Insperity Inc (NSP) 2004 Q1 法說會逐字稿

Good day, ladies and gentlemen. Welcome to the first quarter 2004 Administaff earnings conference call. My name is Carroll and I will be your coordinator for today.

At this time all participants re in a listen-only mode. We will be facilitating a question and answer session towards the end of today's conference. If at any time during the call your require assistance please press star followed by a 0 and a coordinator will be happy to assist you.

I would like to remind you that any statements made by Mr. Sarvadi, Mr. Rawson or Mr. Sharp that are not historical facts are considered to be forward-looking statements within the meaning of the federal securities laws. Words such as expects, intends, believes, estimates, likely, goal, assume, and similar expressions are used to identify such forward-looking statements and involve a number of risks and uncertainties that have been described in detail in Administaff's filings with the SEC.

These risks and uncertainties may cause actual results to differ materially from those stated in such forward-looking statements. As an additional reminder ladies and gentlemen this conference is being recorded.

I would now like to turn the presentation over to Mr. Douglas Sharp, Chief Financial Officer, please go ahead, sir.

Thank you. We appreciate you joining us today.

Let me outline our plan for this morning's call. First I'm going to discuss our first quarter finance results. Paul will add his comments about the quarter and on the outlook for the remainder of 2004. Then Richard will discuss trends in our direct costs including benefits, workers' compensation and payroll taxes, and the impact of such trends on our pricing. I will return to provide financial guidance for the second quarter and the remainder of 2004. We will end the call with a Q&A session.

Now, let me begin by summarizing the financial highlights from the quarter. Revenue per work site employee per month increased 14.1% or $139 over Q1 of 2003 to $1,123 per work site employee for the quarter. This increase in revenue when combined with benefit costs coming in at expected levels and insurance proceeds of $1.1 million relate to the reimbursement of workers' compensation claims that were paid to the state of Texas in the prior quarter resulted in a 42% increase in gross profit per work site employee per month to $223.

Operating expenses for the first quarter were $42.9 million. Within our expected range. Resulting in operating income $7.2 million compared to an operating loss of $6.6 million in the first quarter of 2003.

We reported first quarter earnings of $9.2 million or 33 cents per share including Aetna settlement proceeds of $8.25 million or $5 million and 18 cents per share after taxes. The workers' compensation of $1.1 million or $666,000 and 2 cents per share after taxes. These results compare to a net loss from continuing operations of $4.1 million or 15 cents per share for the first quarter of 2003. Highlight on the balance sheet which I would like to point out is an increase of $4.8 million in working capital since the prior year end to approximately $61 million.

Now let's review the details of the first quarter results. The average number of paid work site employee per month increased slightly over the fourth quarter of 2003 from 74,332 to 74,792. This number was slightly lower than our expectations as we exceeded our targeted unit growth in only two of the three months in the quarter. Paul will provide further details regarding the unit growth divers in a few minutes.

First quarter revenues increased 11.8% over Q1 of 2003 to $252 million. As the impact of our new billing system and increased pricing more than offset the 2% decline in average paid work site employees.

To clarify the impact of the new billing system, prior to its implementation we billed our customer at a constant rate over the competitors of the year. However, the new system invoices our fee at a higher rate earlier in the year to correspond to the pattern of incurred payroll taxes which decline throughout the year as employees earn their wages.

Substantially all of our work site employee based was on the system in 2004 compared to only approximately 20% of our base on the new system at the beginning of 2003. In largely contributed to the reported increase in revenue.

Our reporting of revenue growth by region will also be impacted by this change as year-over-year variances will not be comparable throughout 2004. However, some of you would prefer to continue to receive the information the results are as follows: The northeast region which represents 14% of total revenue grew by 20%. The southeast region which represents 10% of total revenue declined by 1%. The central region which represents 15% of total revenue grew by 13%. The west region which represents 23% of total revenue grew by 25%. And the southwest region which represents 38% of total revenue grew by 5%.

We averaged 234 trained sales reps for the first quarter. Up from an average of 226 sales reps for Q4 of 2003.

Moving to gross profit. Gross profit per work site employee per month increased from $157 in Q1 of 2003 to $223 in the first quarter of 2004. With the increase, primarily resulting from the impact of the new billing system as pricing increases implemented over this 12-month period have effectively offset increases in direct costs.

