Insperity Lags Q4 Earnings, Shares Up 7% on Strong Outlook

Insperity Inc. NSP reported fourth-quarter 2015 earnings (including stock-based compensation expense and amortization of capitalized stock-based compensation but excluding all other non-recurring items and related tax impact) of 25 cents per share, lagging the Zacks Consensus Estimate of 32 cents. Earnings also declined 28.6% on a year-over-year basis.

The company reported adjusted earnings of 33 cents a share, a decrease of 19.5% year over year. This figure excludes non-cash impairment and other charges, stockholder advisory expenses and stock-based compensation.

Despite the earnings miss, shares rose 6.95% on Friday buoyed by the upbeat guidance provided by the company.

Operational Details

Insperity’s revenues of $650 million increased 9.1% on a year-over-year basis but lagged the Zacks Consensus Estimate of $670 million.

The year-over-year improvement was attributed to higher average paid worksite employees (up 12%), partially offset by sluggish net hiring and greater-than-expected large-claim medical costs.

Insperity’s gross margin in the quarter was down 210 basis points from the year-ago quarter to 14.9%, primarily due to an increase in payroll taxes, benefits and workers’ compensation expenses in the quarter.

The company’s operating expenses (including stock-based compensation) declined 1.5% year over year to $83.8 million.  Operating margin was 2% compared with 2.6% in the year-ago period, despite the cost-cutting initiatives taken by the company.

Insperity exited 2015 with cash, marketable securities and restricted cash of $279 million compared with $305.1 million as on Dec 31, 2014. The company has returned about $230 million in dividends and share repurchases in 2015.

Guidance

Insperity also provided an outlook for first quarter and full year 2016.

For the first quarter of 2016, Insperity projects adjusted earnings in the range of $1.44 -$1.52 a share while for full year 2016, the company projects adjusted earnings of $3.19 -$3.36 a share.

Conclusion

We believe that the company is likely to benefit from an increase in worksite employees (WSE). In addition, increased contribution from Strategic Business Units (SBU) is likely to benefit it going ahead. Moreover, as workforce synchronization continues to gain traction with mid-market clients, it will likely benefit Insperity.

In December, Insperity had announced a Dutch tender offer under which the company will repurchase $125 million worth of stock. Earlier this month, the company gave updates for the same. Insperity will now be purchasing shares worth $143.1 million that is approximately 12.4% of its common stock issued and outstanding as of Jan 11, 2016. We believe that this is a positive for investors.

However, a sluggish global macro environment can lead to headcount reductions at client companies. An increase in health care costs does not bode well for Insperity as these constitute one of the major components of operating expenses. Furthermore, client attrition amid increasing competition from the likes of Automatic Data Processing Inc. ADP and TriNet Group, Inc. TNET remain concerns.

Currently, Insperity has a Zacks Rank #1 (Strong Buy). Another stock in the same space that can be considered is TrueBlue, Inc. TBI having the same Zacks Rank as Insperity.

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