Insperity, Inc. (NYSE: NYSE:NSP) reported its third-quarter earnings, revealing a mix of challenges and strategic initiatives poised to drive future growth. The company disclosed an adjusted EPS of $0.39 and adjusted EBITDA of $39 million, with a slight decline in paid worksite employees. Despite this, client retention was notably strong. Insperity is entering a transitional phase with the retirement of CFO Douglas Sharp (OTC:SHCAY) and the appointment of Jim Allison as his successor. The company is investing in a strategic partnership with Workday (NASDAQ:WDAY) and AI advancements to enhance service efficiency and is cautiously optimistic about its growth prospects in 2025.
Key Takeaways
- Insperity reported a 2% decrease in paid worksite employees from the previous year.
- Adjusted EPS stood at $0.39, and adjusted EBITDA was $39 million.
- Client retention remained high at 99%.
- Operating expenses were below plan, with $23 million returned in dividends and $15 million in share repurchases.
- CFO Douglas Sharp to retire on November 15, 2024, with Jim Allison taking over.
- Insperity expects a 1.3%-1.5% decline in average paid worksite employees for 2024.
- The company forecasts an adjusted EPS between $3.42 and $3.66 and adjusted EBITDA between $262 million and $274 million for 2024.
- A partnership with Workday and AI implementation are key strategies for future growth.
Company Outlook
- Insperity anticipates growth acceleration in 2025, focusing on fall selling and retention campaigns.
- The Workday partnership is expected to deploy in the first half of 2025.
- AI solutions are set to improve service efficiency and operational processes.
Bearish Highlights
- The company faced weak client hiring and loss of mid-market accounts, leading to a decline in worksite employees.
- The economic environment poses challenges to client retention and employee growth.
Bullish Highlights
- Strong client retention at 99% despite market challenges.
- Anticipated growth from strategic initiatives, including the Workday partnership and AI advancements.
- The company managed operating expenses effectively, even with lower employee counts.
Misses
- A decline in average paid worksite employees from Q3 2023.
- The company is bracing for a slight decrease in worksite employee numbers for 2024.
Q&A Highlights
- CEO Paul Sarvadi expressed confidence in the company's robust mid-market pipeline and the effectiveness of the upcoming fall campaign.
- Sarvadi acknowledged the positive impact of the incentive-based approach on booked sales growth.
- The initial list for the Workday beta program has been narrowed down to approximately 30 mid-market clients.
Insperity's third-quarter earnings call reflected a company in transition, grappling with current market uncertainties while laying the groundwork for future growth. The firm's investment in technology and strategic partnerships, particularly with Workday, indicates a forward-looking approach designed to enhance its competitive edge in the PEO space. With a strong retention rate and a clear focus on operational efficiency, Insperity is positioning itself to capitalize on market opportunities in the coming years.
InvestingPro Insights
Insperity's recent earnings report and strategic initiatives align with several key insights from InvestingPro. Despite the challenges highlighted in the earnings call, InvestingPro Tips reveal that Insperity has maintained dividend payments for 20 consecutive years, demonstrating a commitment to shareholder returns even in uncertain times. This consistency is particularly noteworthy given the company's current transitional phase and the economic headwinds it faces.
The company's financial health appears robust, with InvestingPro Data showing a Price/Earnings ratio of 18.87, which is relatively moderate and may suggest a fair valuation considering the company's stable dividend history and growth initiatives. Additionally, Insperity's revenue for the last twelve months stands at $6,537.87 million, with a modest growth of 4.04% over the same period, indicating resilience in its business model despite the reported decrease in paid worksite employees.
An InvestingPro Tip notes that Insperity holds more cash than debt on its balance sheet, which provides financial flexibility to fund strategic initiatives such as the Workday partnership and AI advancements mentioned in the earnings call. This strong cash position could be crucial for navigating the anticipated slight decline in worksite employees for 2024 and positioning the company for the expected growth acceleration in 2025.
It's worth noting that InvestingPro offers 10 additional tips for Insperity, providing investors with a more comprehensive analysis of the company's financial health and market position. These insights could be particularly valuable as Insperity navigates its current challenges and pursues future growth opportunities.