As for the components of direct costs benefit cost the per covered employees $551 for the quarter. Within the expected range and increased 3.4% from Q1 of the prior year. Approximately 71% of the work site employee base was covered by our medical plans during the first quarter.

Workers' compensation costs were 1.37% of nonbonus payroll for the quarter including $1.1 million or .12% of nonbonus payroll related to insurance proceeds received from our former carrier [KIMPER]. These proceeds were from an insurance policy which covered claims arising from the liquidation of another former insurance carrier Reliance National which were settled with the state of Texas during the fourth quarter of 2003.

This settlement was expensed during the prior quarter and credited this quarter upon receipt of the reimbursement. Q1 2003 workers compensation costs totaled 1.46% of nonbonus payroll, which included retroactive surcharges of approximately $1 million or .11% of nonbonus payroll. Payroll taxes including FICA, FUDA and state unemployment taxes as a percentage of total payroll costs were 9.50% in Q1 of 2004 up from 8.9% in Q1 of 2003, however, slightly lower than our expectation.

Now, let's talk about operating expenses. Operating expenses totaled $42.9 million for the quarter, within our expected range and increased by only $319,000 over Q1 of last year. This increase included the following: Compensation costs increased by $2 million over Q1 of 2003. Of which approximately $900,000 was due to salary increases over the 12-month period. $500,000 due to additional head count and the remainder of the increase due to higher payroll taxes, 401(k) matching and severance payments.

Depreciation and amortization costs declined by approximately $854,000 as the effect of certain fixed assets becoming fully amortized more than offset depreciation resulting from this year's reduced capital expenditures. As expected general and administrative were relatively flat. In Q1 of 2003, we had higher Aetna related legal fees and a $300,000 data communications credit which were offset increases by increases in corporate insurance costs in Q1 of 2004.

Commission costs declined by $342,000 consistent with the decline in work side employees. Advertising costs declined by approximately $500,000 as Q1 spending was reduced coming off of our significant fall sales and marketing efforts.

As for interest and other income in the first quarter of 2004, we reported net interest expense of approximately $161,000 compared to $253,000 in Q1 of 2003. Additionally, other income included the $8.25 million settlement of our dispute with our former health insurance carrier Aetna.

Now I would like to make some comments on our balance sheet. Total assets were $367 million including current assets of $239 million. Prepaid insurance and other current assets totaled $17 million and included the following items: $9.1 million funded to United Healthcare, which represents a cumulative funding in excess was actual costs since inception of the plan over two years ago. This surplus declined by approximately $900,000 from Q4 of 2003.

The next component is $1.1 million related to the Texas unemployment tax credit received last year. This is down from $5.1 million at December 31, 2003 as $4 million was applied to Q1 state unemployment tax liabilities.

First quarter capital expenditures totaled $14 million which included $530,000 in capitalized software development costs. This run rate is consistent with Q1 of 2003 but significantly down from 2002 and prior years when we were investing heavy in our facility and technology infrastructure.

Deposits of $51.6 million consisted primarily of $33 million related to our workers' compensation program which includes $21 million set aside for expected future claims and $12 million in collateral. Additionally we currently have a $17.5 million deposit with United Healthcare related to our medical plan.

We ended the quarter with approximately $61 million of working capital an increase of $4.8 million since December 31 of 2003. This increase included the $8.25 million settlement with Aetna and was net of share repurchases of $3.1 million and capital expenditures of $1.4 million during the quarter.

Now, I'd like to turn the call over to Paul.

Thank you, Doug.

Today I'll focus my comments on our progress and plans to achieve double digit unit growth over the balance of the year. I'll discuss the first quarter results in sales client retention and the net effect of new hires at layoffs within our client base. Then I will provide some details on our sales and marketing initiatives that I believe will accelerate our growth throughout 2004.

First I'd like to provide our view as an increasing economic momentum that we see in the small business community. As the human resource department for thousands of the best small businesses in country we actually process new hire and termination paper work, over time, commissions bonus payments and raises all of which provide insight into the economic trends in this sector of our economy.

The first quarter data shows increasing momentum in several of these measures. First, over time for full-time hourly employees was 8.6% of payroll compared to 7.6% one year ago. Secondly, when you add in raises over the last year this group of employees experienced a healthy 4.4% increase in compensation.

