Insperity Inc (NSP) 2006 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Administaff first quarter 2006 earnings conference call. Joining us on the call today are Mr. Paul Sarvadi, Chairman and Chief Executive Officer, Mr. Richard Rawson, President, and Mr. Doug Sharp, Chief Financial Officer. I would now like to turn the call over to Mr. Doug Sharp. Please proceed, sir.

Thank you, we appreciate you joining us this morning. Let me take a minute to outline our plan for this morning's call. First, I'm going to discuss our first quarter financial results. Paul will add his comments about the quarter and on our plans to continue to build shareholder value, and Richard will discuss trends in our direct cost including benefits worker's 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 2006. And then we'll end the call with a question and answer session. Before we begin, I would like to remind you that any statements made by Mr. Sarvadi, Mr. Rawson or myself that are not historical facts are considered to be forward-looking statements within the meaning of the federal security laws. Words, such as, expects, intends, plans, projects, believes, estimates, likely, possibly, probably, goal, objective, assume, outlook, guidance, predicts appears indicator, and similar expressions are used to identify such forward-looking statements and involve a number of risks and uncertainties that's have been described in detail in the company's filings with the SEC. These risks and uncertainties may cause actual results to differ materially from those stated in such forward-looking statements.

Now let me begin by summarizing the financial high-lights from the quarter. We with reported a 130% increase in first quarter earnings to $10.5 million, or $0.37 per share. First quarter earnings exceeded our expectations, due primarily to favorable results in two of our major key metrics. First of all, we averaged just over 96,000 work site employees, an increase of 15% over Q1 of 2005, and at the high end of our forecasted range. Secondly, gross profit for work site employee per month averaged $236 above our forecasted range of 230 to $234 that's in that surplus in our direct costs program came in better than expected. Operating expenses increased 14% and declined on a per work site employee per month base from $188 in Q1 of 2005 to $186 in Q1 of 2006. We generated $21 million of EBITDA during the quarter in increased working capital by $16 million to a balance of $109 million at the end of the quarter.

Now let's review the details of our first quarter results. The average number of paid work site employees per month increased 15% over the first quarter of 2005, from 83,729 to 96,006. In a few minutes, Paul will provide the details behind your unit growth drivers including sales, client retention, and net growth within the existing client base. First quarter revenues increased 21% over 2005 to $361 million primarily as the result of the 15% increase in the average paid work site employees, and a 5% increase in revenue per work site employee per month. Looking at first quarter revenue contributions and growth by region. The southeast region which represents 9% of total revenue, grew by 29%, the northeast region, which represents 17% of total revenue grew by 36%, the central region which represents 14% of total revenue grew by 31%, the west region, which represents 23% of total revenue grew by 17%, and the southwest region which represents 36% of total revenue grew by 12%. And as you may recall from our last quarter conference call, this region was impacted by the termination of two mid-market accounts in January that were sold prior to our mid-market initiatives at below standard pricing.

Now let's move to gross profit. As I mentioned a moment ago, gross profit per work site employee, per month for the quarter was $236 up significantly from the $215 reported in the first quarter of 2005. This was also above our expected range, as higher than expected surpluses were generated in both worker's compensation and payroll tax areas. With regards to payroll taxes, our objective is to earn a small surplus in this area from effective pricing and cost management. This surplus came in slightly higher that expected during the quarter. Payroll taxes, as a percentage of total payroll costs, declined from 9.48% in Q1 of 2005 to 9.46% in Q1 of this year, while our pricing allocations increased slightly. Worker's compensation costs were .99% of non-bonus payroll for the quarter below our forecasted range of 1.10% to 1.15. Updated actuarial loss estimated reflected continued favorable claims trends and resulted in this quarter's $2.5 million reduction in previously reported loss estimates. Total benefit costs per covered employee per month increase 3% over the first quarter 2005 to $607. This was at the high end of our expected cost increase of 2 to 3% which considered the impact of certain healthcare plan design changes that went into effect January 1 of this year. Approximately 73% of the work site employee base was covered by our medical plans during the first quarter, resulting in cost of $444 on a per work site employee per month basis. In a few minutes, Richard will provide further details on recent trends in our direct costs and also comment on our outlook for the remainder of 2006.