Full transcript - Insperity Inc (NSP) Q3 2024:
Operator: Good morning. My name is Jenny, and I will be your conference operator today. I would like to welcome everyone to the Insperity Third Quarter 2024 Earnings Conference Call [Operator Instructions]. At this time, I would like to introduce today's speakers. Joining us are Paul Sarvadi, Chairman of the Board and Chief Executive Officer; Douglas Sharp, Executive Vice President of Finance, Chief Financial Officer and Treasurer; and Jim Allison, Executive Vice President, Comprehensive Benefits Solution and CPO. At this time, I'd like to turn the call over to Douglas Sharp. Mr. Sharp, please go ahead.
Douglas Sharp: 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 third quarter and '24 financial results. Paul will then comment on our recent accomplishments, including an update on the implementation of our Workday strategic partnership solution and on our outlook for the remainder of the year. Then Jim Allison, who succeeded me as upon my retirement, will return to provide our financial guidance for the fourth quarter and an update to the full year guidance. We will then end the call with a question-and-answer session. Before we begin, I would like to remind you that Mr. Sarvadi, Mr. Allison 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 a more detailed discussion 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 Web site. Now before I discuss the third quarter results, I want to express my gratitude for the opportunity to serve as CFO of Insperity over the past 25 years. As we announced a couple of months ago, I will be retiring as CFO on November 15 and Jim Allison, the current Executive VP of Comprehensive Benefits Solutions and CPO, will be my successor. I'm grateful to have played a role in the significant growth of the company over the years and helping the company achieve its mission of providing premium HR services and products to the small and midsize business community. I'm retiring, knowing Insperity is in good hands with its current leadership team, including Jim, who brings significant experience in the company's operations and finances to the CFO role. So now let's discuss our solid third quarter results, in which we reported adjusted EPS of $0.39 and adjusted EBITDA of $39 million. As for our growth metric, the average number of paid worksite employees of just over 309,000 was at the midpoint of our forecasted range. As expected, the 2% decline from Q3 of 2023 was impacted by the continuing softness in hiring by our client base and the loss of several mid-market accounts at the beginning of the year. Client hiring continued to be weak during Q3 as slight net gains in the first two months of the quarter were offset by a net decline in the third month. We believe the current macroeconomic environment continues to weigh on our clients and prospects and contributed to slightly lower worksite employees paid for new sales. However, this was offset by strong client retention of 99% for the quarter. An 11% decrease in gross profit from Q3 2023 on the 2% decrease in paid worksite employees included a difficult comparison to the prior year's quarter, which was positively impacted by favorable healthcare claims development. Our Q3 2024 benefit cost trend was slightly above the high end of our forecasted range but below our initial budget. And when combined with our overall pricing strategy, we believe we have effectively managed to our long term goal of matching price and cost. In a few minutes, Jim will provide more color in this area, including our expectations over the remainder of 2024. Q3 operating expenses were managed below plan with various savings in our G&A cost. Our year-to-date operating expenses now include approximately $40 million associated with our Workday strategic partnership. Now the third quarter of 2024’s effective tax rate was positively impacted by research and development credit, which contributed just $0.02 per share in earnings above our Q3 2024 forecast. And we continue to forecast the full year 2024 effective income tax rate of 28%. During the quarter, we continued to provide returns to our shareholders through our regular dividend program and the repurchase of our shares. We paid out $23 million in cash dividends and repurchased 167,000 shares of stock at a cost of $15 million in Q3. We ended the quarter with $212 million of adjusted cash, an increase of about $40 million over December 31, 2023 balance. And we had $280 million available under our credit facility. Now at this time, I'd like to turn the call over to Paul.