Salary employees we paid in the first quarter of 2004 and 2003 experienced an average pay raise of 2.5%. Although the percentage of employees receiving a bonus during this period remain constant from last year, the average size of the bonus was up a whopping 40%. These compensation numbers imply there is real growth and momentum in the small business community.

The remaining question has been will this strength translate into sustainable job growth. Now, the most important economic factor within our client base that affects Administaff is the net effect of layoffs and new hires within the client base. This is because the number of paid work site employees in a given month is determined by taking the number paid last month and then adding new employees from new clients sold in the prior period, then subtracting the numbers of employees associated with terminating clients and factoring in the net debt of new client and layoffs within the client base that existed in both periods.

This reflection of the economic climate in the small business community determines whether we have a head wind or tail wind in our efforts to grow our business. Layoffs that exceeded new hires consistently for the last couple of years and created a significant head wind for the company. As I reported last quarter, the last half of this last year this number stabilized as a few positive months were sprinkled in to moderate this effect.

We have been watching closely for a new trend of at least 3 straight months in a row for this number to turn decisively positive and I'm happy to report we've just seen the trend established as new hires exceeded layoffs in each of the four months of the year by a small but increasing number. Based on these factors, we believe the economic environment is becoming a positive factor for the first time in several years for our business.

Now, for the first quarter of 2004, the critical measures of success for Administaff were the base number of work site employees and the pricing of this base after the year end new sales and renewals were completed. These metrics become the foundation for growth and profitability for the balance of the year. Since many accounts join Administaff in January and February of each year the percentage of new and renewed or rate price accounts in the first quarter is significant.

Once this year end transition is completed we have a clear picture of the starting point to build on for the year in terms of both volume and price. Our first quarter results demonstrate that both the number of employees and the pricing form a solid foundation for growth and profitability ahead.

Richard will discuss pricing allocations and our direct cost trends in a few minutes so I'll focus on the growth and in the number of paid work site employees and service fee markup above the allocations to cover our direct costs.

Our goal as we entered the new year was to have a net gain of 700 to 1,000 paid work site employees on average each month. We actually exceeded this goal in three out of the four months so far this year. However, we experienced a decline in February. In my view, We're not quite hitting on all cylinders yet but the trends in sales retention and employment are much more favorable for growth.

Client retention were slightly below the expectation for January and February but March and April were on target. This caused the employee count for the first quarter to be slightly below the bottom of our range for the average for the quarter at 74,792 paid works site employees versus our 75,000 employee estimate.

As I reported in February we had a very successful fall selling campaign which re-established some momentum and allowed us to replace terminating clients and achieve our 700 to 1,000 employee growth goal in two of the three months of the first quarter. However, the other major question for the quarter is that we continue to build upon the momentum in sales to fuel future growth.

So let's talk about sales results for a few minutes. Sales results for the first quarter were solid. The number of employees related to new clients sold in this period was 146% of budget and 196% over the same period last year. Sales efficiency at a standardized average client size of 13 employees was just under our target of 1.0 at .97.

Closing rates which rebound significantly during the fall campaign continued to exceed 20% in the first quarter. Although these numbers are very good, I believe we still have a lot of room for improvement. Our census to first call ratio which represents our opportunity to bid a prospect we've called on was under our threshold target of 40% at 38%.

One reason the efficiency was the actual average size client was up to nearly 18 employees per client. So we still have room for more sales people to hit their monthly target and provide some upside in our unit growth.

We have also seen the average service fee markup within our comprehensive service fee decline about 3% as we shifted our emphasis to growth since September. It is now time to balance our efforts with an emphasis on our markup since we have regained our sales momentum.

Now, I'd like to discuss the sales and marketing initiatives underway that we believe will continue our unit growth acceleration to our target double digit year-over-year number. The next step in accelerating sales was to leverage the fall campaign success and energize the sales organization for the spring and summer month. That was accomplished in April with a highly successful client and sales conference.

For the first time we brought all the sales staff in to Houston for the annual client conference. The opportunity for sales staff to interact with our most satisfied and exuberant clients provided just the right catalyst to increase belief and confidence in the sales organization. Also the specific client stories of successful service interaction and real impact on the success of the client companies armed the sales staff with new ammunition in their dialogue with prospects upon their return.

We also communicated the marketing and growth strategy that the sales organization and also added a day and a half of intense training meetings to improve skills and performance. Our marketing plan for the balance of the year is aggressively focused on establishing our market position and producing more opportunities for new sales.