Now let's move on to operating expenses ,which increase 14% over Q1, 2005 to 53.6 million within our expected range. On a per work site, employee, per month basis operating expenses declined from $188 in Q1 of 2005 to $186 this quarter. As expected, increases in cash compensation-- compensation commissions, and general administrative costs were more than offset by lower stock-based compensation and advertising costs. As for net income, we reported approximately $2.1 million for the quarter in excess at the high end of our expected range of 1.7 to 2 million,due to higher invested balances and rising interest rates.

Now let's review several key balance sheet and cash flow items. Working capital increased by approximately $16 million since December 31, 2005 to 109 million. Cash outlays, including cash dividends of 2.5 million and capitol expenditures of 3.3 million, were more than offset by working capital generated from our operations, as well as, $9 million in proceeds received from the exercise of stock options. As for a couple of other balance sheet details, prepaid expenses and other current assets totaled 14 million at March 31, including 6 million related to our worker's compensation program and 1 million related to our primary healthcare plan. Deposits of $66 million consisted primarily of 64 million funded into our worker's compensation plan. However, AIG our worker's compensation carrier,is expected to return approximately $26 million of this balance this week in accordance with the terms of the prior year's policies. We intend to use these proceeds to pay off the $32 million mortgage on our corporate heard quarters as the interest rate on the mortgage has increased substantially over the past year. Now before providing our financial guidance, I would like to turn the call over to Paul.

Thank you, Doug. I'd like to begin with a few comments about the drivers of our excellent first quarter results. I'll also point out two non-financial highlights for the quarter, and then I'd like to end with providing some historical perspective on the value of Administaff and our plan to increase shareholder value from where we are today. The first quarter results demonstrated our continued growth and profitability momentum derived from our success in sales, service, pricing, direct cost management, and operating expense leverage. Sales momentum continued after our successful fall selling campaign resulting in the first quarter sales sales at 116% of forecasts and 20% ahead of last year. This was accomplished bay 6% increase in trained sales staff over last year and a 13% improvement in sales efficiency. These sales were made with a 2% increase in the mark up over sales made in the same period last year in line with our pricing strategy. The number of trained sales personal was 224 for the quarter, which was slightly down from 227 average for the fourth quarter, consist with the seasonal elimination of reps that were not successful during the fall campaign. We made substantial progress in any quarter hiring new sales personnel as the total hire reached 265 by the end of the quarter. These will begin to roll in as trained personnel and subsequent quarters toward our goal of 250 as reach this year's fall campaign.

In February, we held our annual sales convention in conjunction with our 20th anniversary celebration, followed by our sales reward trip for our 2005 top performers. These events were exceptional and energized participants toward our 2006 objectives. Shortly thereafter, we launched our spring selling campaign which is now in full swing, increasing activity as expected to fuel second quarter sales. Our service and client retention results were equally impressive for the quarter with the client satisfaction rate of 90% in monthly attrition rates at or below targets. Our historical monthly attrition rates are 6 to 7% for January, 2.5 to 3% for February, and approximately 1.5% for March through the balance of the year. January attrition was reported last period at 8%, including two large accounts terminated at our discretion. Without the accounts attrition was 6.5%, and February and March were both below targets at 2.2% and 1% respectively. While April numbers just in, we're slightly above our target at 1.8%. All in all, we are on track toward our 2006 retention objectives. The combination of effective sales and retention results, a modest contribution from the net effect of new hires exceeding layoffs within our client base, resulted in reaching the top of our range in unit growth for the quarter.

We also made progress in the quarter on the legal and regulatory front including passing legislation in the state of Washington and eliminating a shareholder lawsuit filed against the company a few years ago. On March 30, 2006 the court granted our motion to dismiss the case and ultimately entered a final order of dismissal with prejudice. The lead plaintiff did not file a notice of appeal by the deadline last week so we believe this matter is now concluded. One other development of note from the first quarter, was the completion of the transition plan in the acquisition of HR tools and other assets from Recruit Max. We have rebranded the HR tools website and web-based products and are positioned with this new platform to drive activity and other HR revenue generating offerings. In a few minutes Richard will provide details surrounding additional contributors to our solid first quarter results, including pricing renewing accounts, and managing our direct costs. When you put the whole picture together, including the operating expenses and interest income,it's evident our business model is performing effectively and efficiently.

