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BARRETT BUSINESS SERVICES INC (BBSI)·Q3 2024 Earnings Summary

Executive Summary

  • Q3 delivered stronger-than-expected execution: revenues rose 8% to $294.3M, gross billings grew 9% to $2.14B, and diluted EPS was $0.74; management cited “billings growth ahead of our expectations” and a record number of WSE adds from new clients .
  • Workers’ compensation costs benefited from favorable prior-year liability and premium adjustments of $4.3M; gross margin as % of gross billings held at 3.5% YoY, supporting profitability despite higher SG&A linked to profit-based compensation .
  • Guidance raised: full-year gross billings growth increased to 7–8% (from 6–8%) and gross margin % of gross billings tightened/raised to 3.03–3.07% (from 3.0–3.1%); WSE growth and tax rate maintained .
  • Capital return remains a pillar: $8M buybacks at $35.09 average and $2.1M dividends; $36.9M remains on the $75M authorization—supporting shareholder yield into year-end .
  • Near-term stock catalysts: raised guidance, record WSE adds, and 2025 earnings leverage from BBSI Benefits; management expects 2025 gross billings growth similar to 2024 assuming a stable economy (noting one fewer business day) .

What Went Well and What Went Wrong

What Went Well

  • Record controllable growth: “record number of gross WSE additions from new clients,” with WSEs up ~5% YoY and average billing per WSE up ~3%—a clean execution of the sales funnel and retention strategies .
  • Workers’ comp performance: “favorable claim frequency trends and favorable claim development” produced $4.3M favorable adjustments; gross billings growth broad-based with double-digit East Coast growth (+18%) and Southern California back to double-digit growth .
  • Product momentum: BBSI Benefits expanding—“approximately 480 clients on our various medical plans, servicing more than 11,000 total participants” and management expects the product to be accretive to earnings in 2025 .

What Went Wrong

  • Staffing revenues declined 2% YoY as mix shifted to recruiting for PEO clients (equal margin, lower top line), though management sees stabilization and maintained strategy .
  • Pacific Northwest softness: region declined ~1% YoY, reflecting slower client growth and net negative client hiring, consistent with recent quarters and local economic challenges .
  • SG&A rose due to higher variable compensation tied to stronger profit (pressuring leverage in the quarter), though full-year SG&A remains aligned with profit goals .

Financial Results

MetricQ3 2023Q2 2024Q3 2024
Revenue ($USD Millions)$273.3 $279.7 $294.3
Diluted EPS ($USD)$0.67 $0.62 $0.74
Gross Billings ($USD Billions)$1.96 $2.03 $2.14
Gross Margin % of Gross Billings3.5% 3.3% 3.5%
Workers’ Comp % of Gross Billings2.7% 2.5% 2.3%

Segment Revenues ($USD Millions)

SegmentQ1 2024Q2 2024Q3 2024
Professional Employer Services$246.2 $259.9 $272.8
Staffing Services$19.6 $19.8 $21.5

Key Performance Metrics

KPIQ1 2024Q2 2024Q3 2024
Gross Billings ($USD Billions)$1.91 $2.03 $2.14
Average WSEs123,050 128,734 133,398
Ending WSEs124,785 130,046 132,698
Payroll Taxes & Benefits (% GB)8.5% 7.3% 7.2%
Workers’ Comp (% GB)2.6% 2.5% 2.3%
Gross Margin (% GB)2.1% 3.3% 3.5%

Notes:

  • Q3 workers’ comp included $4.3M favorable adjustments; Q2 included $8.9M favorable adjustments .

Guidance Changes

MetricPeriodPrevious GuidanceCurrent GuidanceChange
Gross Billings Growth (%)FY 20246%–8% 7%–8% Raised
Gross Margin % of Gross BillingsFY 20243.0%–3.1% 3.03%–3.07% Raised/Tightened
Average WSE Growth (%)FY 20244%–5% 4%–5% Maintained
Effective Tax Rate (%)FY 202426%–27% 26%–27% Maintained
Dividend per Share ($)Quarterly$0.08 (raised in Q2) $0.08 confirmed (Dec 6 payment, Nov 22 record) Maintained

