BBSI misssed its own guidance on gross rev., which it put out on 2/4/14. Guide: $735 to $755, actual $727. Actual Net Earnings barely matched the low end of guidance. Guide ($0.45) to ($0.5) per share, actual ($0.50) [In BBSI's favor, 1Q net is distorted by payroll taxes. So a bigger loss indicates a bigger payroll - which is 'good'.]
Now BBSI says it has clients who are not profitable, so will be dropped. And that this group is larger than it figured.
It takes an English major to parse these statements. If you discover you had under-charged some clients, you raise your fees. Dropping them is the last resort when the clients won't pay the higher fee. This apparently is what is happening. We won't know how all this will affect the profitability for at least 2 or 3 quarters.
I think we will continue to see the profit margin squeezed due to the new insurance company coming in. I think their deductible premium is probably more than they have been paying for excess WC. Also, the carrier is required to provide a ton more paperwork (all done by BBSI) and report things correctly. This will take money. I suspect, also that the carrier will want their reserves to be more adequate so expect "reserve strengthening" in the coming quarters up to and through 2105. It could very well be that some of the business they are "getting off" is at the urging/requirement of their new insurance carrier as they are interested in profit, also. I see a bit of a shift and revamping before the go back to the huge growth mode again. Maybe they will last long enough and their tail will not slap them too hard by that time comes. Remember, this is primarily an insurance company without the required capital. Now the have an A+ insurance carrier who will pick up any pieces if something goes wrong--but it is expensive.
Dropping lower profit clients and replacing them with new higher profit clients will save resources and produce higher earnings. Revenues may suffer for a quarter or two, but Barrett is the top of the line payroll product for thousands of companies and growing in popularity. This move makes great business sense!
Where did the storyline of dropping lower profit clients and replacing them with higher profit clients come from? That is in complete contradiction to what BBSI has done for over a decade in the California market. Pay the insurance brokers twice what anyone else pays them to bring you business and then undercut any competition using the self insurance model as a price cutter. The reason BBSI doesn't show a profit in the 1st quarter is because of the low margins in CA on the PEO business. The margins don't straighten out until that client has met some of their maximum tax contributions. Pricing is the only reason BBSI has gotten the market share that they have. Not entirely sure what you are referring to about BBSI having a top of the line payroll product. Until about 2 years ago they were using a DOS based payroll program that was created in the 80's.
Agree. I think the slight miss (and I do mean slight) is a speed bump. They are still growing at 15% if memory serves and have major potential new business out there. I have no problem with them culling unprofitable accounts. Pure revenue growth is stupid if it comes at the expense of profitability. IMO, this is a buying opportunity and I have been adding shares. Bought my first shares at $15 and then kept buying, watching it finally break loose. I'm confident it will break loose again and perfectly willing to wait for 1-2 years if that's what it takes.