We intend to communicate how we help the best small businesses in America get better and to emphasize our commitment and support of the small business community. This will be accomplished by driving home our new marketing message small business is good for America and Administaff is good for small business.

We began in effort in the first quarter by publishing the first advertorial in a series of four this year distributed in local business journals throughout the country. The first one was connected to the XXXVIII Superbowl held in Houston this year and was called Super Entreprenuers, including comments from 38 clients selected from across the country. Each advertorial combines information on how small businesses contribute to our community and how Administaff helps small business succeed.

The second advertorial was prereleased to clients and sales staff at the recent conference. This issue which concentrates on the economic contributions of the small business community will be published for distribution the week of May 17th to coincide with National Small Business Week.

Now, we're also driving this message home with another initiative which is a direct hit to our target prospect base. As we recently announced we have become the title sponsor of the Administaff Small Business Classic, a champions tour professional golf event that will coincide with our annual fall campaign. This sponsorship will add television advertising spread across the fall months hitting as many as 25% of our target 400,000 to 600,000 owners of small to medium sized businesses across the United States.

This effort is a center piece of our positioning as not only an advocate but also a real partner and advantage to the best small businesses in the country. The theme behind the promotion will be emphasized in the advertising, public relations and all events leading up to the tournament. We will also use this venue for incentives for incentives for prospect client sales staff and corporate staff.

This marketing message is also being communicated through a powerful radio advertisement with Rush Limbaugh endorsing Administaff on his daily program. This venue has the highest concentration of our target buyer and offers the opportunity to inform prospects of exactly what Administaff does without engage in attentive listening to Rush Limbaugh. The new relationship also includes banner advertising at the Rush Limbaugh website which we believe will further drive new leads.

To demonstrate how the things work together I would like to play a new ad from Rush that is expected to air soon. Let me see if I can get the technology right and play the ad for you. Administaff takes care of small business human resource needs and administrative hassles and helps you increase productivity and profitability, they will also handle your headaches like payroll, benefits, recruiting, training and more, and now Administaff is putting small businesses in the lime light with a little help from famous friends and golf legends. Administaff is sponsoring the small business classic at Augusta Pines in Houston.

The Administaff's classic will be held October 4th through the 10th of the year. The Administaff's Small Business Classic in Houston. The small business is good for America folks and Administaff is great for small businesses.

Learn how Administaff is helping America's best small businesses get even better call 1-866-639-0011, that is 1-866-639-0011 or visit Administaff.com and find out what your small business is missing.

Now, in addition to the initiatives I've outlined we are continuing many of the efforts which contributed to the rebound in sales last fall this includes our expanded call center, our referral program, direct mail and calling on alliance partner and distributors. So as I look ahead to the balance of the year and in order to lay the foundation for a strong 2005 our marching orders are clear and specific.

We need to continue to drive sales and retention through these programs in order to achieve our goal of double digit unit growth. We also need to emphasize increasing our service fee markup on both new and renewing accounts which we intend to accomplish through appropriate incentives for sales personnel. And we need to continue the excellent job we have done in matching the pricing allocations to the major direct cost components.

These areas are in the best shape of the history of our company due to the level of detail information and analysis we now have available and the actions we've taken over the last year. These area are Richard's primary responsibility to that the point I would like to turn the call over to him.

Thank you, Paul.

Today I would like to update you on our pricing strategy and explain how we determine the pricing for our service to customers. Our billing system invoices the customer for our fee every time an employees gets paid. This fee is reported to our customer as a percentage of each employees wages and is the sum of several different allocations each of which is separately determined in our pricing system.

These separate allocations are designed to cover the expected cost of social security tax, Medicare tax, federal unemployment tax, state unemployment tax, workers' compensation insurance, medical insurance, life and accidental death and dismemberment insurance, disability insurance for both long and short term. Educational assistance, employment practices liability insurance, and service fee.

Now, some of these allocations are calculated as a percentage of the employees wages while other allocations costs are a fixed dollar amount. The billing system that we installed last year allows to us look at how much money we bill the client by employee as well as by client for each allocation category. We can also get a sum total of all clients by allocation category then we can compare the total of each allocation category to the corresponding cost center category and determine whether we have a surplus or a deficit in that cost center. Our gross profit then is the sum of our service fee allocation component plus or minus any surplus or deficit from the other cost center components.

