BARRETT BUSINESS SERVICES INC Q3 FY2024 earnings call

• Financial results: Strong third quarter with gross billings exceeding expectations, record worksite employees from new clients, and good client retention.
• Staffing operations: Staffing business declined 2% but is stabilizing, with recruiting for PEO clients placing 105 applicants in the quarter.
• Field operational updates: Entered new markets with an asset-light model, having 21 new market development managers, and moving into traditional branches.
• Product updates: BBSI benefits new health insurance offering with a partnership with Kaiser Permanente, 480 clients on medical plans servicing over 11,000 participants, and a 35% greater pipeline for 2025 opportunities compared to prior year.

During the third quarter, gross billings increased 9% to $2.140 billion compared to the prior year quarter of $1.960 billion. PEO gross billings rose 9% to $2.120 billion, while staffing revenues declined 2% to $21 million. PEO worksite employees grew by 5%. The workers' compensation program had favorable prior year liability and premium adjustments of $4.3 million. Investment income was $2.2 million. Net income per diluted share was $0.74, up from $0.67 in the prior year quarter. PEO gross billings by region: East Coast grew 18%, Mountain and Southern California 10% each, Northern California 6%, and Pacific Northwest declined 1%.

• Revised full-year gross billings growth outlook to 7%-8% (previously 6%-8%).
• WSE growth expected to be between 4%-5% for the year.
• Gross margin expected to be between 3.03%-3.07% of gross billings (previously 3%-3.1%).
• Effective annual tax rate remains between 26%-27%.

• Economic uncertainties that could impact client hiring and business growth.
• Intense competition in the staffing and benefits industries.
• Execution risks related to new market development and product launches.

Q: Good afternoon. Gary and Anthony, how are you? Wanted to touch on the competitive environment. A lot of your public peers are really struggling for growth in this environment and competition seems to be fairly cutthroat. Just curious what you're seeing out there and given this is your first real full year of BBSI benefit, do you think that's helping you outpace growth relative to peers?

A: Yes. Good question. Couple of things, right? One is our clients are in a sweet spot I would say for the macro economy. Our blue/gray clients are modestly hiring now. Anthony said it's at a pace less than the historical, but it's growth, right? And we'll take growth because last year we didn't have growth in that space. So our clients are growing number one. Our clients are healthy. We're retaining our clients. That's key in this business is to retain your business and we've got a very high retention rate from the products and services that we provide. And then on the sales side, we've been saying for years that workers' comp has been competitive. That hasn't changed. And then as far as competition in the marketplace, we've had a lot of focus and attention on our sales pipeline, our sales efficiency, our sales process. We get we're getting more referral partners recommending business to BBSI. We're getting more prospects. We're getting more closes. With those closes we get more worksite employees. So just in general we're selling and servicing more and we're doing that in a market that in my mind I don't think it's any more competitive. It's just always been competitive. But we've got a good focus and attention on it. And then on the health side, it is another arrow in our quiver. It's something that we're now getting referral partners in the benefit space. We're getting clients that we wouldn't have typically seen before that are looking for a package product. So we've got new products that are attracting new referral partners and new products that are attracting clients. So I think we've been working on the right things and we're putting together some negative quarters of positive results.

Q: Hey, good afternoon, guys. Nice quarter. Maybe we'll start with just gross billings growth. The guide is 7% to 8%. You did 9% Q3. Historically, you've had more than a few double-digit gross billing years. What kind of environment would you need to consistently grow double digits again?

A: Yes. We talk about our controllable growth, right? So that's the clients we add and the WSEs they have and the clients we retain in WSEs. Our controllable growth is the best it's ever been, right? So that's going to be a huge piece of our growth this year is going to be on our controllable side. Then you're going to get a little wage inflation which is going to help you grow as well and then you're going to get your clients that are hiring which is going to help you grow as well. Now the client hiring, Anthony mentioned, it's still below historical levels. We grow quicker when our clients hire, not by our clients giving raises. So the more the employees they hire, the quicker we grow. And that has been the slowest piece in this economy. Last year it was negative. This year it's positive, but it's still a fraction of what it was on our historical level. So it's running like 25%, 30% of what it was historically. So realistically if that number as far as our client hiring were to increase that would easily put us back into the double-digit sweet spot.