Paul Sarvadi: Thank you, Doug. And thank you all for joining our call. Today, I'll begin with remarks on our third quarter financial results. I'll follow with commentary on our plans to take advantage of our market opportunity in Q4 to move towards growth acceleration in 2025. I'll finish with a discussion of sales and service initiatives we expect to implement over the course of the next year to drive long term growth and profitability, including AI and our Workday strategic partnership. Now in Q3, we weathered the continued heightened uncertainty in the small and medium sized business marketplace with solid financial performance in adjusted EBITDA and EPS. We achieved our worksite employee average target for the quarter with good client retention. However, worksite employees from net hiring versus layoffs was below expectations and even slightly negative for the full quarter. This factor included a net gain in the first two months, followed by a greater than expected reduction in September beyond what's typical from just summer help going away. We believe this reflects continued stress in the small business marketplace and possibly some preelection hesitancy. This pressure continued to be evident from our real time internal data beyond the normal hiring activity, including low levels of overtime pay and commissions paid to sales personnel at the client companies. Despite these difficult conditions, our booked sales were up 8% over the same period last year on a 2% increase in business performance advisers in the marketplace. In addition, pricing for our HR services was up 2%, reflecting continued adherence to our long-term pricing plan even in a competitive environment. Our pricing policy discipline also continued in our direct cost allocations, including payroll taxes, workers' compensation and employee benefits. This is our standard mode of operation and it's important to highlight in this setting. For example, this quarter, our benefit claim cost was slightly higher than expected after our first half of the year with slightly favorable cost in this area. Our pricing allocation policy is not driven by these short term variances but rather by our conservative view of long term trends. Our pricing policy has continued our focus on trends that have been higher in the marketplace post COVID. This approach to match price and cost over the long term allows us to provide our small business clients with what we believe is a more stable employment cost structure than other firms, providing us with a significant competitive advantage. We are tweaking our guidance for the fourth quarter as you'll hear from Jim in a few minutes to factor in the slight increase in health came activity and the lower paid worksite employees, primarily from the lower net hiring in the client base. Now for the balance of the year, we believe we are well positioned to return to growth acceleration in 2025 with a successful fall selling and retention campaign. This would be achieved by reaching a starting point in paid worksite employees in Q1 that is even with the average worksite employees we expect to pay in Q4. Our fall selling and retention campaign is well underway and we have several reasons to be encouraged. We have over 700 trained business performance advisers in the field, a well trained -- well designed pricing and incentive strategy for each target market segment and a robust marketing campaign and in addition, a strong mid market pipeline. We also have reason to believe there may be post election relief of hesitation and uncertainty in the target market. The election’s over soon and both parties have highlighted support of the small to medium sized business community. Throughout our history, we have seen some level of rebound from periods of uncertainty. We have seen companies in our target markets of the best small and midsized businesses in the country typically have a growth mindset and can't be held back for long. As we focus on 2025, we believe we have an exceptional opportunity for growth acceleration as we also lay the groundwork for greater effectiveness and efficiency in both sales and service. We anticipate implementing a role based approach to optimize our sales organization with our offerings, including our long standing core PEO to the small business marketplace, our traditional employment business and our significant mid market opportunity. We also expect to focus on improving effectiveness and efficiency on the service side of the business. This is made possible by our dramatic progress leveraging our own vast HR content knowledge and data through AI after so many years delivering the most comprehensive HR service in the marketplace. Our AI strategy is centered on creating efficiencies, leveraging our deep embedded HR expertise and enhancing, not replacing, the best-in-class service that Insperity is known for. Our technology investments in recent years have focused on modernizing our data platform and elevating our capabilities of data strategy, governance, engineering and analytics. These initiatives laid the groundwork for our efforts to capitalize on AI investments. As examples, the implementation of Salesforce (NYSE:CRM) as our CRM and the creation of a modern data hub enable us to scale and be more nimble with business priorities like powering the marketing funnel and developing our own internal AI tool. We can also quickly ingest and transform new data sources