPS) figure also missed the company’s guided range of $1.78–$1.87 a share.

Revenues of $882.7 million increased 10% on a year-over-year basis but lagged the Zacks Consensus Estimate of $886 million. The year-over-year growth was driven by 10% increase in average paid worksite employees. Revenues per worksite employee per month remained almost flat at $1,687.

Management stated that client attrition of 8.3% was significantly below the company’s historical first-quarter levels of 10–12%, for the third consecutive year. However, net hiring of worksite employees by clients was 30% lower than the year-ago quarter.

Shares fell 5.20% to close at $86.60 on May 1. We note that the stock has gained 22.1% on a year-to- date basis, significantly outperforming the Zacks Staffing industry’s increase of 5.5%.

Quarter Details

Gross margin contracted 60 basis points (bps) on a year-over-year basis to 18.7% in the quarter.

Adjusted EBITDA increased 2.5% year over year to $62.7 million, which was within management’s guided range of $63–$66 million. EBITDA per worksite employee per month declined 8.3% in the quarter.

Insperity’s operating expenses increased 9.2% year over year to $105.9 million, reflecting a 13% increase in the number of total business performance advisors, and continuing investments in the company’s technology infrastructure, security and development.

As percentage of revenues, operating expenses decreased 10 bps from the year-ago quarter to 12%, primarily owing to operating leverage and budget savings. Operating expense per worksite employee per month declined from $204 in the year-ago quarter to $202 in the reported quarter. Non-bonus payroll cost per worksite employee per month increased 0.5% to $6,725.

As a result, operating margin contracted almost 50 bps from the year-ago quarter to 6.1%. Operating income per worksite employee per month plunged 8.9% on a year-over-year basis to $102.

Insperity exited the quarter with cash, marketable securities and restricted cash of $348.1 million compared with $330.5 million as on Dec 31, 2016.

Insperity bought back 114,568 shares for $9.3 million and paid dividends totaling $5.3 million. The company increased quarterly dividend payout rate by 20% from 25 cents per share to 30 cents per share.

Guidance

For second-quarter 2017, Insperity projects adjusted earnings in a range of 65–71 cents per share. Adjusted EBITDA is projected in a range of $27–$29 million. Insperity now forecasts average paid worksite employees growth in the range of 9.5–10.5%.

Insperity raised EPS guidance for full-year 2017. The company now projects adjusted EPS of $4.30 to $4.44, up from previous guidance of $4.21 to $4.42. The range reflects growth of 20–24% over 2016.

Adjusted EBITDA range was narrowed to $162–$166 million as compared with previous guidance of $161–$168 million.

Insperity now forecasts average paid worksite employees growth in the range of 11–12%, which is near the low end of initial guidance, primarily due to ongoing weakness in net hiring by clients and a slight shift in the timing of enrolment of two large midmarket accounts.

Our Take

Insperity is well placed to benefit from the booming professional employer organization (PEO) industry, strong client retention and growth in worksite employees in the long run.

However, the company has not achieved the desired levels despite increasing average worksite employees, which remain a major concern. Additionally, a sluggish global macro environment can lead to headcount reductions at client companies. An increase in health care costs does not bode well for Insperity as it is one of the major components of operating expenses.

Furthermore, increasing competition from the likes of Automatic Data Processing (NASDAQ:ADP) and TriNet Group (NYSE:TNET) remains a threat.

Zacks Rank & Key Pick

Insperity carries a Zacks Rank #3 (Hold). A better-ranked stock in the broader tech space is On Assignment (NYSE:ASGN) , sporting a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Long-term earnings growth for On Assignment is currently pegged at 14%.

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