If we see that the cost in any one of these cost centers is increasing at a rate faster than we expected we could immediately raise the allocation rate for that cost center on all new and renewing business. If the increase is a statutory rate change that applies to all employers then our contract allows us to pass on these increases immediately to all existing customers.

Now, let's discuss what we have seen as far as increases in these cost centers and how our pricing matches those costs. Last quarter I reported that we had received about 60% of our state unemployment tax rate notices and that we had estimated that the weighted average state unemployment tax rate for all states would be increasing 55-70% over 2003.

Well, now that we have received the remainder of those state tax rate notices, I can report that our weighted average increase turned out to be 61% increase over 2003 which fits comfortably within the pricing allocations we set last fall. Since we have a surplus in this cost center and the effective payroll taxes is the most significant in the first quarter of the year this cost center contributed significantly to our first quarter gross profit.

Subsequent quarters will not benefit as much from a surplus in this cost center. By the end of the year, barring any retroactive charges that we should have a small surplus in this particular cost center.

As for healthcare costs, we have begun to see an upward trend in costs of approximately 3.4% over last year. This increase takes into consideration the fact that participants are still migrating from PPO plans to lower cost HMO and they are selecting lower co-pay options as well. These factors cause us to have lower costs and we expect them to trend upward at about an 8% rate over the next year. Therefore we have announced beginning in June a 2% increase in our healthcare allocations.

The last major cost center to discuss today is our workers' compensation insurance program. What we have seen year to date for this policy year is very encouraging. Since policy inception in September of 2003 we have seen a 4.8% decline in the number of report the claims over the same time period of the previous policy. In addition, we have seen a 4.4% decrease in the dollar amount of incurred claims during this same time period.

Now, as these claims get another 90 days old and we see how they are developing out we might start to see decline in our costs compared to earlier forecasts. But for now we will continue to forecast this expense at about 1.51 to 1.53% of nonbonus payroll or that translates to about a 12-14% year-over-year trend increase. We have continued to increase this allocation category and we are very comfortable with our ability to match the pricing cost in this area.

In summary, we continue to be pleased with the results of our pricing strategy and the new information that we have available to manage these cost centers going forward.

Now, I would like to turn the call back over to Doug.

Thanks, Richard.

Now, let's discuss our guidance for the second quarter and the remainder of 2004. Beginning with the full year, our guidance provided last quarter remains unchanged. With the exception of an offsetting adjustment between gross profit and operating expenses having no impact on our operating income.

Specifically the guidance provided last quarter included gross profit per work site employee per month to be in the range of $209 to $215 for the full year. These expectations included $3 per work site employee per month of revenue related to the reimbursement of the 401K plan record keeping expenses. As we currently expect substantially all the 2004 record keeping business to be performed solely for the PEO client base we determined it was proper to record this reimbursement as an offset to operating expenses.

Adjusting our initial 2004 guidance for this change equates to a gross profit per works site employee per month expectation of $206 to $212 for the full year with a similar reduction in operating expenses. Therefore, while we initially budgeted operating expenses to be in the range of $173.5 million to $177.5 million, adjusting for this change results in a revised change of $170.5 million to $174.5 million. Remember that the high end of this range relates to a higher incentive compensation accrual upon achieving the high end of our work site employee and gross profit per work site employee targets.

Let me reiterate that the combination of these changes in the two metrics have no impacted to the expected operating income provided in last quarter's guidance.

Now as for our second quarter based upon Paul's comments we expect the average paid work site employee to be in the range of 77,000 to 78,000 for the quarter. We expect the gross profit per work site employee per month to be in the range of $200 to $204. As mentioned in last quarters it conference call the second quarter gross profit per work site employee should be lower than the full year metric. This relates to new business in which the payroll takes allocation in our fee is billed [inaudible] over the remainder of the year while the payroll tax costs is incurred as employees earn their wages at the specified wage levels.

In other words, historical earnings pattern which used to apply to all of our business now only applies to new business sold throughout the year. Initially, new business has a lower gross profit than our base in the thirst three month period. Approximately the same as the base in the next three months and higher than the base thereafter. For the second quarter we expect operating expenses to be in the range of $43 million to $44 million which is slightly higher than Q1 of 2004 due primarily to expenses associated with our annual sales and client conferences and our incentive sales trip, which occurred in April.