as well as our own vast body of HR thought leadership content and knowledge. By leveraging enterprise AI solutions to process our proprietary information, we are building and testing an internal tool that we believe will drive both efficiencies and deeper knowledge for our service and sales teams to further enhance the client experience. Service areas like the contact center and payroll lend themselves naturally to AI support. We believe use of AI will increase the speed and proficiency of our service teams. As we design and test our AI solution, we're measuring the benefits in these areas and believe that it will help us with operational capacity management and optimization. Longer term, we are targeting a client based conversion of our tool that would allow clients to get answers to common questions more easily. We're also expanding our use of machine learning and AI to drive predictive insights that we believe can directly impact growth in retention. Significant progress has also been made advancing our strategic partnership with Workday. I've spoken previously about the four defined pillars of work, including our Insperity corporate tenant, our exclusive client tenant, our deployment and enablement services and our joint go-to-market plan. I'd like to provide a brief update on the execution of each of those. And as a reminder, through this strategic partnership, Workday and Insperity are committed to jointly developing, marketing, selling and supporting the preeminent solution for targeted small and medium sized businesses that combines Workday's HR technology with Insperity's HR services. We expect to offer this unique PEO solution to the target market using Workday technology for less upfront capital cost, ongoing expense complexity and implementation time than currently available in the marketplace. Our go-to-market plan for this strategic partnership is centered on co-selling, co-branding and co-marketing to the target market of companies with fewer than 3,500 employees. We've established an incentive program in concert with Workday to increase opportunities for sales. We are currently focused on the integration of this go-to-market plan into the 2025 business plans for both firms. We are progressing well on our co-branding, co-marketing efforts as both Workday and Insperity's marketing teams are engaged in building out a mutual approach to generate awareness, excitement and interest for the new joint solution. We plan to deploy the Workday platform for Insperity's corporate use first to better understand the implementation process and how to configure and integrate the systems we will use across both tenants. We've made excellent progress and we believe we are now on track to deploy this solution in the first half of 2025. Our strategy to deploy the Workday solution for our own corporate use before taking our new joint solution to the market is proving out. Many of the nuances of integration and configuration that are part of the implementation are directly applicable to the development of the joint solution. Now we're also progressing well on the development of the joint solution client tenant. We have an agreed upon development plan well underway with Workday that we believe would make the technology platform fit our PEO business model. We continue to refine the definition of differentiation of the product offering. We remain focused on delivering a comprehensive HR and technology solution with speed to value and total cost of ownership as key drivers as well as the pricing methodology that will apply to the new joint solution. We're well underway establishing our deployment and enablement organization as well. This is not a new test since we already deploy and enable new clients onto our own premier HR technology platform in our current PEO offering and onto another HCM platform for our traditional employment clients. Throughout this year, our service operations group has been completing advanced training and certifications for specific roles while establishing our playbooks for customer support for the new joint solution. They've had the advantage of being able to use the corporate tenant deployment to provide the basis for much of this effort. These playbooks will include processes similar to the approach used in our current fast deployment onto our current system. We're also well along the path of identifying an initial group of clients that will be migrating to the new platform ahead of launching the joint solution to new clients. In summary, we're focused on a successful fall selling and retention season to achieve a solid starting point for 2025. We also see an opportunity for growth acceleration next year with sales and service improvements as we leverage our data infrastructure with AI and our Workday strategic partnership. Now before I pass the call on to Jim for our guidance discussion, I'd like to publicly thank Doug for his outstanding performance in his key role here at Insperity for so many years. Doug has had an excellent career demonstrating dedication, commitment and making a significant contribution to the success of Insperity. I'm also very excited to execute an effective succession plan having Jim Allison as our new CFO. Jim is uniquely qualified and experienced to immediately take over this role. We look forward to the opportunity for you to meet and work with Jim going forward. At this point, I'd like to pass the call on to Jim.
