BBSI (BBSI) Q2 2023: Staffing Revenue Drops 32% as PEO Expansion and Benefits Drive Strategic Shift

August 2, 2023 | By EarningsIQ Research

BBSI’s Q2 revealed a pronounced shift in business mix, with staffing revenue plunging and PEO expansion, pricing discipline, and new benefits offerings taking center stage. Management’s confidence in controllable growth and capital return remains high, even as macro headwinds and regional softness temper near-term outlook. Investors should watch for benefits traction and margin leverage to define BBSI’s next phase.

Summary

• Staffing Model Reset: Strategic repricing and client culling sharply reduced staffing revenue but improved profitability focus.
• PEO and Benefits Expansion: Larger client wins and rapid benefits adoption signal a business model tilt toward higher-value services.
• Margin Leverage Ahead: Pricing discipline and workers’ comp gains underpin management’s conviction in margin improvement and capital return.

Business Overview

BBSI, or Barrett Business Services Inc., is a provider of business management solutions, primarily through its Professional Employer Organization (PEO) model, which bundles payroll, HR, compliance, and risk management for small and mid-sized businesses. The company generates revenue via gross billings on wages and services for worksite employees (WSEs) and also operates a legacy staffing segment, though this is being deemphasized. Major segments include PEO services (over 95% of billings) and staffing (now less than 5%), with a growing focus on bundled health benefits and risk solutions.

Performance Analysis

Q2 marked a decisive pivot in BBSI’s revenue mix, with PEO gross billings rising 5.1% year-over-year while staffing revenue fell 32%. The PEO segment, now the core of the business, benefited from net new client additions and higher average client size, though existing client hiring was soft, especially in Northern California and the Northwest due to residential construction weakness. Average billing per WSE increased 3%, driven by resilient wage inflation and pricing power.

Staffing’s sharp decline was a result of both macroeconomic caution and intentional pruning of unprofitable accounts, as well as a shift to recruiting for PEO clients, which preserves margin but reduces reported revenue. Gross margin benefited from lower workers’ compensation expense and disciplined pricing, while SG&A growth was contained despite investments in benefits and technology. Investment income also improved, aided by favorable workers’ comp program renewal terms.

• Regional Divergence: PEO billings grew double digits on the East Coast and in Southern California, offsetting declines in Northern California and the Northwest.
• Worksite Employee Growth: WSEs rose 2% overall, with net new client adds masking weakness in client hiring in construction-heavy geographies.
• Benefits Uptake: Participation in BBSI’s new health benefits offering more than doubled, reaching 135 clients and 3,000 participants.

Capital return was robust, with $10 million in share repurchases and a new $75 million buyback authorization, reflecting management’s confidence in long-term value despite a more cautious near-term top-line outlook.

Executive Commentary

Strategic Positioning

1. PEO-Centric Growth and Client Mix Shift

BBSI is doubling down on its PEO model, targeting larger clients and leveraging upgraded technology and national licenses to expand its addressable market. The company’s ability to sell and support bigger accounts is raising average client size and offsetting client runoff, which is now below pre-pandemic levels.

2. Staffing Rationalization and Margin Focus

The company is intentionally shrinking its staffing business, repricing and shedding unprofitable clients and shifting recruiting efforts to PEO accounts. This sacrifices top-line revenue but preserves or enhances margin, aligning with the company’s capital efficiency priorities.

3. Benefits Platform as a Growth Lever

BBSI Benefits, the new health insurance offering, is gaining traction across geographies and client types, with rapid uptake among both existing and new clients. The company is learning and iterating quickly, aiming for a strong showing in the upcoming 1-1-24 selling season. This platform is positioned to deepen client relationships and unlock new referral channels, particularly among health brokers.

4. Workers’ Compensation Risk De-Risking

Recent years have seen a deliberate move to fully insured workers’ comp programs, eliminating downside risk from adverse claims and providing upside via returned premiums if claims develop favorably. New payment terms allow BBSI to retain cash longer, boosting investment income and further de-risking the balance sheet.

5. Capital Allocation Discipline

With no debt and strong cash flow predictability, BBSI is prioritizing share repurchases and a stable dividend, signaling confidence in intrinsic value and a focus on long-term shareholder returns.

Key Considerations

BBSI’s Q2 underscores a business in transition, with a clear focus on margin quality, capital return, and expanding its value proposition through benefits and technology. The company’s ability to offset macro softness in key regions with controllable growth levers will be critical to sustaining its trajectory.

Key Considerations:

• Regional Construction Exposure: Weakness in Northern California and Northwest, especially in residential construction, is a drag on client hiring and hours worked.
• Benefits Adoption Trajectory: Rapid growth in plan participation is promising, but revenue impact will become more visible in 2024 as the next selling season ramps.
• Pricing and Wage Inflation: Continued wage growth and pricing discipline are supporting billings and margin, but competitive pressures may intensify.
• Capital Return Commitment: Aggressive buybacks and a new $75 million authorization reflect confidence, but sustainability depends on continued execution.

Risks

Macro caution among business owners, especially in construction-linked geographies, could further dampen client hiring and hours growth. Benefits platform execution risk remains, as successful scaling is not guaranteed. Competitive pressures in PEO and benefits could challenge pricing power, while any negative shift in workers’ comp claims trends or investment income could pressure margins. Management’s outlook is predicated on controllable levers, but external shocks remain a material risk.

Forward Outlook

For Q3 and Q4, BBSI guided to:

• Gross billings growth of 4 to 6% for the full year, down from prior 5 to 8% range
• Average WSE growth of 2 to 4% for the year
• Gross margin as a percentage of gross billings between 3.1 and 3.15%

Management highlighted several factors that will shape results:

• Continued slow client hiring in existing base, especially in construction
• Benefits revenue to ramp in 2024, with more visibility after Q3 selling season

Takeaways

BBSI’s Q2 reveals a business leaning into higher-value, lower-risk growth levers, while actively pruning less profitable lines. With macro softness and construction drag offset by PEO and benefits expansion, the company is betting on margin quality and capital return to drive long-term value.

• Staffing contraction is by design, as BBSI retools for a PEO- and benefits-led future with higher average client value and stronger retention.
• Margin guidance upgrade reflects real pricing power and risk management, not just cost cuts.
• Investors should closely track benefits adoption and the next phase of PEO client wins, as these will determine whether BBSI can sustain above-peer returns and capital return momentum.

Conclusion

BBSI is executing a strategic reset, trading lower top-line staffing revenue for higher-quality PEO and benefits-driven growth, improved margins, and robust capital returns. While regional and macro headwinds persist, the company’s focus on controllable growth and risk de-risking positions it well for long-term value creation—if execution on new platforms holds.

Industry Read-Through

BBSI’s results highlight a broader PEO industry trend: clients are seeking bundled HR and benefits solutions, and providers that can scale technology and risk management are gaining share. Staffing models are under pressure—not just from macro softness but from structural margin realities and a shift toward integrated solutions. Regional construction exposure remains a risk factor for all HR and staffing providers, while successful benefits expansion could unlock cross-sell and referral opportunities industry-wide. Capital allocation discipline and risk transfer in workers’ comp are becoming best practices, raising the bar for competitors.

BBSI Industrials Business Services PEO Staffing Benefits Capital Return Risk Management