Earnings Call Themes & Trends

TopicPrevious Mentions (Q1 2024)Previous Mentions (Q2 2024)Current Period (Q3 2024)Trend
BBSI Benefits (Health Offering)~280 clients, >7,000 participants; Kaiser partnership announced; 2024 accretive 1/1 success; Kaiser launched; ~380 clients, >8,500 participants; revenue mixing into GAAP ~480 clients, >11,000 participants; expected earnings leverage in 2025 Accelerating adoption
Technology/AI in risk programsN/A explicit in Q1Uses AI in workers’ comp discipline; 22 quarters of favorability trend Continued favorable claims and prior-year adjustments; fully insured structure, no retained risk Structural advantage sustained
Macro/client hiringModest hiring; NW weak; controllable growth primary driver Hiring improving across industries, incl. construction; below long-term average Economy consistent; modest client growth; controllable growth drove +5% WSE Stable-to-improving
Regional trendsEast +17%; SoCal +7%; NorCal +4%; PNW −6% East +19%; Mountain +7%; SoCal +6%; NorCal +4%; PNW −3% East +18%; Mountain +10%; SoCal +10%; NorCal +6%; PNW −1% Broad-based improvement, PNW lagging
Competitive landscapeN/AWorkers’ comp competitive; expanding referral network, benefits drive “PEO takeaways” Competition “always competitive”; local service model and benefits broaden referral sources Executing multi-channel sales

Management Commentary

  • “The momentum of our business strengthened in the third quarter, with billings growth ahead of our expectations and a record number of gross WSE additions from new clients.” — CEO Gary Kramer .
  • “Our workers’ compensation program continues to perform well… In Q3 ’24, we recognized favorable prior year liability and premium adjustments of $4.3 million.” — CFO Anthony Harris .
  • “We are bullish on [BBSI Benefits]… we should start to see some strong operating leverage that could be meaningful to the bottom line as that scales up [in 2025].” — CFO Anthony Harris .
  • “We are a referral partner-friendly PEO… multichannel approach [SEO/SEM] improving velocity into the top of the sales funnel.” — CEO Gary Kramer .

Q&A Highlights

  • Competitive positioning vs. peers: BBSI emphasized local service teams, “derisked” model (no retained WC/health risk), and focus on blue/gray-collar segments; benefits offering enables “PEO takeaways” from competitors .
  • Benefits disclosure and accretion: benefits currently “a little better than breakeven,” expected to become earnings-accretive in 2025 with scale; disclosures likely to expand as materiality increases .
  • Pipeline sources: stronger referral partner velocity and direct SEO/SEM channels fueling lead-gen; multichannel approach broadening reach .
  • Double-digit growth path: client hiring remains at ~25–30% of historical levels; stronger hiring would return billings to double-digit growth consistently .
  • Retention: above 90% target; most churn driven by closures/M&A; retention remains strong even as some closures rose with tighter economic conditions .

Estimates Context

  • Wall Street consensus (S&P Global) was unavailable at time of request; we attempted to fetch EPS, revenue, and EBITDA quarterly estimates but encountered an SPGI daily request limit error. As a result, we cannot determine beats/misses vs consensus for Q3 2024 at this time [SPGI error in tool].
  • Given raised FY guidance and internal statements of performance “ahead of expectations,” we expect upward estimate revisions in gross billings and gross margin assumptions, but cannot quantify without S&P Global consensus access .

Key Takeaways for Investors

  • Raised FY guidance (gross billings and gross margin %) signals durable momentum into Q4 and supports higher confidence in FY profitability trajectory .
  • Workers’ comp performance continues to provide favorable prior-year adjustments and predictable profitability under the fully insured model—reducing tail risk relative to risk-retaining peers .
  • BBSI Benefits is scaling (480 clients, 11,000 participants) and should begin delivering operating leverage in 2025, a potential multi-year EPS driver .
  • Regional breadth is improving (East, Mountain, SoCal, NorCal strong) with PNW lagging—portfolio diversification helps offset localized weakness .
  • Capital returns remain robust (buybacks and dividends), with $36.9M remaining on authorization—providing support to per-share metrics and investor yield .
  • Staffing topline remains subdued by strategy shift, but margin parity with recruiting for PEO clients suggests no structural profitability drag and stabilization underway .
  • Watch for 1/1 benefits selling season conversion and any signs of client hiring normalization; improved hiring is the key swing factor for returning to consistent double-digit billings growth .

Appendix: Additional Q3 Details and Capital Allocation

  • Liquidity: $94.4M unrestricted cash and investments; debt-free at quarter-end .
  • Buybacks: $8M repurchased in Q3 (228,570 shares at $35.09 average); $36.9M remaining under $75M program .
  • Dividend: $0.08 per share confirmed, payable December 6, 2024 (record date November 22, 2024) .
  • Balance sheet snapshot (Q3): Total assets $725.8M; stockholders’ equity $215.4M .