Now I'd like to back up and look at the big picture for a few minutes and see how we're increasing the value of Administaff. Since we became a public company 9 years ago, in 1997, we've had impressive compound annual growth rates in the most significant key metrics driving the value of the company. Our count on annual growth rate over the 9 years in unit growth was 16%, driving revenue growth of 25%, and earnings growth of 31%. Now these rates reflect our stated long-term goals of double digit unit growth north of 20% revenue growth and 30% earnings growth. Since going public, Administaff is more than quadrupled the number of work site employees and increased net income more than 11 times from 2.6 million in '96 to 30 million last year. Total assets up other tenfold. Shareholder equity has increased by fact of nearly 15 times and working capital has increased 24 times, while the value of Administaff reflected market capitalization is up less than seven times, even after the increase we have really seen over the last year. But as many of you know, from studying our company over this period, all though the compound annual growth numbers are strong, the range in these key metrics was wide and varied. As an example, our year-over-year unit growth was as high as %44 in one quarter in the year 2000, and as low as minus 6% when we experienced our own perfect storm just a couple of years later. Also, last year was a record setting year earnings, while in 2002 we had no earnings at all when we chose to meet our contractual obligations to clients, in spite of a vendor failing to meet their obligation to us.

Now over the last nine years our market capitalization is also varied in responses to these changes in key metrics and prompts the question, where do we go from here in value creation? My answer is, I believe we are on the fronted end of an extended period of value creation as a result of systemic improvements to our business model. These improvements have produced our strong results in recent periods and should lead to, what I hope to be and extended period of consistent predictable growth in units, in revenue, and earnings. The goals remain the same. It's the volatility, the volatility is what we have worked so hard to eliminate, and if we're successful we will see a long run similar to other small cap turned large cap companies. In the business services arena, an excellent example of the value creation we're shooting for is evident looking at the history of Paychex. Their track record is useful in engaging the potential of a company with a recurring revenue model, an underpenetrated market and a pipeline for new offerings. Although Paychex has a product offering in our space, my purpose for this dialogue is to compare value creation characteristics rather than the product offering. Paychex is a good example of a company that after hitting a few bumps in the road in the early '90s, we fined their business model and began a very impressive run. Over approximately 10 years, Paychex grew their core payroll business effectively and layered on additional new services including worker's compensation, 401K plans and HR services. Year-over-year revenue in earnings growth numbers ramped up and then maintained strong levels in the ranges I described as goals for our company. Over the same 10 years the company and shareholders were certainly rewarded for the consistent results. Paychex's shares split 3 for 2 eight times and the company progressed from a small to mid to a large cap company.

I'm certainly not guaranteeing or even predicting this for Administaff, but I am saying, however, that our goal has been to achieve this level of predictable, consistent growth and over the last 2 years we've started an impressive run of our own. We also have similar characteristics which I believe give us an unusual potential to grow our business and our value over an extended period of time. We have the market opportunity of 600,000 perfect fit target client for our core service and we have just over 5200 on them on board today. We have a service offering and delivery model in a class by itself and a plan for growth and profitability that is working very well. We also have a similar dynamic in the ability to offer goods and services to current clients and to extend our expertise in new offerings to our small business target. We're also fortunate to have the most important ingredient in predictor of future success at Administaff, an extremely bright, talented, skilled and energized group of people focused on our goals. This quarter, I had the opportunity to look the entire team in the eye and review the stop 20 key success factors and milestones in our history at our 20th anniversary celebration. And my confidence about our future is a function of what I see in their dedication, commitment innovation and performance. At this time I would like to pass the call on to Richard.

Thank you, Paul. Today I'm going to report on the details of our first quarter pricing and direct cost results and update you on how we see these trends effect our gross profit for work site employee per month for the remainder of 2006. As you know, our pricing model is built by using individual allocations designed to match each of the direct costs, plus a separate allocation for our HR services, we call mark up. It is designed to generate most of our gross profit per work site employee per month. Since all of our direct costs are not known in advance, we build in targeted allocations to cover those particular costs. Our pricing strategy, is to have these allocations slightly exceed the direct costs and produce a net surplus that when added to our mark up produces the desired gross profit per work site employee per month. Doug just reported that our gross profit per work site, per employee, per month came in at $236, which was above the top end of our guidance. Last quarter, we said that our forecasted mark up for 2006 would increase from an average of $195 per work site employee per month to an average of $198 per work site employee per month, and our surplus would add another 22 to $26 per work site employee per month.

