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Shares of Insperity Inc. (NSP - Snapshot Report) dropped 7.89% on Friday, Nov 1, 2013, on lower-than-expected third-quarter 2013 earnings of 39 cents per share. The company’s earnings per share not only lagged the Zacks Consensus Estimate of 42 cents but also fell 13.3% on a year-over-year basis.

Quarter Details

Although Insperity’s third-quarter revenues of $539.8 million increased 5.5% on a year-over-year basis, it failed to beat the Zacks Consensus Estimate of $546 million. The year-over-year improvement was attributed to higher average number of worksite employees paid per month and increase in revenues per worksite employee per month.

The company reported average client retention of 99% during the quarter. However, net hiring from its clients was low.

Insperity’s gross margins were down 118 basis points (bps) from the year-ago quarter to 18% primarily due to higher deficit in the benefits cost center. Moreover, a higher number of large health care claims also impacted margins.

The company’s operating expenses increased 1.3% from the year-ago quarter due to recruitment of extra Business Performance Advisors and the company's reform strategy related to the health care claims costs. Operating margins came in at 3.2% compared to 3.7% in the year-ago period primarily due to lower operating income per worksite employee per month.

Insperity’s net income decreased from $11.5 million or 45 cents reported in the year-ago to $10.1 million or 39 cents.

Insperity exited the third quarter with cash, marketable securities and restricted cash of $259.6 million, down from $278.6 million in the previous quarter. Year-to-date, the company has repurchased shares worth $17 million and paid cash dividends of $13 million.

Guidance

Insperity expects gross profit per worksite employee per month in the range of $230–$232 for the fourth quarter of 2013. The company expects operating expenses in the range of $81 million–$82 million for the fourth quarter

Conclusion

Insperity provides human resources as well as business solutions to small and medium business to help them perform better. Insperity reported dismal third-quarter results where both the top and bottom lines failed to beat the Zacks Consensus Estimate. Margins were also impacted by higher-than-expected expenses.

Nonetheless, we believe that management’s initiatives to expand the number of Business Performance Advisors and implement health care reform strategy will benefit in the long run. Moreover, the company’s software-as-a-service and other adjacent business services are also gaining traction which is expected to improve 2014 results.

A debt-free balance sheet, share repurchases and dividend payouts are positive, but increasing expenses, stiff competition from Automatic Data Processing Inc. (ADP - Analyst Report), Paychex Inc. (PAYX - Snapshot Report) and ManpowerGroup Inc. (MAN - Analyst Report) are concerns.

Currently, Insperity has a Zacks Rank #3 (Hold).

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