We assumed net interest expense of approximately $100,000 for the quarter and continued to assume a 39.5% tax rate. Now I would like to open up the call for questions.

Thank you, Mr. Sharp. Ladies and gentlemen if you wish to ask a question please press star followed by one on your touchtone telephone. If your question has been answered or you wish to withdraw your question press star followed by two. One moment, please, while we compile a list of questions.

Gentlemen, your first question comes to you from the line of Josh Rosen of Credit Suisse First Boston. Please go ahead.

Good morning, gentlemen.

Hello, Josh.

Paul, you had mentioned in your comments that January and February were little bit below expectation when it comes to retention and just if you could quantify that a little bit for us, that would be helpful.

Well, you know, we, of course, if you look over the last few years, we have, you know, we saw that number get up to a pretty high number, I think like about 11.5 or almost 12% in prior years for the two months combined. We weren't near that number but we weren't as far back as I was hoping for to be in the year end renewal cycle.

Since then, you know, we have been, you know, right back where we want to be in line with our expectations. But really the employee count is most affected by the month of February where that number was just slightly higher than we expected it to be and instead of moving up that particular month the number moved down. But that is I think a little bit of the volatility that I think is pretty much behind us and I'm feeling really good about all three of the metrics that lead to growth, you know, sales retention and and the net effect of layoffs and new hire.

From a reasoning standpoint it is still a little bit of the remnants of what you have dealt with in the past

Very much so. I didn't relate it to anything that we're doing currently but just some of the -- there is quite a transition at year end and you move all that through and move on from there. I'm happy with where we ended up as a base for going forward both in pricing and the volume of the client base. Just we just didn't quite make that retention number we were hoping to hit for February.

Was that the only short fall when it comes to work site employee count. You mentioned that sales trends were above for the quarter, you know, month to month was February a below trend quarter from a sales standpoint as well or?

Not from new sales during the quarter but when you add in all the sales from prior periods we brought so many on and paid them in January that the number we paid in February wasn't quite as high as I would like it to be so really the combination of the those two in terms of what flowed in to paid work site employees. Sales have continuing to be strong and we feel like we're in good shape there.

Thank you very much.

Thank you, sir. Gentlemen, your next question comes to you from the line of David Farina of William Blair. Please go ahead.

Good morning. Doug, first, can you comment, your receivables seem to have ballooned quite a bit from December to March. You didn't make any comment on that during your balance sheet discussion.

Yeah, David, a lot of that is just a timing thing where the year end happened to end on a Wednesday when we typically receive quite a bit of money from the clients related to the Friday's payroll. As the year end ended on a Wednesday we had quite a bit of prepayments at the year end number. March ended on a different day where you didn't have the same type of event occurring. That is really the reason for the decline in the accounts receivable because those prepayments are netted against that receivable line item.

The balance sheet today would be significantly lower then.

I'm sorry.

If you look at a comparable balance sheet for last Friday, would it be improved?

That's correct.

Fair enough.

Second question for you, Richard, it's great you guys are able to break all this stuff out and I know you always price the medical side of things one year in the future. Any chance as you kind of train your customers to look at the different allocations and make adjustments as necessary that you can also move medical on to more after variable pass-through type of model as opposed to the one year forward you're doing now.

Well, the answer to the question is we could, but when you look at what the small business owner, excuse me, is looking at when they are comparing our service to the other options that they have out there, if especially in an unbundled environment they are looking at getting a quote for their healthcare benefits that last for a full year. So it would be kind of, you know, wouldn't be a comparable kind of comparison for that business own to be looking at. So that is why we forecast out and price for a full year in advance.

I think the difference between, you know, some years past and today is because of the fact that we have the, you know, the technologies that allowed us to get the data. We get the data very timely. And the accuracy rates in terms of claim payments that come to us from our primary carrier United are at the top end of the range in terms of -- in terms of, you know, we set standards for reporting information and they hit the top of those standards all the time. So it as lot easier for to us look at what is happening and build that into pricing going forward.

Okay. Thank you.

Thank you, sir. Your next question is from the line of Randy Mehl Robert W. Baird.

Yeah, good morning, Paul, Richard, and Doug, and thank you for the detail here. I was wondering, has there been a change in the structure of your sales compensation to start the year, maybe you could refresh us on that. It seems like you're running very low commission rates. I'm just wondering if there has been a bump in fixed comp or salary in terms of the mix?