Jim Allison: Thanks, Paul. Our outlook for full year 2024 earnings remains within the range of our prior guidance, albeit at the lower end of that range. As Doug and Paul have mentioned, the environment for worksite employee growth continues to be challenging due to the economic climate and labor market in our target customer segments. We are cautiously optimistic that recent and anticipated interest rate decline along with the completion of the current election cycle could provide improvement over time, but we have not incorporated a change in the short term. Given these factors, combined with the starting point going into the fourth quarter, we have adjusted our full year outlook to the lower end of our previous guidance and now expect average paid worksite employees in a range of 307,400 to 308,100, which is a decline of 1.3% to 1.5% compared to 2023. On a year-to-date basis, our pricing and benefit costs have been slightly favorable when compared to our initial budget. Our benefits cost in Q3 returned closer to our original budget due to a slight increase in utilization and we have assumed a similar level in our Q4 forecast. We expect that our full year benefit cost trend will remain near the low end of our initial 2024 expectations of 4.5% to 6%. We expected somewhat elevated healthcare cost trends for both 2024 and 2025 and we did not adjust our pricing targets based on the favorability we experienced in the first half of the year. As a result, we believe that our pricing remains in a solid position at this point. We continue to closely monitor healthcare and other direct cost trends along with the competitive landscape. And if necessary, we would adjust our pricing targets next year consistent with our long term pricing strategy. Operating expense management remains a key focus due to the lower worksite employees. We forecasted and achieved savings in Q3 and we have refined our plan for Q4. That said, we continue to focus efforts and planned spending on the implementation of the Workday strategic partnership and we expect total spend on this initiative of around $60 million for the full year as originally estimated. Based on these factors, we are now forecasting full year 2024 adjusted EPS in a range of $3.42 to $3.66 per share within the range of our previous guidance of $3.33 to $3.88. We are now forecasting adjusted EBITDA in a range of $262 million to $274 million. As for Q4, we are forecasting paid worksite employees down 1% to 2% compared to Q4 of 2023. For Q4 earnings, we are forecasting adjusted EBITDA in a range of $15 million to $27 million and adjusted EPS from negative $0.10 to positive $0.12. Earnings comparisons to Q4 of 2023 will be significantly impacted primarily by the planned investments in the Workday strategic partnership in 2024. At this time, I'd like to open up the call for questions.
Operator: [Operator Instructions] Your first question is coming from Andrew Nicholas of William Blair.
Andrew Nicholas: I wanted to first ask on client retention and just maybe market competitiveness overall this fall season. I know you're still in the midst of it and the next couple of months won’t make a big difference, but I guess, two part question is, is the Workday partnership or the plans to launch that in the first half of next year having any noticeable impact on large client retention to this point? And then again, just on market competitiveness. It seems like you've priced your book very effectively relative to cost trends. Just wondering if that's giving you any sort of advantage in the market or if there's still quite a bit of aggressiveness from competitors in terms of undercutting on price?
Paul Sarvadi: Certainly, there has been a competitive environment that we've talked for many quarters. We've responded to that in a very exceptional way, I believe, in that we have created incentives for our potential clients, our prospects, different incentives in each segment knowing what each segment really highlights as their incentive for coming on. But what we've done is we've created these incentives that are shorter term, they don't affect the long term pricing of the client. And that has worked and has been favorable because we believe some of the pricing that's going on in the marketplace has been more desperation and we believe that our long term pricing policy really is the better answer, especially for the clients because it allows us to give them a more stable cost structure into the future. So we've been successful on that front. Now relative to client retention these incentives that we've created also have been applied in our renewal process with clients. And so yes, we're well under way of having some success there. But you are also correct in your question it’s kind of in the middle. So all the balls are in the air. So we still got to do a really effective job for the next couple of months. And the fact that we have a Workday relationship, we know has certainly created a different perception within our client base, especially in that mid-market space. It's kind of hard to tell at this stage, which type of factors are making the difference, these new incentives or the Workday relationship. But hey, all of it is helping and we're looking forward to doing our very best over these next couple of months.
Andrew Nicholas: And then for my follow-up, switching gears a little bit. I just wanted to talk about expenses. It looks like really nice job managing the G&A line this quarter. Can you talk a little bit about where those savings are coming from? And then you talked about your AI investments and some of the opportunities to drive efficiency there. Is that -- are the efficiencies there enough to kind of offset the cost of implementing them in the near term? Just trying to understand if that is incremental to the cost structure looking ahead to '25.
Douglas Sharp: I'd say for the recent quarter to say it’s in the G&A area, really just focusing in a period of slower worksite employee growth on where we can get most efficiency out of certain areas. In this past quarter, they primarily were in the G&A area. As we mentioned, we are investing in the Workday partnership that obviously adds -- needing to add some personnel and redeploy personnel. And so we are making those investments. But yes, at the same time, we're looking at other areas of the business where we can create more efficiencies, I would say -- and you refer to Paul on this, fairly early on in getting any efficiencies out of AI. We see a lot of potential there in both the sales and the service organization. And we think that, that can create operating leverage going forward. But I would say we're still at the fairly early stages of that.