Q: Hey, good afternoon, guys. Nice quarter. Maybe we'll start with just gross billings growth. The guide is 7% to 8%. You did 9% Q3. Historically, you've had more than a few double-digit gross billing years. What kind of environment would you need to consistently grow double digits again?

A: Yes. We talk about our controllable growth, right? So that's the clients we add and the WSEs they have and the clients we retain in WSEs. Our controllable growth is the best it's ever been, right? So that's going to be a huge piece of our growth this year is going to be on our controllable side. Then you're going to get a little wage inflation which is going to help you grow as well and then you're going to get your clients that are hiring which is going to help you grow as well. Now the client hiring, Anthony mentioned, it's still below historical levels. We grow quicker when our clients hire, not by our clients giving raises. So the more the employees they hire, the quicker we grow. And that has been the slowest piece in this economy. Last year it was negative. This year it's positive, but it's still a fraction of what it was on our historical level. So it's running like 25%, 30% of what it was historically. So realistically if that number as far as our client hiring were to increase that would easily put us back into the double-digit sweet spot.

Q: Hey, good afternoon, guys. Nice quarter. Maybe we'll start with just gross billings growth. The guide is 7% to 8%. You did 9% Q3. Historically, you've had more than a few double-digit gross billing years. What kind of environment would you need to consistently grow double digits again?

A: Yes. We talk about our controllable growth, right? So that's the clients we add and the WSEs they have and the clients we retain in WSEs. Our controllable growth is the best it's ever been, right? So that's going to be a huge piece of our growth this year is going to be on our controllable side. Then you're going to get a little wage inflation which is going to help you grow as well and then you're going to get your clients that are hiring which is going to help you grow as well. Now the client hiring, Anthony mentioned, it's still below historical levels. We grow quicker when our clients hire, not by our clients giving raises. So the more the employees they hire, the quicker we grow. And that has been the slowest piece in this economy. Last year it was negative. This year it's positive, but it's still a fraction of what it was on our historical level. So it's running like 25%, 30% of what it was historically. So realistically if that number as far as our client hiring were to increase that would easily put us back into the double-digit sweet spot.

Q: Yes, Gary. You've been at your PEO staffing business, if I remember correctly, for about a year or so. It's good to hear the progress there. Do you think you're in a place where you can consistently grow that going forward?

A: Yes. We've been doing the recruiting for our PEO clients now. It's really a product that if you think of it, they've never used recruiters before. A lot of it is in the small blue-collar space. They've been doing it on their own or friends of friends or friends of employees and they've never adopted a recruiting model. So when they're typically joining us, they're doing recruiting for the first time and we're getting good penetration into our installed base and then we use it as a sales tactic when we're bringing on new business. So it's been working well for both. And then every branch has goals, every branch is talking to the clients about it, every branch gets compensated on how many places we're putting in. So we've got alignment through the organization in order to make sure this is successful. We think it's a really good tool for our clients.

Q: Hey, good evening. So I was wondering if we could talk a little bit about in your either in your prepared remarks or the press release, besides talking about the value added and where we are with the BBSI benefit, I was wondering if you could talk a little bit about some of the potential new product offerings, new service offerings, things of that nature that you might be looking at or if there is any sort of adjacencies that have sort of opened up as an opportunity to layer on with benefits?

A: Yes. Hey, Mark. We have a pretty well baked product roadmap, and I don't want to spill the popcorn or get ahead of ourselves, but we have a pretty baked product roadmap, and when we get to next quarter, we're going to be talking about some new products that we're launching in 2025. I don't want to spill the popcorn now, but we will be launching additional new products that are bolting into our tech platform that are better -- that will be used to by our clients to better service their business and we're excited about these products that are going to go out next year, but we're going to wait a quarter until we till I can say it with confidence that it works because right now it's in beta with some of our clients but until we get through beta and launch it, I don't want to overpromise.