BBSI: A Diversified Business Services Provider Delivering Consistent Growth

Published on September 24, 2024 | Ticker: BBSI

Barrett Business Services, Inc. (NASDAQ: BBSI) is a leading provider of business management solutions, combining human resource outsourcing and professional management consulting to create a unique operational platform. The company's integrated platform is built upon expertise in payroll processing, employee benefits, workers' compensation coverage, risk management and workplace safety programs, and human resource administration. BBSI's partnerships help businesses of all sizes improve the efficiency of their operations, and the company works with more than 8,000 clients across all lines of business, licensed to operate in all 50 states.

Financials

BBSI had a strong track record of financial performance, reporting annual net income of $50.6 million, annual revenue of $1.07 billion, annual operating cash flow of $67.2 million, and annual free cash flow of $55.4 million in its most recent fiscal year. The company's diversified business model and focus on serving small and mid-sized businesses have enabled it to deliver consistent growth and profitability.

In the first quarter of 2024, BBSI reported a 7% increase in gross billings to $1.9 billion, driven by a 7% increase in PEO (professional employer organization) gross billings to $1.89 billion, partially offset by a 12% decline in staffing services revenue to $20 million. The company's PEO worksite employees grew by 3.1% year-over-year, reflecting strong controllable growth from net new PEO clients as well as modest hiring within the existing customer base.

Geographic Performance

BBSI's geographic diversification was evident in its regional performance. In the first quarter, the East Coast region grew by 17%, the Mountain States and Southern California regions both grew by 7%, and Northern California grew by 4%, while the Pacific Northwest declined by 6% due to continued weakness in the construction sector.

Workers' Compensation Program

The company's workers' compensation program continued to perform well, with favorable claim frequency trends and favorable claim development leading to $3 million in favorable prior year liability and premium adjustments in the first quarter, compared to $1.1 million in the prior year period. BBSI's client workers' compensation exposure is now primarily covered by its fully insured program, with no retained liability by the company.

Expenses and Investment Income

BBSI's selling, general, and administrative (SG&A) expenses increased by approximately 3% in the first quarter, growing slower than the company's billings growth rate and providing ongoing operating leverage. The company's investment income also increased by $0.9 million to $3.2 million in the first quarter, reflecting the strength of its conservative investment portfolio.

Outlook

Despite the net loss of $0.1 million, or $0.02 per diluted share, in the first quarter, BBSI remains well-positioned for the year ahead. The company reaffirmed its full-year guidance, expecting gross billings to increase between 6% and 8%, average worksite employees to grow between 4% and 5%, gross margin as a percentage of gross billings to be between 2.95% and 3.15%, and an effective annual tax rate between 26% and 27%.

Liquidity

BBSI's balance sheet remained strong, with $124 million in unrestricted cash and investments and no debt as of March 31, 2024. The company continues to allocate capital strategically, investing in product enhancements and geographic expansion, while also returning excess capital to shareholders through its dividend and stock buyback program.

Recent Developments

One of the key growth drivers for BBSI is the continued expansion of its employee benefits offerings, including the recent partnership with Kaiser Permanente for health insurance programs effective July 1, 2024. This partnership, combined with the company's existing national PPO offering, is expected to further strengthen BBSI's product suite and drive growth in the years ahead.

The company's asset-light model for geographic expansion is also progressing, with 15 new market development managers in various stages of their development. Two of these markets have already transitioned to traditional BBSI branch locations, demonstrating the scalability and success of this approach.

Conclusion

Overall, BBSI's diversified business model, strong financial performance, and strategic initiatives position the company well for continued growth and value creation. The company's focus on serving the needs of small and mid-sized businesses, combined with its innovative service offerings and operational excellence, make it an attractive investment opportunity in the business services sector.

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