Insperity Inc (NSP) Q1 2019 Earnings Call Transcript

As Paul will discuss further in a few minutes, recent technology investments included spend associated with a robust data analytics tool to leverage our significant amount of HR data as we further enhance our service offering. Operating leverage in other areas of the business resulted in a decrease in adjusted operating expense per worksite employee per month from $214 in Q1 to 2018 to $209 in Q1 of 2019.

Our effective tax rate in Q1 came in at 12%, slightly below our forecasted rate at 13.5% and keep in mind that our Q1 tax rate is typically lower than our full year rate due to the tax benefit associated with the vesting of long-term incentive stock awards during the quarter. For the remaining quarters, we continue to estimate a tax rate of 29%, which then equates to a full year rate of 22%.

As per our balance sheet and cash flow, we ended the quarter with $141 million of adjusted cash. This is up from $129 million at December 31, 2018 after the repurchase of 230,000 shares of stock at a cost of $29 million and the payment of $12 million in cash dividends, further reflecting the strong cash flow inherent in our business model.

Now at this time, I'd like to turn the call over to Paul.

Paul J. Sarvadi -- Management Director, Chairman and Chief Executive Officer

Thank you, Doug and thank you all for joining us today. Today, I'll provide comments covering three topics. First, I'll provide some color surrounding our strong first quarter results and our subsequent increase to our guidance for the year. Second, I'll provide an update on progress of our two of our key 2019 initiatives. And I'll finish with a discussion of the sustainability of the outstanding results we've been delivering over the last several years.

Our excellent first quarter was set up by strong Q4 sales converting to paid worksite employees and continuing our historical highs in client retention. This year end transition during our heaviest renewal period went very well driving an increase of more than 15% year-over-year in this key unit growth metric. In our model, high levels of retention for the first two months of the year sets the stage for the full year due to the concentration of renewals at year end. The number Doug reported for Q1 of 7.9% attrition is the same as Q1 of 2018. Our full year 2018 retention ultimately came in at an historically high level of 86%. So with a solid Q1, we are on track for another good year in this metric.

Our new sales in Q1 came in at 112% of budget with both core and mid-market outperforming expectations. Activity was strong with a 17% increase in business profiles or opportunities to bid our services, driven by a 10% increase in trained Business Performance Advisors. The size and maturity of our sales organization combined with our mid-market sales success is now allowing us to grow the number of worksite employees at a faster rate than the growth rate of the number of BPAs. This more efficient growth model as we continue -- this is a more efficient growth model as we continue to get leveraged in the sales side of our business.

We expect to continue to ramp up the number of BPAs, as we open up nine new offices this year, targeting an average increase in trained BPAs of 13% for the full year. Our marketing programs continue to be effective helping to drive consistency in our sales effort. Marketing source discovery calls increased 30% in Q1 and were 2.8 times more efficient converting to sales than self-generated leads.

Digital, loyalty programs and channel partners are the three most productive programs. In addition to these three staples of our marketing plan, we are adding an authority of marketing program and new targeted advertising to our mix. Authority marketing leverages the expertise we have at Insperity in a variety of ways from social media and blogs to the use of the recently released book, Take Care of Your People.

Our goal with this initiative is to cast a wider net and reach prospects in a different way, starting the conversation on a higher level. Our new advertising focuses on the value of an effective people strategy is a force multiplier in business success. These two marketing initiatives are designed to continue to ramp up lead flow to support our growing sales team and establish our new tag line, HR that Makes a Difference.

Net hiring within the client base in Q1 continued, however, at a slightly slower pace than the period last year. Other metrics we follow closely, including average pay increases, overtime as a percentage of base pay and commissions paid to the sales staff of our clients continue to show strength compared to historical levels, although slightly down from recent highs. Another important data point for the health of the small and medium sized business marketplace is owner sentiment.

In personal interaction at our largest annual client entertainment event in early April, we found a decidedly positive tone around current business conditions and the outlook for 2019. Although this was an anecdotal, rather than a scientific survey, this included a wide geographic representation from among a wide spectrum in terms of types of companies.

From a growth perspective, we're operating in an environment with strong sales and retention, combined with solid -- a solid economic climate in the small and medium sized business community. Our first quarter results were also solid in the management of pricing, direct costs and operating expenses. Effective management of these factors drive our ability to grow adjusted EBITDA at a higher rate than the unit growth as we did once again this quarter. So we are increasing our guidance for the year, simply due to an excellent start in the first quarter and updating the corresponding trends we are seeing in the business.

Two of our key initiatives for 2019 are our WX or workforce acceleration ramp up and the introduction of our new HR analytics tool, integrating Visier (ph) into in Insperity Premier. Our WX initiative was launched at our sales convention in January and our early read on the sales pipeline is encouraging. Our BPAs are embracing the introduction of the two optional bundles WO and WX early in the sales process, which allows for a more natural process to recommend WX in the event the prospect does not qualify or is just not ready for workforce optimization.

We expect the increase in WX sales activity to continue to ramp up throughout the balance of the year and begin converting to sales at a higher rate as BPAs, yet more at best selling this new bundle.

Last quarter, we announced a beta test with selected clients of our new HR data analytics engine. We view this powerful new tool as a game changer in highlighting our unique capability to provide instant insights, coupled with consultative support from capable HR experts to help clients act on this information. We believe this software with a service approach is a tremendous competitive advantage for Insperity and this new tool drives home the point.

We are continuing training of our HR professionals this quarter on the use of the tool and the information to support clients. This predictive data analytics capability is built into our Insperity Premier HCM platform, a first for the Visier offering. In addition, Insperity clients have no setup, administration, data management or additional cost as this new capability just shows up with single sign on and seamless navigation within Premier. This adds substantial and demonstrable value to our offering and reinforces our premium service positioning.

Late in the first quarter, we've been adding the data analytics discussion to the technology demo for prospective mid-market clients. Our plan for monetizing this new technology is through increasing our win rate in sales of mid-market accounts and improving retention, increasing the lifetime value of clients within the segment. We are very excited about the early reaction from prospective enterprise and mid-market clients from anecdotal response to our HR analytics demo.

Comments and immediate action taken by these prospects to move the sales process forward have been very encouraging. These two initiatives are important because they contribute to our potential to continue the impressive run we are on in growth and profitability. After four years in a row increasing our adjusted EBITDA by more than 25%, a natural question is how sustainable are these strong results.

There are four pillars to our business model, supporting the sustainability of our high performance; consistent predictable growth, management of price and cost, operating leverage and the sheer size of our market opportunity. Our proven capability to generate consistent predictable double-digit unit growth is the platform for sustaining this level of performance. This competency comes from the combination of a professional dedicated service organization, delivering on our promises and achieving exemplary retention results, and a high performance sales organization hiring, training and supporting BPAs to drive sales success at targeted levels.

We've also proven over many years our proficiency at managing employment costs and effectively matching pricing to clients to achieve targeted levels of profitability, while providing a more stable cost environment for clients. This is also a central element to the sustainability of the high performance of our business model.

Our business model also has operating leverage built in as approximately 55% of our expenses are variable, increasing along with our growth, while the other 45% are fixed or semi-variable. Investments in growth, service, technology or compliance can be readily managed to balance growth and profitability.