CBIZ, Inc. Q3 FY2024 earnings call

• Overall business health was strong with total revenue up 7.1% for the first nine months and 6.9% for the third quarter.
• Progress on the Marcum acquisition: Major closing conditions satisfied, expected to close in coming days.
• Financial Services division: Core accounting and tax growth driven by pricing, advisory services had strong growth, government health care consulting business very strong.
• Benefits and Insurance division: Growth in all major service lines.
• Client sentiment: Waned somewhat but many clients still cautiously optimistic, concerns around election, market volatility, regulations, geopolitics, talent access, and inflation.
• Capital spending: Third quarter ~$2.7M, nine months ~$9.6M, expected ~$12M full year.
• Depreciation and amortization: Third quarter $9.6M, nine months $28.6M, expected ~$38M full year.

For the Financial Services division, total revenue was up 8.0% in the third quarter with same unit revenue up by 5.2%; for the first nine months, total revenue within Financial Services was up 7.7% with same unit revenue up by 4.5%. The solid organic growth in core accounting and tax was driven by pricing, and advisory services had stronger growth than anticipated. Within the Benefits and Insurance division, total revenue was up 3.7% for the third quarter (all organic), and for the first nine months, total revenue was up 4.6% with same unit revenue up by 4.0% for the nine months, with all major service lines contributing to growth.

• Reaffirm full year 2024 adjusted earnings per share expected to increase 10%-12% over 2023's $2.41.
• Total revenue expected to increase 7%-9% for 2024.
• GAAP reported earnings per share expected to be within 1% higher or lower than 2023's $2.39 due to Marcum-related expenses.
• Effective tax rate for 2024 expected at approximately 28%.
• Fully diluted weighted average share count expected 50M-50.5M.
• 2025 guidance including Marcum impact to be provided with Q4 and full year 2024 results.

• Forward-looking statements subject to risks and uncertainties due to matters not yet occurred.
• Potential impact of unforeseen events on future results.
• Integration risks with Marcum.
• Economic uncertainties affecting client spending and investment decisions.

Q: Hi. Good morning. Thanks for taking my questions. I wanted to maybe ask a high-level one on Marcum to start. Obviously, it's been a couple of months now since both your internal client base -- excuse me, employee base and Marcum partners and employees have gotten to know the deal, understand the deal and potentially get more comfortable with it. Just curious what the feedback has been internally? And any kind of color on what the post-integration maybe leadership structure might look like or any people from Marcum that you expect to play a big role in the combined firm?

A: Yeah, Andrew. Thank you. This is Jerry. I couldn't be more pleased with the reception that we've had, both from our internal team here -- our own team here at CBIZ as well as the Marcum team. As you suggested both myself, Ware, Chris Spurio, others have spent a lot of time in the Marcum offices and an even broader array of our teams have been working together over the past 90 days to envision the opportunities that will come when we bring these two terrific organizations together. I shared an anecdote recently where my very first visit to the Marcum office in downtown Manhattan, where when I walked in the office, it came a day after we had done a fireside chat, the CEO of Marcum and myself together. And as I walked through the office, you could just feel the excitement about the opportunities that we're going to come through combining these two organizations. Together, we'll expand our industry groups, 13, I think we have now industry groups. We have advisory services that we've worked hard to build out over the past almost decade. They can now bring those services to their clients. Like I said, they have strength in advisory -- I'm sorry, in industry groups that they spend more time in energy building out. The combination couldn't be better and more complementary and the teams feel that. And kind of going to your second comment, what have we been working on? We probably have 13 work streams that have been developed, everything from core accounting and tax, all the functional areas, marketing, finance and IT. We have two in a box is how we refer to it, but basically equal representation from the Marcum team and the CBIZ team working side by side. We had a meeting about a month ago where we brought all those work streams together. We had 70 people in the room. You would have thought that those two teams have been working together side by side for many, many years. And the most encouraging part of that meeting was there was virtually no we've done it this way and you've done it that way, and this is the way we need to go forward and the entire conversation was about how we move forward together and build a foundation and an organization that will take us to even greater height. So super encouraging, both from what I've seen and what we've experienced and the excitement around the future. To your last question around leadership, we haven't formally announced the leadership structure. That's to come hopefully in the days ahead as we -- in the next few days ahead as we get close to closing here. But I will share that they have an extraordinarily strong team. Obviously, we have a very strong team. And what we'll see coming out of this is a representative sample or a combination of the strength of their team, our team. I know in my direct reports, certainly, if you look at the team that was here 12 months ago, what we'll have is some members of their team joining our senior team in my direct reports, some members of my team are remaining -- historically in legacy team remaining in those positions. And then a number of positions that we've gone outside and hire new in the past 12 months. So kind of a third, a third, a third, but a team that's positioned to take us to even greater heights going forward. So super excited about the opportunities.