So, let me update everyone on our progress. The mark up component of gross profit is still tracking toward our full year estimate. This quarter our average mark up on renewing business increased almost $6 per work site employee per mont,h and the mark up on our new business sold increased $3 per work site employee per month. The net surplus component of our gross profit was above the top end of our forecasted range. Let me explain what happened with each of the direct costs beginning with benefits. For the quarter our benefits costs that include healthcare, prescriptions, dental, vision, life and accident insurance, and disability coverage, came in at $607 per covered work site employee per month, or at the high end of our previously forecasted range. Our analysis of these results did not reveal any need to alter our previously forecasted 5 to 6% annual increase in benefits cost per covered employee for 2006. The better than expected first quarter surplus was produced in the other two areas of direct cost, those being employer payroll taxes and worker's compensation. Let's begin with employee-related payroll taxes. This quarter the spread between our allocation and this cost was slightly higher than we originally forecasted. This is the primarily the result of unemployment rates from various states, coming in slightly lower than previously estimated. Therefore, we would expect our surplus in this area to continue for the balance of the year.

The second contributor to our surplus came from lower than expected costs in our workers compensation program. A theme that has become part of our success as a result of our worker's compensation captive structure that we implemented in September of 2003. Some of you have asked, how long can these results continue? Let me first explain the process and then I'll answer the question. When a new policy year begins, the insurance company and our independent actuary make an estimate as to the total cost of claims to be incurred for that policy period. These costs are primarily driven by the number of reported injuries, the incidence rate, and the ultimate cost of those injuries, including both medical and lost time, i.e. the severity rate. Our loss control efforts include safety professionals working to reduce the incidents rate and claims management personnel working to reduce the severity right. Then, in each accounting period our independent actuary updates the original policy estimate using resent incidents in severity rates to determine if the reserve estimate should be changed. Our expense each quarter includes the actuary's estimates for the current policy year plus a separate reserve estimate for each prior policy year. When the continuing efforts by our people to manage and settle these claims at lower than expected reserve amounts is successful, our actuary then continues to reduce the reserve amounts needed to settle the remaining open claims. Overtime, as the claims associated with the older policies get closed out, the change in reserve estimates for the remaining claims in that policy year typically become smaller. Therefore, when you stack multiple policies together. You have new policies with conservative estimates based upon limited information and you have older policies with refined estimates, based upon greater information.

This quarter, the actuary reduced the reserve amounts for both the 2003/2004 policy year, and the 2004/2005 policy year. The adjustment was only 3% of the total estimated cost for both policies, or about $2.5 million. Consistent with the first quarter of 2005's adjustment. The estimated reserves associated with the current policy year, which began in October of 2005, were not adjusted at all because the policy is still so new. So the answer to the question is this: As long as the insurance company and the actuary set conservative reserve estimates at the beginning of each policy year, and we continue to manage safety in the workplace of our clients and our claims people continue to effectively settle claims at amounts lower than the reserve estimates, we would expect to have continuing favorable adjustments to our reserves. Considering the most up to date information we have, we now anticipate our worker's compensation insurance cost would be in the range of 1.05 to 1.10% of non-bonus payroll for the full year, which is slightly lower than our previous forecast.

So, in summary, our pricing remains strong, and we are all well on our way to achieving the $198 per work site employee per month targeted mark up. We still see benefit allocations in the associated costs trending favorably compared to the marketplace. Couple that with the ongoing management of our other direct costs, compared to their specific allocations, we see the surplus per work site employee per month going from the 22 to $26 range previously forecasted, to a 27 to $29 range for the full year. At this point I would like to turn the call back over to Doug.

Thanks, Richard. Now let me provide an updated forecast of our key metrics which increases our 2006 full year guidance from what we provided last quarter. As for work site employees, we expect to average 98,500 to 99,000 for the second quarter with net monthly adds between 1200 and 1400 for the latter half of the year, as sales are expected to ramp-up from our spring sales campaign. This results in a forecasted range of 101,000 to 101,500 for the full year. As for our other full year guidance, gross profit for work site employees per month was initially set at rage of 220 to $224 per work site employee per month for the full year. This assumed a slight increase in the market up of our HR services to an average of $198 and a 22 to $26 surplus on our direct cost programs. Based upon our first quarter results and the recent pricing and direct cost trends we are no forecasting a 27 to $29 surplus and therefore raising our guidance of this metric to rage of $225 to $227 per work site employee per month.

