Q3 2024 Earnings Summary
- BBSI is achieving record controllable growth by focusing on increasing their sales pipeline, efficiency, and process, resulting in more referral partners, prospects, and closes, and adding a record number of worksite employees from new client adds during the quarter.
- BBSI Benefits, their new health insurance offering, is attracting new clients and referral partners, enhancing their growth, and is expected to be accretive to earnings starting in 2025 as it scales up, providing potential for strong operating leverage.
- BBSI's differentiated business model, focusing on local service teams and avoiding underwriting risk on workers' comp and health insurance, leads to predictable profitability and cash flow, which could potentially deserve a superior market multiple.
- Increased client closures due to harder times: The company has observed a rise in client closures or sales as times have become tougher. This increase could negatively impact client retention and future growth, even though overall retention remains above 90%.
- Slow client hiring impeding growth: Client hiring is currently running at only 25% to 30% of historical levels, which limits the company's ability to achieve double-digit gross billings growth. Higher client hiring rates are necessary for the company to return to its historical growth levels.
- Benefits product not yet significantly contributing to earnings: The new benefits offering is currently just above breakeven and has not yet provided meaningful earnings leverage. While it is expected to be accretive in the future, the delay in significant contribution could affect near-term profitability.
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Growth Outlook
Q: What would it take to return to consistent double-digit growth?
A: To achieve consistent double-digit growth, we need an increase in client hiring. Our controllable growth through client additions and retention is the best it's ever been, but client hiring remains at 25–30% of historical levels. If client hiring increases, we can easily return to the double-digit growth sweet spot. -
Benefits Profitability
Q: Will you provide more details on benefits offering and profit potential?
A: As our benefits product grows, we'll enhance disclosures. It's currently profitable, a little better than breakeven, but we expect meaningful earnings leverage starting in 2025. The gross margin rate on benefits will be higher than our typical rate of around 3%, leading to strong operating leverage as it scales up. -
Competitive Edge
Q: Is BBSI Benefits helping you outpace growth relative to peers?
A: Yes, BBSI Benefits is attracting new referral partners and clients. Our clients are modestly hiring, and we're retaining them with our high-quality products and services. We've improved our sales pipeline and efficiency, leading to more prospects and closes. While the competitive environment hasn't changed, our focus and new products are driving consecutive quarters of positive results. -
Model Differentiation
Q: How does your model compare to TriNet and Insperity?
A: Our differentiator is our local service teams, which clients value highly, resulting in strong retention. We focus on the underpenetrated blue and gray collar space due to our workers' comp expertise. We've de-risked by not taking risk on workers' comp or health insurance, providing predictable profitability and cash flow, positioning us for a superior market multiple. -
Earnings Leverage
Q: Is SG&A growth being half of revenue growth still the target?
A: Our goal is to achieve earnings leverage by growing SG&A slower than revenue. We aim for 10% top-line growth and 15% bottom-line growth, resulting in about 1.5x leverage. While ratios may vary year-to-year, the focus remains on consistent earnings leverage. -
New Products 2025
Q: Any new product offerings or services coming?
A: Yes, we'll be launching new products in 2025 that integrate into our tech platform to better serve clients. We're currently beta testing with clients and will provide more details next quarter once confident in their performance. -
Client Retention
Q: How are client retention trends?
A: Our retention remains strong, above 90%, which is our target. Most client losses are due to businesses closing or M&A. Despite economic challenges, our teams are deeply integrated with clients, leading to longer relationships. -
Lead Generation
Q: Which lead sources are contributing more now?
A: Our lead generation is broad-based. We're increasing the velocity of referral partners like P&C brokers, benefits brokers, and CPAs. Additionally, our direct efforts through SEO and SEM are yielding positive results, ensuring a robust sales funnel. -
Staffing Growth
Q: Can you consistently grow the PEO staffing business?
A: Yes, we're offering recruiting services to PEO clients, many using recruiters for the first time. It's working well both for existing clients and as a sales tactic for new business. Every branch is aligned and compensated on placements, ensuring success.
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