Q: And then for my follow-up question, Jerry, I think you mentioned advisory being a bit stronger than you expected in the third quarter. Can you unpack that a little bit? Where are you seeing pockets of strength? I think one of the things that you highlighted last quarter is something that maybe underperformed your expectations was on kind of the size of M&A transactions. So just any other insight you can provide on that and maybe what the pipeline looks like there for the fourth quarter and early next year?

A: Yeah. So the strength really almost across the board, the combination of all of our advisory services performed really strong in the third quarter. As you know, that's a little less predictable, tends to be more project-based, tends to be more episodic. And it really came in pretty strong across the board. We were pleased with the activity that we saw on the PE advisory side, the amount of activity there. So deal flow, albeit not the larger transactions still were not as strong as they were, say, one year or two ago, but we had more transactions. So more work, smaller pieces but very strong performance in that group. So very encouraging.

Q: Hey, good morning, guys. Thanks for taking a couple. So in terms of -- it looks like a lot of the organic growth you mentioned a couple of times was from pricing. I guess, I mean, normally think about 1% to 2% increase in pricing per year. Maybe just talk a little bit about what's going on there? And is it likely that we're back to the 1% to 2% next year?

A: Yeah. Chris, this is Ware. We continue to get relatively good increases driven by pricing and kind of more efficiencies in engagement management, combination of the two. But when you look at the organic revenue, and it's particularly easier to measure this on the Financial Services side, a good 80% to 90% of the increase is there continue to be driven by pricing. We've got efficiencies and improved realization and yield on engagements that also drives the top line. To your other question, I know we've commented before that with the inflationary rate lower than it was in recent years, it's reasonable to expect the commensurate reduction in pricing. So pricing is not 1% or 2%, it's higher than that, but it's lower than it has been in recent years.

Q: Government health care services, it sounds like it's back. It's growing nicely and was that a surprise or you could see it from kind of what's happening out there?

A: Yes, absolutely. Great question. We can -- we've seen that. And you're probably referencing the stumble we had midyear a year ago. Second half last year was good. First half this year was terrific year-over-year. And that growth continues to grow at kind of the higher single-digit rates again. Cautionary note that as this business grows, and it's now cresting $200 million a year. That rate of growth on a percentage basis is harder to achieve, but it's very healthy. They're having a great year.

Q: Hey. Good morning, everyone. I wanted to touch a little bit on the pricing dynamic, again, for a moment, if we could. I was sort of thinking about the efforts that you've made over the years to strengthen pricing. And I was wondering if there was sort of a common threat or component in the pricing gains that you're seeing as well as maybe if there's any revenue mix benefit that we should be thinking of, whether that ties to the commentary that you had on the discretionary project-based work or how we should be thinking about that part of it?

A: Yeah. Let me -- there's a lot to unpack there. So let me just give you some information, and hopefully, I'll address your questions. But just to rewind the tape a little bit, we put some tools in place five or six years ago that helped us really take a granular look at our engagement profitability and yield and pricing actions. And that then enabled a really targeted ability to look at specific clients and specific service lines, specific books of business and things like that with action plans to get pricing, okay? Now you don't get a pricing 100% of the time. So there is a little blow back but minimal, we've experienced minimal over the years. Interestingly -- and so you've seen the pricing in recent years really be a major driver or a major contributor to the organic revenue growth. It continues to be a major contributor yet, again, this year. And I think the message is that we've now baked and embedded that approach into our annual planning, our annual engagement renewal cycle and it's to be expected. Now it's not always going to be 7%, 8%, 9% like it was in recent years. So this year, it's maybe half of that. But kind of commensurate with the underlying inflation rate. And then the other thing we can say is with respect to Marcum, I think we've said this where they have a very similar approach. So I think this is something that, together, we're totally in sync as we combine operations.

Q: And then one quick -- one of your comments and maybe sort of think about this, and I haven't thought about before. Is there sort of an update that we should be thinking about as far as client retention that you're seeing? And maybe if you -- it might be early, but if you can speak to client retention trends that you've seen historically with Marcum? Are they similar to what you've seen? And how do you think that might be combined?

A: Yeah. Thanks, Marc. To answer your question, Marcum’s client retention rates are very similar to ours, which is very encouraging. I think we’re at the top – certainly top quartile, decile of our industry based on all the information we see, and they’re at the same place. So not like there’s something to fix there. They’re already best-in-class, and we would expect that to continue for both organizations going forward.