Paul Sarvadi: Let me just add to that on the AI front. It is very exciting. And what is exciting to me is that the thought leadership that we've had for so many years as the most comprehensive service in the marketplace, we have incredible knowledge based data information that is going to be highly leverageable that will help us be more efficient and more effective. And what we look forward to that is that our ability to grow the client base and not have to add as many people, because people will be able to do their jobs more efficiently, more effectively. There are great examples we're seeing already. But this is all still in this careful development and then we will spend more time talking about it specifically what will be -- I don't want to really say piloting, because it's -- maybe it's beyond piloting but it will be testing and making sure things are working properly because we believe we can elevate the client experience in our own corporate staff experience and be more consistent and more accurate in our communication. So that's going to be a significant emphasis for 2025. Now how quickly that turns into benefit at the bottom line that's -- it's too early to tell that but we definitely see that, that's part of the picture for a company like ours going forward.
Operator: Your next question is coming from Tobey Sommer of Truist.
Tobey Sommer: I wanted to start out on corporate instance of Workday as well as the client facing. Has the time line shifted at all, is it pushed out to the right? And if so, what might be the driver of that?
Paul Sarvadi: So what we've done, we had never put and even to this day, I'm not ready to pinpoint a date. Because when you're developing like we are together on this project, I don't want to pinpoint a date too early that moves out or pinpoint a date too far out that relaxes people. So we are progressing very well, very diligently at a very detailed specific level but we also, relative to the corporate instance and the client instance, as I mentioned in my script, our work to go live on the corporate in sense is part of a process that is -- it's almost like the beta for going on to the client side. There's a lot of integrations and things of that nature on the compliance front that also are part of what goes into the client side. Now it's not exactly the same as the client site, obviously, and there are -- there's other significant development to do. But it is foundational to where we're going. So the timing of those two being relatively close together is important as well. So it's been planned for the corporate side for that first half of the year, could have been earlier, could be a little later, but that's -- it needs to be timed just right with the whole process. I hope that helps you.
Tobey Sommer: And how do you think about, in this selling season, the puts and takes as far as sort of prospective customers maybe looking at transitioning to your existing HR platform and then eventually to a Workday platform as maybe more than maybe want to bite off in a relatively compressed amount of time versus the -- probably upside of the benefit to retention of existing customers who maybe were looking for some more features see on the horizon you're going to be able to offer them.
Paul Sarvadi: I'll tell you the understanding and expectation that has created that we are going to have this solution coming has actually been really good in both prospects and clients. On the prospect side, we've spent some time really thinking to, hey, would this be an issue about customers say, hey, I'll just hold off. But the reality is that there's a lot of other things that happen when a customer comes on and it makes a big difference in that client's business, and they're able to see that. And coming on to our system, which takes a short period of time, we have not seen that be an issue for companies, they might be -- they might come on our system and then be in the second wave on the new one for their own timing reasons, that's perfectly fine. But we haven't had anybody that I'm aware of that just said, hey, we're going to wait. And in fact, I actually think we're getting closer and closer to the point at which a prospect who goes through the normal process, it's going to take 18 months, hey, they're about to get in a situation where within the same time frame here and less, they're going to be -- they can be on this system. So the decision that we want prospects to make is to look at their whole business and see if they need a technology and service solution if they want to completely deal with their scalability issues and -- because we're going to be that answer. So I'm excited about our go-to-market strategy in next year because we literally will be together talking to prospective clients and helping them navigate their best path forward, whether it's a Workday solution apart from us, which, like I said, takes a considerable length of time or coming on to our joint solution, which gives them a broader set of solutions to really help their business grow and develop.
Operator: Your next question is coming from Mark Marcon of Baird.