No, actually, Randy, that is a good question, thank you. We have not change the the sales compensation this year. However, the units were down from a year-ago and, of course, there is a component of the commission that is a residual based on, you know, the base of business that a particular sales person has.

So with that base being lower their commissions follow and are also lower but our sales compensation structure is still a base salary that I always say is enough to live on but not enough to have a live on, but not enough to have a life to keep them hungry and then after that there is an enrollment bonus that is paid for out of of our enrollment fee to the customer so that the sales person gets the thrill of the kill when they bring in a client and then sales people are tied in to the margin that we sell an account at because their residual is a percentage of the markup and if they sell it at a higher markup they get a higher percentage. If they sell it at a lower markup they get a lower percentage. That structure for sales compensation is the same.

Okay. Thanks.

And then your healthcare surplus came down a bit in the quarter. Is it reasonable to expect that that should continue to move down throughout the year.

Randy, this is Richard. You know, our strategy has been to -- that United Healthcare has been in agreement with us to continue to lower the funding rates each quarter as -- as they have seen the costs come in. And, you know, the real -- the real situation here is that because our costs have been lower than what they were expecting them to be for now three quarters in a row they have continued to lower their funding requirements which now is starting to turn into a reduction of that surplus. And so even going forward into the second quarter we have lower funding rates than what we originally had anticipated back in the fall.

Okay. So but it is difficult to tell that the point whether --

Yeah, it is kind of good news/bad news. The good news is that if our costs become lower than what we expected than the surplus would increase.

Right. But we would all prefer costs to continue to run lower than expected.

Right.

Final question. Richard, you mentioned the possibility of retroactive charges in SUDA and I was wondering if that was something you were just throwing out as possibility or if there is something out there that you see?

That actually, no. I'm just -- I just want people to be aware that that can happen. We don't have anything that we are aware of at the moment that would -- whether it would be a retroactive charge but since we had one from the state of California, I want people to know that that could happen.

Thanks a lot. I appreciate that help.

You bet.

Gentlemen, your next question comes to you from the line of Jim MacDonald of First Analysis. Your question, please.

Good morning, guys.

Hi, Jim.

Hi, Jim.

Give could you give us more guidance on growth, maybe with what the current employees were in April and March around how that is trending?

Well, like I said, you know, we -- I think we gave guidance on the employee count for the quarter. We're comfortable with those numbers. But like I said, all three areas I feel just very good about right now and, you know, hopefully all those things come in favorable and we will really start to see the growth moving forward.

Can you give us any specifics like the actual number paid or actual number of --

Actually, we do that in January because it is important to bring everybody's models into assignment but we generally don't, you know, give out one month of the quarter after the beginning. So we would rather not release that number.

Okay.

We still have to do some analysis on it. It just came in, you know, hours ago so we always like to dig deeper and understand what is feeding into that number before we make any comments about it.

Any specifics you can give us on kind of the new hires and new -- versus layoffs in terms of what percent that was in April?

I can tell you that and again this is why we need to do some more analysis, you got to kind of dig down to make sure you know where they all came from but I tried to kind of build into my dialog there that what we have seen is we saw a slight positive in January, in February, March a little higher. April a little higher. So it seems to be increasing in terms of the effect of new hires over layoffs. And I think that is a very positive sign and when I put all that together with the compensation numbers, you know, being at 8.6% of over time when you get to that level you're -- you know, unless you think your business is going down, it is time to hire somebody because you're spending more money on over time than would be costing you to hire people. The other thing I want to look at is to see how broad based these new hires came from and the early read is it was very broad based, you know, not a particular few larger clients adding a bunch or starting a division or unit. You got to look in and see what is driving that but the early read was it is very broad based and this is also an encouraging sign.

Two other kind of technical questions. In terms of your guidance, does the guidance for the year exclude the two one-time items in the first quarter?

I mean the guidance for the full year is consistent with that provided, you know, last quarter. So the 206 to 212 is consistent that prior guidance adjusting for the retirement services.

That doesn't include the Aetna lawsuit, doesn't include the million --

No, it doesn't, I'm sorry.

Does it include the million dollars for the first quarter in.

Yes, it does.

Okay. Includes that. And then one other question in terms of the share repurchase, could you tell us how many shares you repurchased and kind of when you repurchased them?