As for operating expenses we now expect to be in a rage of 215.5 million to 217.5 million for the full year. This is up from our previous guidance due primarily to additional incentive compensation based upon our improved 2006 outlook and additional stock-based compensation related to [director grants]. When combined with our 2006 expected range of average paid work site employees, operating expenses on a per work site employee per month base are now expected to decline from $180 in 2005, to approximately $178 for 2006. As a result of increased cash balances and rising interest rates we now expect net interest income to be in the range of 10 million to 12 million for the full year. We are now forecasting 28.9 million average outstanding shares up from our initial forecast of 28.2 million. This higher number of outstanding shares would be expected to impact reported full year earnings by approximately 3 to $0.04 per share. We expect a 36.7% income tax rate and our annual capital expenditures budget remains at approximately $13 million.

Now shifting to the remaining second quarter guidance, we expect gross profit per work site employee per month to be in the range of $221 to $224. As a reminder, gross profit per work site employee, generally declines from the first quarter to the second quarter of each year, as new business added after January 31 has a lower gross profit than our base in the first three months paid, approximately the same as our base in the next three months, and higher than the base thereafter. This is because the payroll tax at location in our fee for new business is billed [inaudible] over the remainder of the year. A lot of payroll tax cost is incurred as work site employees earn their wages up to specified wage levels.

Second quarter operating expenses are expected to be in the range of 53 million to 53.7 million. This is relatively consistent with our Q1 operating expenses as an anticipated $2.5 million sequential decline in G&A costs is expected to be offset by additional advertising costs of approximately 1.4 million. and additional stock-based compensation of approximately 700,000. As a reminder, first quarter G&A cost included $2.5 million in costs associated with our annual sales conference and employee incentive trip, and our 20th anniversary celebration. Finally, we expect net interest income to be between 2.25 million and 2.75 million for the second quarter. Now at this time I'd like to open the call for questions.

Thank you, sir. And your first question comes from the line of Tobey Sommer of Suntrust Robinson Humphrey please proceed.

Good morning. Thank you for taking my call. I have a question for you regarding your guidance-- actually I have two questions. One, what may have driven your thought process behind tweaking the high end of your range for the full year in terms of average work site employees paid per month? And then I wanted to get a sense for, if I'm doing my calculations correctly, at the midpoint it looks like the implied EPS is a little bit higher than what expectations were for and I want to make sure I'm thinking about that correctly. Thank you.

Sure, Toby let meed address that. To answer your first question just math. When we take where we ended the first quarter, what we anticipate for the second and rollout the 12 to 1400 per month new adds, it comes out in that range and as the year progresses you are able to tweak your full year estimate and that's what we did. So I mean, that's basically it. Now if you do take the sum-- the guidance of the key metrics and look at an implied EPS, you see that we definitely raised the guidance including you have to factor in the higher number of shares that come out of the higher-- higher share price we have had of late, and when you factor that in that was another 3 or $0.04 so you are looking at a substantial move up in the total range of our expectation for the full year from where we were a couple of months ago.

Thanks, maybe two follow-up details. Also, how much would-- is the increased expectation for stock equity compensation expense for the year? And-- and then I had a follow-up on gross profit per work site employee.

On the increased stock based compensation for the year, it's about 450,000 or so in dollars over the initial guidance for that particular line item.

Okay. And then the gross profit line in the model appears to be a point where you have had a lot of leverage opportunity for upside over the last several quarters. In just trying to see if you could give us a refresher on how you arrive at your guidance and how when you do report sometimes your experience enables you to report a better gross profit per WSE per month number.

Yeah, sure, Toby. You know when we look at our forecast for gross profit what we look at is the amount of surplus that we can see at a particular time that we believe is going to be there. And then we let the actual performance each quarter in all of the direct costs just, you know, rollout and typically, as you said, we have had a theme for, I don't know five or six, seven quarters now that the gross profit per work site employee per month has been higher than what we forecasted. And I think if you would go back to the particular quarters, what you would find is that at different times it's in the different direct costs, which that's how our model is designed to work. Because we don't know all of those costs in advance, we have to make estimates, and the estimates for the cost,as well as, the estimates for the pricing allocations, and then we work very hard at managing those costs to make sure they come in at or better than our forecast.