Mark Marcon: First of all, Doug, it's been a pleasure working with you for 20 years. So really appreciate all of the help over the years and look forward to working with Jim. With regards to the quarter and the guide for the fourth quarter, can you talk just a little bit more about what you're seeing with regards to healthcare trends, obviously, TriNet ended up reporting that severity was up. When you take a look at your gross profit per worksite employee, are you seeing an increase in terms of number of claims, is it severity, is it general inflation? How are you thinking about that with regards to the fourth quarter? And then for next year and how we should think about pricing and what sort of impact could that end up having with regards to retention as well as new bookings in the core selling season?
Jim Allison: I think the first thing I would say is there is a normal range of benefits trend that kind of exists in history. Right now, we're probably seeing the trend is running a little bit towards the higher end of that historical range. Probably the biggest driver [Technical Difficulty] there are a lot of the specialty drugs that are out on the marketplace now. The GLP-1s being that the most recent example of that. But there are also a fair number of new high cost treatments, different kinds of cancer treatments and things like that, that continue to come to market. So those are the things that are kind of driving a little towards the top end of the range. From our perspective, we went into '24 and also '25, expecting that we're going to have some level of elevated healthcare cost trends and put in a pricing strategy for that. I would say that things have come in a little bit better than our expectations, particularly in the first half of this year. And from a severity standpoint, things are pretty much in line with where we expected them to be. We did see just a little bit more utilization in the third quarter of '24 than we had seen in the first half. So it's a little bit more utilization, not a significant change in severity at this point.
Mark Marcon: And then with regards to the Workday partnership. And at what point -- and I know it's still early, but do you feel like by the time we get to the selling season for end of '25 going into '26 that everything will be fully in place? Just trying to get a sense for when -- and I fully appreciate that sometimes Workday implementations can take a while. But just wondering, do you think it will be all set up so that you feel like it will be really smooth by the time we get out to '25, '26. And also any sort of indications with regards to what you're seeing in terms of referrals from the Workday pipeline?
Paul Sarvadi: So let's talk about the big picture of as we go into the next year. Obviously, the development is the key things and tracking towards a launch of the joint solution but the other thing, though, to remember is that the go-to-market effort will be ongoing. So when you first started asking the question, it's about that fall period in '25, I'm seeing us be absolutely ready and out there literally being able to fully inform the prospect about what's coming, demo, what's out there, what we have coming and customers being able to make that decision to come on board. So I'm not ready to pin down a launch date of actual product but I know we're going to be on the track and it's going to be within such a time frame that selling will be happening, that I'm confident. So hopefully, that helps with that question. I know there was a second part to that question but I can't remember what that was. No, yes, about the also the -- you're really talking about the go-to-market effort of passing leads back and forth and things of that nature, that has begun. The keys to making that work, I mentioned in my script is that having a go-to-market plan that is in both companies' business plans, so it's not off to the side. But just the timing this year when we put all this in place, it was beyond the point to really have it as an essential element to people's incentives, et cetera. We have worked through all that. We have a significant go-to-market strategy team meeting to lock everything down about what's in the 2025 business plans for both companies. And so I anticipate some real acceleration over time on that level.
Operator: Your next question is coming from Jeff Martin of Roth Capital Partners.
Jeff Martin: I wanted to dig in a little bit more. It sounds like you're expecting year end transition to be favorable coming out Q1 [WSEEs] relatively consistent with Q1. Just curious if you could confirm that. And if there's anything specific to that, that you expect to be different from years past that would drive a positive transition?
Paul Sarvadi: So I do expect it to be favorable. We've got work to do. We're in the middle of it. And I'd say favorable, I thought compared to last year, we had seven customers go away that cost us 8,000 employees and $40 million of adjusted EBITDA for the year. By the way, while I mentioned that, just keep in mind as we talk about the Workday solution, we're talking about a nominal number of clients that makes a huge difference in our model. So I really want people to understand that. So again, a little bit better ability to keep some good sized customers because of that -- at least it's in the hopper coming down the road. We're hopeful that, that is part of the picture for this year but there's still a lot of work to do. And we don't -- I think it's important also to have in context that to have growth acceleration, to turn the corner and go from a nominal reduction in worksite employees to a positive number, we just need to have a decent year end and have the number we pay in the first quarter about the same as the number we pay in the fourth quarter, and then we're in deposit. And based on the sales effort that we have right now and the specifics that we have planned for a more role based approach for next year specific to each product that we offer in the marketplace. We think that also is going to help us be more effective next year. So even this year has been a tough year with the climate out there. But in an environment like that is when you really roll up the sleeves, people work hard and you learn things, and we've learned a lot of good things. And I think we're ready to make some tweaks, make some changes that we're really looking forward to a solid 2025.
