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Barrett Business Services Inc. (BBSI - Snapshot Report) reported third-quarter 2013 earnings of $1.21 per share, which exceeded the Zacks Consensus Estimate of $1.07 per share. On a year-over-year basis, earnings improved from 81 cents.

Quarter Details

Barrett’s reported revenues of $764.1 million in the third quarter were not only up 36.9% from the year-ago quarter, but were also ahead of the Zacks Consensus Estimate of $734.0 million. The year-over-year growth was primarily attributable to continuous increase in the company's co-employed client count as well as improvement in the same-store sales.

Professional employer service fees grew 38.4% year over year to $722.4 million primarily driven by new client additions. Revenues from Staffing Services were $41.7 million, up 15.3% from the comparable previous-year quarter led by increase in new businesses. The segment witnessed marginal increase in staffing business from existing customers.

Barrett’s gross margin improved 8 basis points (bps) on a year-over-year basis to 3.9% primarily due to higher revenue base.

Although the company’s operating expenses increased 32.1% from the year-ago quarter to $17.3 million, as a percentage of revenues operating expenses contracted 8 bps to 2.27%.

This resulted in a 16 bps year-over-year expansion in operating margins. Also operating income increased 51.7% from the year-ago quarter to $12.9 million. Barrett reported net income of $9 million or $1.21 per share compared to $5.8 million or 81 cents in the year-ago quarter.

Barrett exited the quarter with cash, cash equivalents and marketable securities of approximately $42.1 million compared to $14.2 million in the previous quarter. Long-term debt balance was sequentially flat at $5.2 million.

Guidance

For the fourth quarter of 2013, Barrett expects gross revenues to increase 30.0% on a year-over-year basis and to range between $780.0 million and $790.0 million. Moreover, management expects fourth-quarter 2013 earnings to increase by at least 43.0% year over year and range between $1.15 and $1.20. The Zacks Consensus Estimate stands at $1.04 per share.

Our Take

Barrett registered incremental profit in the third quarter and also exceeded the Zacks Consensus Estimate. Revenue growth was encouraging given solid client growth. Management is quite hopeful about the coming quarter and expects strong business pipeline and a healthy client base.

However, it is to be seen how the company’s continued investments on operational infrastructure improvements rationalize margins in the near term. Moreover, increasing competition from Paychex (PAYX - Snapshot Report) and Insperity, Inc. (NSP - Snapshot Report) remain the headwinds, going forward.

Currently, Barrett has a Zacks Rank #3 (Hold). Apart from Barrett, Investors can also consider SanDisk Corp. (SNDK - Analyst Report) which has a Zacks Rank #1 (Strong Buy) and is worth buying.

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