Okay. One more question then I'll get back in the queue. You have spoken too, from time to time, the opportunity that you see to layer on additional services, to your rather large customer base, and perhaps generate new re-occurring, high-quality revenue streams. I was wondering if you could speak to that, maybe what it represents currently, and maybe what you see as the opportunity not in terms of guidance for this year but maybe longer term '07, '08, just how should think about that. Thank you

Sure, and I'll tell you how we look at it internally. Our goal is to have a variety of other product and services to our target customer and to our current customer that would provide us a third contributor to our gross profit per work site employee. You can see how sensitive our model is to upside from that gross profit per work site employee and right now the two contributors are the mark up on our HR services, which we expect for this year around $198, and then the surplus from the management of the direct costs, which Doug and Richard both covered earlier. So what we're after is the third contributor where we do have some other revenues right now, but I it's a nominal amount so we don't break that out. But our goal including the acquisition of the HR platform is to make that appreciable. And hopefully over time we can, look at '07 and '08 and '09 of having that be a number that's significant enough to identify and then watch that ramp-up as a third contributor along with the other two.

Thank you. Your next question comes from the line of Cynthia Houlton of RBC Capital markets.

Hi, just little bit of clarification. I know it seem likes this quarter the gross profit for work site employee got a timing related benefit on the payroll taxes, and I assume that's why we're seeing, a somewhat material sequential decline in gross profit. Could you just break that out a little bit more in terms of-- so we can see how much more on a normalized bases what the assumption is going forward.

I think ,as I commented in my script , on the guidance for the second quarter, for instance, that's where you see some impact on the payroll tax area as we bring on new business and how that new business is priced ratably over the remainder of the year and the cost is front-end loaded. If you look at our gross profit where we ended for the first quarter that 236 and then where we expect to be for the second quarter in this 221 to 224 range, the main driver for that decline is in the payroll tax area.

Okay. That's what I assumed. And then just the sales force number you said that there was a kind of a sequential decline due to kind of volunteer turn over. What was the attrition and the sales for the quarter, and then also when you said you want to get to 250 trained, is that by the end of September or end of June quarter?

No. That would be as we approach our fall campaign which is around September or so. And the first part to your question is, it was involuntary turn over. When we go through our fall selling season there are so many-- there's so much momentum for our sales staff to execute well. If they aren't going to have good results during that period, when we get into the first part of the year that's time to help people transition out to something they will be more effective doing, so that's seasonal effect we have year in and year out where there's a little bit of thinning out when you come into the first quarter of the year, so that's what happened we went from 227 in fourth quarter last year to 224, so it wasn't very heavily at all. I think our total turn over annual rate is still in the mid-30s or so. And that's appropriate for us. We would like to move that down some, but we can live where we are for a long time on that front.

The mid-30% was what your sales force total turn over was?

Right.

Okay. Thank you.

Thank you. Your next question will come from the line of Jim Macdonald of First Analysis, please proceed with your question.

Good morning, guys.

Hi, Jim.

Hey Jim.

Could you talk about same-store sales? I think you mentioned it but I didn't get a number.

We went through the regions, for instance, and the increase in the revenues by region.

I'm talking about new hires minus hires existing-.

Are you talking about the net effect of new hires versus layoffs in the client base, Jim?

Yes.

It continues to be a little bit perplexing, out of the four months we've had this year, we've have a modest contribution in two of them, and nothing to modest-- negative effect in two of them. So it's really pretty much, I'd say, you know, light breeze to the back but nothing to shout about.

So you are not seeing the 2.5 to 3% that the payroll industry is seeing?

No, I was looking at results from ADP this week and some others and noticed that there, but we really haven't seen that across the base at this point.

And talk little bit about office openings you opened three offices this year, I believe, and if you expect more and kind of seems like you did that pretty early in the year and is that penalizing you a bit on the cost side.

Just nominally so, the cost for opening new offices and markets are not a appreciable for us today compared to the total expense level. But yes, we opened three already, we plan to open one more for sure, and if things keep going well, the way they did the first quarter, we may open some more later in the year. We're on track with our plan for the year which was four, we exceeded our expectations for the first quarter and have positive outlook going forward we may add some more.

Okay. Just one more quick item. You mentioned April attrition, I think, was 1.8% what was your-- what was the expected rate? 1.5?