Jeff Martin: And then on the AI side, could you talk to 2025, how that may progress? Sounds like there's a lot of potential efficiencies. Do you expect that to be fully implemented by a certain time frame in 2025 and how much efficiency operating leverage you may be able to get out of that?
Paul Sarvadi: Well, I think what's really exciting is that the excitement around AI and the way it works in our business, in terms of individual service providers being able to instantly have really good information, accurate information, the best answer we have to a question and to be able to do that instantaneously instead of a process of gathering information, thinking through things that could take a day or two and then going up to different folks or going across our organization, because a lot of times answers to the question don't come out of one department, it's information from across the organization. So having that information the best answer available immediately. And then still doing the work to make sure that this specific case that is the best answer, there's still work to do but it's much faster. Now the fact that there's so much energy around this, what I'm excited about it has brought to the surface for our corporate staff and our leadership to really focus on our operating cost on these things. And it's not just the service side but I'm not just focused on that. Even in the sales side, even in some of the other support parts of the organization there is efficiency gain. And it's great when you -- the company's always want to have some focus on operating expense control and trying build leverage in an organization. But usually, there's negative energy around that. What I'm excited is that AI gives positive energy around operating efficiency. And so that's going to be a highlight in our cultural mindset for 2025.
Operator: And your next question is coming from Andrew Polkowitz of JP Morgan.
Andrew Polkowitz: I also wanted to extend my congrats to Doug on the upcoming retirement and also Jim on the new role. My first question, I was encouraged that you called out good BPA leverage. I think it was 8% booked sales growth on 2% BPA growth. I was curious if you could call out just anything structural driving that or any details on your pipeline have you feeling good?
Paul Sarvadi: So as far as looking forward, I mentioned four things that really give me some confidence and encouragement about going forward. But I got to tell you that third quarter effort was basically rolling up the sleeves and really a lot of hard work in an environment where there's quite a bit of hesitation out there, and we even think almost the preelection stuff as things have gotten kind of crazy on that front. And thankfully, that should be hopefully over very soon. But it was really rolling up the sleeves. And it’s also testing some of our incentive-based approach during the third quarter and we were able to confirm some things and then tweak things a little further as we have gone into this fall campaign. So the number of trained BPAs out there, the incentive plans that I just spoke about and there's just other good things that pipeline in our mid market is strong. So we're really working hard to have an effective fall campaign.
Andrew Polkowitz: I just got one follow-up, related to Workday. I know you mentioned that you have a process underway for ID-ing initial group of clients to get on to the new joint solution before full launch. I was just curious, as far as identifying those clients, have there been clients that have actively reached out to you guys interested in being part of the beta? And just any details on how you ID those clients.
Paul Sarvadi: We have a client base that is informed and we were able to kind of target particular mid-market customers that we felt would be a variety and be the best that we would start with and we were able to work through that. And so we have a list of specific clients that are actively in communication about this process and we're in good shape on that front. And yes, I mean -- so we started with a number of about 60 or 70, reduced that to around 30 and then have highlighted a group of customers that we believe will be the best as the very initial beta group.
Operator: Thank you very much. While we appear to have reached the end of our question-and-answer session, I will now turn the call back over to Mr. Sarvadi for closing remarks.
Paul Sarvadi: Well, thank you again to all of you [Technical Difficulty] with us today. And once again, I just want to say a final thank you last call with our CFO, Doug Sharp with us, and once again, really thankful for a great job done all these years and hoping for all the best for you, Doug, going forward. And Jim looking forward to getting on the road together and getting the chance to meet a lot of great people out there that are our investors in the business. So thank you, once again, everybody, for being here and we look forward to seeing you out on the growth.
Operator: Thank you very much. This does conclude today's conference. You may disconnect your phone lines at this time, and have a wonderful day. Thank you for your participation.
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