BARRETT BUSINESS SERVICES INC (BBSI)·Q2 2024 Earnings Summary

Executive Summary

• Q2 delivered 6% revenue growth to $279.7M and 6% gross billings growth to $2.03B; net income was $16.7M ($0.62 diluted EPS), with results described as in line with the full‑year plan .
• Workers’ comp delivered a sizable $8.9M favorable prior‑year liability/premium adjustment; gross margin was 3.3% of gross billings (down ~20 bps YoY), as elevated payroll taxes continued to weigh but are being priced through for H2 .
• FY24 outlook maintained for gross billings growth (6–8%) and WSE growth (4–5%); gross margin range tightened to 3.0–3.10% (from 2.95–3.15%); effective tax rate unchanged at 26–27% .
• Capital returns remain a support: dividend raised 7% to $0.08 (split‑adjusted) and $44.9M repurchase capacity remained after Q2’s 222,780 shares repurchased at $31.63; no debt and $110.4M unrestricted cash and investments .

What Went Well and What Went Wrong

• What Went Well

  • Record client adds and improving client hiring drove 4% WSE growth; management cited “controllable growth” and a record number of WSE adds, with new business momentum and retention sustaining the trajectory .
  • Workers’ comp performance remained strong with $8.9M favorable prior‑year adjustments and renewal on favorable terms with no downside risk to BBSI; gross margin tracking to plan .
  • BBSI Benefits gaining traction; Kaiser HMO + national PPO offering sold to 20 new clients in July/August, ~380 clients now on medical plans (>8,500 participants); product expected to be accretive to 2024 and an accelerant into 2025 .

• What Went Wrong

  • Staffing revenues declined 3% YoY in Q2 amid macro supply/demand imbalances; management expects sequential growth in Q3 and Q4 but guided only modest YoY declines .
  • Pacific Northwest remained a laggard: Q2 PEO gross billings declined 3% YoY vs outsized East Coast strength (+19%); PNW softness tied to slower client growth, construction, and local conditions .
  • Gross margin as a percent of gross billings fell to 3.3% (vs 3.5% YoY) as higher client payroll tax rates persisted; management is pricing through and expects stronger margin rates in H2 .

Financial Results

Sequential and level-set comparison

Year-over-year comparison (Q2)

Segment revenue breakdown

KPIs

Actual vs consensus (S&P Global)

Note: S&P Global consensus data was unavailable due to access limits at the time of analysis; therefore, vs-consensus comparisons could not be provided.

Guidance Changes

Earnings Call Themes & Trends

Management Commentary

• “Our strong performance continued through the second quarter… we are confident 2024 will be another strong year for our shareholders.” – Gary Kramer, CEO .
• “We achieved a record number of WSEs from new client adds during the second quarter.” – Gary Kramer .
• “In Q2, we recognized favorable prior year liability and premium adjustments of $8.9 million… renewed with favorable terms including cost savings… and no downside risk to BBSI.” – Anthony Harris, CFO .
• “We are pleased with the results of BBSI Benefits… accretive to earnings in 2024… bullish on this product and will now reap the benefit of leverage through scale.” – Gary Kramer .

Q&A Highlights

• Workers’ comp visibility and durability: Management emphasized structural discipline, technology adoption (including AI), and “22 quarters in a row of favorability,” expecting the trend to continue given program design and conservatism .
• Benefits (Kaiser) timing: 7/1 launch was a deliberate learning step; management expects more meaningful gross margin contribution in 2025, hinging on the 1/1 selling season .
• Regional dynamics: PNW weakness tied to construction and local conditions; stability intra‑quarter but still lagging other regions; Northern California rebound continues .
• Go‑to‑market: Referral partner expansion progressing; more active partners than ever, with growing engagement from benefits brokers though ramp is slower than hoped .
• Competitive positioning: Health benefits enabling “PEO takeaways” from competitors where local service plus benefits make a compelling value proposition .

Estimates Context

• S&P Global consensus estimates for Q2 2024 revenue and EPS were unavailable at the time of analysis due to access limits; therefore, we cannot provide a vs‑consensus comparison.
• Management framed Q2 performance as consistent with plan and reiterated FY24 growth targets while tightening gross margin guidance to 3.0–3.10%, implying Street models should converge toward the new GM range and reflect H2 margin improvement as payroll tax pass‑throughs take effect .

Key Takeaways for Investors

• Controllable growth remains the core engine (record WSE adds, strong retention), with client hiring inflecting positively—especially outside the PNW—supporting mid‑single‑digit billings growth and improving mix into H2 .
• Workers’ comp performance is a durable differentiator; the $8.9M favorable adjustment and favorable renewal terms underscore earnings quality and cash flow resilience .
• Gross margin guidance tightened to 3.0–3.10% as payroll tax headwinds are priced through, pointing to sequential margin improvement in H2 and seasonal Q3 peak profitability .
• BBSI Benefits is gaining traction; expect greater revenue and margin leverage around the 1/1 cycle, with 2025 the likely step‑up year for material contribution .
• Capital returns are active catalysts: dividend raised 7% to $0.08 (split‑adjusted) and ~$44.9M buyback capacity remains; balance sheet is net‑cash with $110.4M unrestricted cash/investments and no debt .
• Watchlist risks/monitors: PNW macro/construction drag, staffing demand normalization, and execution through the 1/1 benefits cycle to crystallize 2025 uplift .
• Near‑term setup: Positive Q3 seasonal pattern, sequential staffing recovery, and ongoing buybacks/dividend support should be constructive for sentiment pending Street estimate updates to the tighter GM range .