205,000 or 210,000 shares. $3.1 million and I believe that was in early to mid-February.

Okay. Thanks very much.

Thank you, sir. Your next question comes from the line of Jim Wilson of Jolson Merchant Partners. Please go ahead.

I guess I was just wondering or maybe Richard or Paul as you look out in the market and the -- the sales environment in trying to continue to grow the work site employee count what do you find as the biggest obstacle with companies? Is it still trying to decide whether they want to add benefits or provide for employees or still a little reluctance from a hiring standpoint? What do you see out there is still the continued, the remaining obstacle.

We just spent quite a bit of time with sales staff since we had them in for the sales conference and then also the sales reward trip for our qualifiers. We really saw over the quarter some good things starting to emerge in terms of attitudes of the leadership out in the business community in terms of turning positive. The thing we have been, you know, dealing with for a long time is just the wait and see mindset that has been out there about making significant decisions in the business. And what sales staff really reported to me was that there was definitely a much more willingness to listen to ideas that could have a positive effect and although people are being meticulous and careful, you can get the decision. You know, for awhile there, it was pretty rough to get anybody to a decision point. So as they left, I think people were feeling very good about kind of the climate in terms of owners of small to medium sized businesses.

Okay and is there -- I don't know if you track this or not, but are you -- is your sales force still really trying to continue to sell a similar base of customers meaning people they have been trying to convince to start a PEO or using a PEO for some time or have they really started to hit on a whole new batch of small businesses or do you really track that.

We actually do. I would say relative to our targeting one of the things that is also encouraging it we are getting to be more and more precise in terms of targeting our particular client base. I think I mentioned last quarter that you know some of the data and information that is available now has basically taken the small to medium sized business community and put them in to tiers. Tier 1, 2, 3 and 4.

Based kind of how I have always looked at that time on kind of the success companies. More after qualitative assessment and we ran that against our client base and sure enough our client base happens to be largely comprised of these tier 1 and 2 companies which is our target. And that is also flowing into our marketing efforts. That is why we decided to use some of these very targeted approaches. The small business classic and Rush Limbaugh and some of these others because we know that our 400,000 to 600,000 target customers, a significant number are in that audience so we know we are talking to our targeted customer. We are hoping to improve in targeting and you know so we didn't see any change in terms of sales people going out in our targeted customer base to add business.

All right, very good. Thanks.

We have time for one more question. Before I announce the final question if there are any additional questions you Douglas Sharp.

The final question is from Thomas Geo-vine of Geo-vine Capital Group. Pleas go ahead.

Hi guys, good morning. I back of the envelope have net income of $17 million and D&A of around $19 million. And Cap Ex of around I think you guys said 8 awhile ago so I'm at around $30 million of free cash. Does that sound something that is in the ball park for the ear?

I don't have all those numbers in front ever me, Tom.

I guess where I'm trying to go with this is that you know again you don't really need capital in order to grow the business and I hope that you will leave the debt outstanding because debt is kind after good thing as part of a capital structure. And I'm just kind of curious as to whether we will be more aggressive on the share repurchase is the board still considering a dividend and I guess what I'm trying to get to is what is the capital plan? And again with your stock as cheap as it is I would hope that you will continue to be kind of aggressive on the share repurchase but can you comment.

Sure, I mean we discuss every quarter at our board meeting where we stand on this issue. And obviously the priorities for our capital, of course, is grow the business. I mean this is a growth company and, you know wee want to accelerate our growth significantly and, you know manage it well, not to throw expense control by the wayside, of course. We are a growth company so the first priority for our capital is what do we need to do to grow the business. Beyond that, we do believe as we demonstrated by buying shares this last quarter, that our -- and increasing our authorization we intend to buy back shares, A, when the window is open because it is fairly limited. Any time the company has material nonpublic information we are restricted from buying. So the windows are relatively narrow for us to do that. But when -- you know, when available when we are able to, we intend to be a buyer of our shares.

Okay. Great.

Ladies and gentlemen, this concludes the question and answer portion of today's conference call. I will now turn the presentation back to Paul Sarvadi for his closing remarks. Sir.

Thank you, I just want to thank everyone for participating today and we look forward to speaking with you next quarter. Thank you.

Ladies and gentlemen, this concludes your presentation. And you may now disconnect.