Yes, 1.5. So, in April you had a little bit of a-- of a down month from-- from, really, the attrition being a little higher, just slightly higher, 1.8. Of course, it was you know lore than the number the two months prior to that, and then you have sales rolling in from the spring campaign that just ramped-up. So, you put that together, and that flows into the guidance we gave on the second quarter.

Thanks very much.

Thank you. Your next question will come from the line of Jeff Martin of Roth Capital Partners. Please proceed.

Thanks, guys, good morning.

Hi, Jeff.

Hi, Jeff.

Paul, in comparison with Paychex, you speak of layer on services could you maybe expand on that a little bit, and refer to your comments with that with respect to revenue-generating type services versus enhancement of current offering type services?

Sure, I would be glad too. The way we look at it internally, there's three groups of people that I want to add three target markets if you will, that I believe have inherent revenue-generating capability that we don't take advantage of today. For example in our current model, all of our revenue ,or nearly all of it, comes from our current customer using the PEO service. We do have a few nominal things relative to the marketplace we have built in to our service, and now we're starting to ramp-up some other income streams because of the recent acquisition, but in general, if you look at our history it's been almost 100% PEO services to that base of 5200 clients that we have in the small business community. But, we are touching a large number of prospects throughout the year. And that's one of the groups that we see as a potential for us to add revenue streams as we lure them into the PEO model. So, that's part of why we purchased the HR tools infrastructure, because we feel like that's an excellent revenue source for providing other point solutions for HR products and services to essentially give these prospects a taste of the quality of Administaff's service from an HR perspective, and make some money while they are a prospect, before they have become a client. Then the second group that we-- that I look at as potential for revenue source, is on the back end, when customers for whatever reason, leave the relationship or even more importantly, if you look at the vast number of employees that leave the relationship as a result of turn over or clients turning over, turnover within the client base, as opposed to turnover of a client. There's a large number of individuals and then also companies and in that area we have our retirement services organization that we made a significant investment in to serve our PEO customer, but all of the things you do to serve that customer ,which is what you do to be in that business any way and it's when you transition out you are putting a lot of things together one of the things you can leave is the retirement services relationship and allow us to continue an income stream on those departing whether it's individuals through an IRA, or some other conversion, or the 401K plan for the client company. And there are other examples of that that we can add on later on whether it be, flexible spending accounts or 125 plans or Cobra manages. A lot of things inherent for what we already do for your customer that we would retain with former customers on the way out. And then in addition to that, we have for our current customer base the client company owner and their company and their families, I mean employees and their families, we have 55, I think it is today, partner alliance partner relationships where we have embedded value-added offerings for the client that also have embedded an income stream for Administaff. So, as we grow this base, from the [90 7, 8,000] we have today to hundreds of thousands of employees and from the 5200 clients today to, thousands and thousands more of those clients, each of those items become additional ways we can have revenue from our current base of clients, employees and their families. So we see those three markets in a variety of products and services to each of those targets as adding a third contributor to our gross profit per work site employee.

Okay. That's very helpful. A couple of other quick questions how should we think about direct cost surplus beyond 2006? I know you referred in the past that you target about a 10 to $20 per month per work site employee, is that the way we should continue to think about it or are we in a new era where it will be higher than that?

Let me comment about that from the big picture. We have talked about, in the past, a range of 10 to $30 for our growth-- for our surplus on the management of the allocation versus the ultimate costs of those direct cost items. And the theory behind that, of course, is that we ought to be able to manage price and cost on on going basis is to have a known surplus of at least $10, I think that's just basically-- remember that's only a 1% of the total dollars allocated to cover those direct cost, so that's a pretty skinny buffer ,if you will, and we believe 1% ought to be the floor. You get up to the $30, that's more like 3% of the amount that's allocated and you get above that number, and you start thinking, gee, could we price a little more aggressively and stimulate growth? So, there's the balance there between, trying to build a surplus versus fueling growth, and that's the balance in our business model. Our goal is double digit unit growth mid-teens, move it up to 20 sometimes in the tougher economy, maybe it falls back to 11 or 12. But, you look at double digit unit growth that produce 20 to 25% revenue growth and produces with our operating leverage in the model 30% plus earnings growth. That's the plan. That's what we've done the last nine years, that's what we are planning to do in the future except without the volatility we've had in the past. That surplus component of 10 to $30 moves up overtime because it's really a 1 to 3% of the underlying cost framework. That underlying cost framework goes up with inflation. So that 1 to 3% that has been in the ballpark range of 10 to $30 the past couple of years, starts move up as those numbers inflate.

Okay. And then my last question is in terms of the adjustment to previously reported worker's comp claims, is any of that factored into your 2006 guidance, and if you have got any visibility as to which quarters we might see similar adjustments, could you give us some detail there?

Yeah, that's an on going analysis that's done every quarter and the actuary looks at the most recent data, looks at the incidence rate, looks at the severity rate of the claims that were incurred during the current period. Looks then back at all of the claims that were in the prior periods of the prior policies and looks at how those have settled out compared to what was reserved, updates the estimates and we get presented a new report every 90 days, and so from our history over the last, really, since 2003, we have seen ongoing period, after period, after period, whereby, the incident rates have been better, and in some cases, while the incidents grew because of the size of our work site employee basis grown we've seen the severity stabilize, and it's a combination of both of those that produces the ultimate cost of that claim. So, it is, the short answer is, it's ongoing.

Part of the business-- I would like to just add-- that I recommend you go back and kind of read fairly closely Richard's script from this call. Because we endeavor to do was layout the stacking of policy years and how that-- how that plays out overtime. And, the nature of the business is to be conservative when you have limited information in an early policy period, and then, as the information comes in and as claims are closed you obviously get more information and can refine those estimates. So, ever since we formed our captive a few years ago, we put our shareholders, and our clients, and our company in a position to be the one that benefits from these stacking of the policy periods, in the way that worker's compensation works when it's managed well. And we knew that on the front end, but if we could do that right, it would be on ongoing part of the way our business works, and so far, execution has been very good in that area.

And ,as far as, to answer the final piece of your question was, did we consider any improvement for the balance of the year? And the fact-- and the answer to the question is yes, we did slightly because we're seeing already that our cost, as a percent of non-bonus payroll, should be going down from about the 1.10 to 1.15, which it was at the begin of the year, down to 1.05 to 1.10%. That's the current view of it. We'll let it play out and see what happens.

Thank you. Your last question will come from the line of Mark Marcon, of Robert W. Baird.

Hi, Jeff [Mulvarn] for Mark Marcon. First, just a quick point of clarification. The Q2 gross profit guidance, obviously, we talked a little bit about it. Was the sequential change a little bit greater than normal this time because you have such a strong sales campaign and therefore, have higher payroll costs than you normally would?

Well, I think that's a little bit of it, but typically, if you look back in how we explained the guidance even last year, just looking at the payroll tax component comparing first quarter to second quarter we would expect that piece to go down say 5 to 10 bucks per work site employee, just on how the new business rolls in and the impact on the gross profit. So, I guess in answering your question, no, I think it's fairly-- that drop is fairly consistent from the first quarter to the second quarter with what we expected.

Okay. And then just one final question, obviously you talked quite a bit about building up new product offerings, and in press release you referenced strategic acquisitions are you looking more to build those up internally, or are you looking at other acquisitions similar to HR tools to continue to build up the products?

I think you are going see a combination of several things. I think you are going to see some developments internally that we can-- that we're already doing for clients that we can modify further to some of these other markets. I think you are going to see new alliances we're going to be able to develop and add, and embed into all three of these targets I have laid out, there. And then I think you are also going to see us acquire some revenue generating opportunities that fit that scheme. So, all three of those avenues to new revenues are available to us, and I expect us to do that over time. Although I don't expect us to be--we're not an acquirer if you look back at our history.

Sure.

It's not an a major thing, and so we're pretty deliberate about that, and we we're not certainly-- by no means are we abandoning the core business, we're growing the core business, we've got so much room to grow there, and that's what drives the other. I call it-- it's our goose and golden egg strategy and if you want those golden eggs over the long haul, you have to make sure the goose is very healthy.

Thank for taking the call and congratulations on another great quarter.

Thank you.

Thanks

Ladies and gentlemen, at this time our Q&A session has ended. I would now like to turn it over the Mr. Sharp for any closing remarks.

I don't believe we had any. Thank for joining us for the call and looking forward to talking to you next quarter.

Thank you for your participation in today's conference. This does conclude the presentation, and you may now disconnect your lines. Have a wonderful day.